Professor Patrick Honohan:

It is a little bit like the "wolf wolf" story. Central banks go around telling people that they really have to rein in things, really, this is going to end badly. They tend to overplay that, in good times and bad times, be very careful now. The messages are broadly correct but they have to be graduated and there was nothing along the lines of, "Forget about all the letters I have sent you, this is really serious and we are going to have to do something." Actually, the Central Bank had powers to do things to stop themselves. It is not a question that they should have told the Government - yes they should have told the Government. One will find that there is a lot of documentation saying, "Look, I said here, this is a very risky situation," and there are those things, but the message did not get through because it was not communicated in a way that would have really rung the alarm bells. In preparing for this session I found a very interesting document on the PAC website that I had not noticed before. It is not an important document, it was probably prepared by a junior official in the Department of Finance. It is not signed but it is presented to the Minister on 3 September 2008. It includes this, third paragraph:

The overall conclusions of the financial stability report of the Central Bank for 2007 was that the shock absorption capacity of the banking system left it well placed to withstand pressures from possible adverse economic and sectoral developments. While it is too early yet to anticipate the context of the Central Bank-FSAI report for 2008...

So the advice being given, at least in this written document, to the Minister was capturing the relatively benign tone of a document which, if that is the message the Department of Finance was receiving from the Central Bank and communicating to the Minister, how could the Minister have expected that a decision like a guarantee was going to lead to the thing? I have the greatest sympathy for the people in the room, the political people on the night of the guarantee. One should recognise that in the context of the advice they were being given, the decisions they were taking are quite understandable.