Mr. David McWilliams:

Thank you very much, Chairman. It is a pleasure to be here. I just want to make some opening remarks about the period in question, starting with 2000 and going up to 2008 and beyond. It is my opinion that the Irish banking system, and by extension the rest of the Irish economy, was set up to fail.

I saw this earlier than anybody else and I made this opinion and these ideas available as widely as possibly. In fact, I probably spent the best part of a decade trying to warn as many people as possible on as many platforms as possible that our property market was going to crash and that when it did, our banking system would be in a situation where money would fly out of the system and lead to a banking crisis. I did this in hundreds of thousands of words; not thousands, but hundreds of thousands of words, in dozens of articles, two a week in the Irish Independent, the biggest selling newspaper in the country, and in The Sunday Business Post.

I made documentaries about this. I had my own TV show on TV3, which was watched by tens of thousands of people. I warned people at every juncture that our housing market was a credit bubble and credit bubbles bust and it is not a matter of if they bust but when they bust. The documentaries of The Pope's Childrenbook, which I wrote, were watched by 36% of the Irish watching audience; that is a lot of people. The Pope's Children, and I do not say this for any other reason than to make the point, was disseminated extremely widely and was the bestselling non-fiction book, not of the year, but of the decade, and it was published in 2005. So these ideas were out there, disseminated widely, in the most accessible way. When I hear the view that nobody saw this coming or that this was in some way a shock or we were taken by surprise, I do not believe that is the case. I think the Irish property crash and the banking crash were both incredibly predictable and absolutely preventable.

This testimony will be a little bit different in the sense that it will not be about what should have or could have happened, and if we had seen that, if we did not see that, and my God I cannot believe we missed that. This testimony will be taken from contemporaneous articles, pieces of work that show thinking at the time. This was not isolated thinking. In fact, I believe, and my experience through the period from 2000 onwards was, that many thousands of ordinary Irish people could see what was happening. The difference is that I was an economic commentator and an economist and I had the platform of the media to deploy these ideas. I cannot tell you the number of times I went into bars and pubs and chatted to people and they said, "Hold on a second, this doesn't seem right; what is going on here?" So it is not as if a significant part of the population was not already worried. I want to make that point that this was preventable and predictable, and that these views were widely disseminated. There were not a huge coterie of individuals doing this but it was certainly out there.

One could probably ask oneself why did this guy, who is a former Central Bank economist, an investment bank economist, why did he not just come home to Ireland, keep his mouth shut, play the game and get on with business. The reason is I felt that if one has a specialty, if one understands something, one has something like a patriotic duty or a moral imperative to say that the policy or numbers of policies that we have together will lead our country into catastrophe. I think it was a patriotic thing to do. It certainly was not a worthwhile thing to do and it certainly was not fashionable and it certainly did not make me popular. The interesting thing is that all through this period I was accused of being unpatriotic when I believe in actual fact it was something that was essential to do if one had the education and the experience to do so. I remember people saying that I was unpatriotic for talking down the economy. The committee might remember that expression, "Talking down the economy". I think that was maybe a reaction on the part of certain parts of the establishment to somebody saying, "Hold on a second, this thing will not last."

It seems to me from a political perspective that on every big economic issue, Ireland tends to split between insiders and outsiders. The insiders are people with "pull", the old fashioned word, with access to power, and the outsiders are people who are actually on the outside. In the case of the property market and the associated banking and credit explosion, the insiders were the bankers themselves, estate agents, people who were doing well out of the property market, parts of the professional classes who were doing very well, and senior Government officials who were looking the other way or were not necessarily taking on board what was clear. These are the people on the inside who were actually doing well. Then, of course, political parties, because if there is a property boom there will be a tax boom. If there is a tax boom then there will be lots of goodies to give out, lots of sweeties to give out. So I think they are the insiders and in the situation of a housing boom where house prices are rising well above what the average person can afford, the outsiders are simply the people on the outside who are forced to play a game in which the dice is loaded against them from the start. I think that is important; there is a political context in this.

I suppose I devoted such enormous energies to trying to warn about this for two main reasons. The first reason was because I believed that hundreds of thousands of ordinary Irish people would end up in negative equity and would end up in debt and would end up in a situation where their lives would be destroyed by the debt associated with the housing market and they would end up being the people who paid. That is a social reason. The second reason, and this is very important for the context of this, is that I had worked both inside the Central Bank in Ireland in a crisis but, more crucially, I had also worked outside in investment banking. What I see and what I saw were panics in investment banks, panics in financial markets, and I could see that every single day we avoided taking responsibility for this mess. Every single day we said, "It will be grand," or, "There will be a soft landing," or, "Don't worry about it, it is the markets." We were therefore condemning ourselves to run out of options when the crisis happened. The more we ignored, the more desperate we became and therefore the more we ignored the more likely we were to end up, which we did when the crash came, in a situation where our choices were not between good and bad but between bad and worse.

