Mr. David McWilliams:

It is an interesting question. The book The Pope's Children was so widely read that these ideas were in the ether. This was not an academic book that nobody read, it was the biggest selling non-fiction book of the decade. This has all happened before, all over the world. We can go back to the Romans or even the Bible. Deuteronomy and Leviticus, two books in the Old Testament, deal with debt forgiveness after booms. We are not talking about something new, we are talking about something that is deep in our culture.

Most mainstream economists in Ireland believe in classical economic theory and I do not. I never have. I will give an example of what happens in peoples' heads when prices rise. There are two stand out American economists I learned about after I left postgraduate studies and university in Ireland; Charles Kindleberger and Hyman Minsky. They understood that once credit was put into the mix, it profoundly changes the way people behave. Members will know this from talking to their constituencies. Kindleberger outlined the various stages of the cycle. There are seven stages.

One is when something material happens or actually changes. In our case we joined the European Monetary Union and our interest rates in the long term went from a real interest rate of about 6% down to almost zero. Our interest rates fell which changed the landscape profoundly. House prices begin to rise in this first stage of Kindleberg's model. The second stage is euphoria. People begin to think it is because of themselves that their house price is rising. They think they are clever. House prices continue to rise. The third phase is gearing, which is when the banks get involved with the idea that one can remortgage a house to buy two gaffs in the Algarve. Gearing means that the whole thing starts to get a little bit crazy. The fourth phase is the mania phase when people become manic. People actually flew to Bulgaria to buy houses, financed by their houses in Ireland.Banks are now pushing the money. The fifth phase is the bubble phase. We all lived through it and know what it is. The sixth phase in the Kindleberger cycle is the phase of distress. This is when people start to dislike the smell of the situation. Early people get out and start selling. The seventh phase of the Kindleberger Minsky cycle is called torschlusspanik, a German phrase from when it happened in Germany and Austria in the 19th century. It translates as shut door panic, when everybody jumps and runs for the door and tries to sell. The whole thing collapses. This happens in assets all the time and I could see this.

There are three phases which happen next. The first is the Minsky moment. This is crucial because our banks had a Minsky moment in September 2008.

A Minsky moment is when a bank realises it does not have any money and must sell good assets to pay for the losses on bad assets, because those assets are entirely bought on margin. Once one buys something on margin, one is in the lap of the gods. So we had Kindleberger's seven stages, then we had a crash and then came the Minsky moment where we had bank collapses. Again, this is all in the book. At that stage only massive state intervention can help. It is described as requiring a hegemon, that is, a big country or large institution, a central bank or the ECB, say, to come in and right the situation. That is because they, like me, do not believe in classical economics. The economy will not right itself after this type of boom and there must be an intervention.