The crash was inevitable. Now why was it inevitable? This is the key.It was inevitable because of the way in which the banks were financing themselves. Again I wrote all of this at the time. I was writing this in 2000 and 2001. This is not me thinking back and looking with hindsight. This was obvious to anybody who was trained. It was obvious. This is not the sort of thing that anybody who is trained could not see. This panic did not have to happen. The panic of September 2008 did not have to happen. It was not anything that was pre-ordained. It could have been fixed very early. The problem is if there is no housing boom there will be no banking boom. If there is no banking boom there will be no banking crisis. If there is no banking crisis there will be no interventions, such as the guarantee, and there will be no bailout. All of these things are the consequence of bad economic policy, not the cause. They are the consequence. What happens in banks when they get out of control is that they all end in bank runs. A bank run is when people take their money out. A bank run is called a run because it happens quickly; it is not a bank amble or a bank stroll or a bank stroll around the park with a dog. It is a run because people panic. That panic will be more extreme if there is what is called hot money, if there is international money financing the banks. When I saw this in 2004 that was when I realised we had a serious problem.

The Irish banking crisis began in 2000, not in 2008 as is sometimes suggested. It began in 2000. The great English economist John Stuart Mill, speaking about the railway crash that happened in Ireland during the Famine, said that crashes do not destroy the wealth of a nation, they merely evidence the extent to which wealth has already been destroyed by stupid decisions taken in the boom. So the destruction of the Irish balance sheet did not happen after 2008; it actually happened before. That is the nub of the issue, because prevention is always better than cure; we know that. There is a direct link therefore between not heeding the warnings and vilifying those who warn.

There is a direct link between this and the subsequent panic which need not have happened and the decisions that were taken.

The best way to look at this credit banking panic is through the prism of a forest fire. Let us imagine a forest fire in a small place; the pyromaniacs start the fire which, in this case, are the banks and the forest is the general economy. The people who are supposed to be the firemen, the regulators and the monetary authorities, look the other way and say "Don't worry about the fire". Some people would have said we have had them before and they have been quite nasty but this one will be different. The firemen say "Don't worry, we'll be grand, it will blow itself out." Then the fire engulfs, not only the forest, but is about to engulf the entire village beside it. The village leaders, the politicians, are faced with the choice - does one let the thing blow and see what happens because one never knows maybe a house will remain, or does one put it out? At that stage one has to put out the fire with every single method possible. Why? Because it is already engulfing the entire place. If one looks at the situation in that way one can see the way in which I, who wrote this a long time ago, think about these situations.

Who started the fire? I wrote many years ago that property markets can only increase with credit. Property markets do not increase as a result of supply and demand. That was a big canard. It does not happen that way. It is credit. Who gave the credit? The banks. Worse, what happened? When the banks ran out of our deposits - normally the bank would say to itself I have a deposit here that will allow me to lend - they borrowed other people's money to give to us to buy houses that we were buying and selling to each other at expensive prices and calling it a miracle. Whose money did they borrow? They borrowed from the Germans, French, British, etc. There was hot money coming in. For example, one of the largest banks took 100 years to build up a balance sheet of €60 billion but it doubled that in three years. Let us think about that. Why? Because it had all this money coming in.

What was the regulation called? It was called light touch regulation. Light touch regulation means one guarantees, almost makes certain, that the banking system is going to implode because hot money always leaves. When hot money leaves then the rest of the money leaves too. We actually set the entire thing up and this is crucial to a fail.

The interesting thing is a lot of people said: "Don't worry. The free market will discipline the banks." That does not happen. Let me explain what happens in the free markets. On the way up the free markets do not discipline the banks but do the opposite and allow the banks to do what they want. As a consequence we have an extraordinary situation where one joins the EMU, which was an unusual decision we might talk about later but it had a material impact on the economy, most of which in my opinion is negative. We have light touch regulation, we get this flood of money into the banks which facilitates over-lending and then the over-lending facilitates over-borrowing. All of this sounds familiar now but back in 2003 nobody was discussing it or those who did were vilified. I shall play the committee a little 40-second clip of me on "Prime Time" in October 2003 which was watched by 400,000 people. This is important and I said:

The Irish housing market is a scam. It is an enormous financial swindle that could potentially confine an entire generation of young Irish workers to years of bad debt. Far from being a reflection of economic vitality and fundamental demand the housing bubble is, in the main, a vacuous financial confidence trick that has been foisted upon us by an alliance of banks and the landowners.

Today, in Ireland, the price of the average house is close to ten times the average wage. This represents an economic failure on a monumental scale. Behind this nonsense is excessive and irresponsible lending from our financial institutions. The situation would be laughable if it were not so serious.

That clip dates from October 2003. I said: "The Irish housing market is a scam." That is what it was and that is what I want to come back to. It was financed by over-lending not demand.

A lot of people have asked me what made me think like that while other economists did not. I will wrap up but I want to make the following point about what happens when house prices rise. Economics tells us that when the price rises the demand falls, that is what we teach kids in school. In Ireland the opposite happens with house prices. When the price rises the demand rises because people get panicked. One hears that all the time. People say: "Jesus, prices are going up by 10%. I'd better get on the ladder now because if I don't I'll have to pay another 10% next year." A very active rise in prices, once it is allowed, creates a dynamic in people's heads to buy more, not less. This is why economists could do with common sense, which is what I have always felt. I urge them to talk to people. I suggest they forget the models, talk to people, ask them what they think and then think about supply. Economists will say "Oh, when the price rises the supply goes up".

The main houses we have in Ireland are a stock of housing. The houses are already built. Someone like my Mum would trade down from a family house, she would move on and some other family would have the home. Let us think about what happens when house prices rise. My mother would say, and it is natural, "I won't sell that now if they are going up by 20%. Wouldn't I be mad to sell so I shall sell next year". That would be a totally rational decision for my mother. Not only does the price not work, it amplifies the problem. It ends up that supply eventually adjusts but it adjusts far too late. We end up building houses in the wrong place for the wrong people at the wrong price. That is why I coined the expression "ghost estates".

In 2006, I was travelling back from Westport having visited Allergan, a factory which produces Botox, not for my own use. I visited for a piece of research I was doing about who made Botox. While I drove back from Mayo to Dublin I saw that every little town had a huge big estate and was reminded of a conversation I had had the night before. I was thinking, because I had talked to a local guy the night before about the famine in Mayo, about how extraordinary it was and how unbelievably catastrophic it was. He talked about the famine villages around Delphi and that neck of the woods. He said they were like ghost villages and were kind of creepy. When I saw the estates on my drive back home I thought they were exactly the same and that they were ghost estates. It is funny because when one comes up with a term one does not realise that it will drop into the lexicon so quickly. Obviously the "breakfast roll man" was building the "ghost estates". All these things happened but the ghost estates are indicative of how supply does not respond.

One wonders why people behave like this. I want the committee to understand, at the very beginning, why the economy behaves like this. People behave like this because we are all impacted by each other. Economists think we are all rational. We are not. We are highly irrational. Has anyone every met a more irrational animal than us? We fall in love, we follow stupid football teams - all the things that make no sense. The reason is that everything we do is impacted by other people.

A couple of months I was in the Aviva stadium with my son. In Dublin, there are two types of people. There are those people who buy their own tickets to the Aviva and there those people who get paid to go to the Aviva. I fall into the former camp. I remember Ireland scored three tries against Australia in the first 18 minutes. Even though I had really good seats with my 12-year old I saw none of the tries. Why? Every time the Irish team did well everyone seated in front of us stood up. Then I had to stand up and my kid had to stand up and get on my shoulders. Then the people behind me had to stand up and that continued for all the people behind them. That is exactly how the economy works too. The fellas who stood up first had no idea they were sending a signal to me to stand up because I was behind them. I had no idea that I was impairing the view of the people behind me. We had all paid to sit in the Aviva but we ended up standing. That is how is the economy behaves. When people see house prices rising in Ireland they buy houses, if they can, not because they want them but because other people are buying them. That type of herd behaviour is essential to understand why a property boom in a country like ours, if it is not controlled, gets totally and utterly out of hand unless of course one is lending to this property boom in which case one is making money so does not care.

The question is, why did the banks not see this? Why did they not see that their own balance sheets were being impaired? I believe it is because banks' balance sheets play tricks on them. Every time a chunk of money goes in to the economy, house prices rise. That means the banks' collateral rises so they feel safe. Every time the collateral rises they feel safer and safer and ultimately they lend more and more and more. Then, if your bonus is related to your share price you have a greater interest in lending more because lending more makes you rich and gives you profits.