patrick honohan : where did all the money channelled into propertybacked lending go? article by mr patrick honohan, governor of the central bank of ireland, originally published in the irish times on 31 january 2015. * * * accompanying chart can be found at the end of the speech. imagine how the irish economy would have performed if the banks hadn ’ t borrowed all that money to finance property - backed loans. during 2002 – 2007 a vast sum in the order of twice annual gdp ( much of it borrowed from abroad ) was channelled by the banking system into property - backed lending. where did all this money end up? that was the question recently asked by colum kenny in this newspaper, and also addressed to me at the banking inquiry. as we take steps to ensure that there is no return to boom - and - bust conditions, it is indeed timely to revisit this question, which has puzzled many. one approach to answering the question seeks to construct a kind of audit trail. thus some of “ the money ” was paid out for construction work, wages, materials and profits – including bank profits. some was received by those who sold property at high prices. these receipts were in part saved, and in part spent, by the recipients, either leaking out of the country in payment for imports or adding to tax revenue. but that audit trail narrative misses a large part of the story. a fuller answer must take into account the damaging effects the spending of the money had on prices and wages ; on investment patterns and the productive structure of the economy ; on the government ’ s spending and tax rate decisions ; and on the levels of indebtedness of households and firms. the only way of getting to grips with the question from this deeper perspective is to pose it in terms of a clearly - defined counterfactual. imagine how the irish economy would have performed if the banks hadn ’ t borrowed all that money to finance property - backed loans. knowing this will allow us to restate the question “ where did the money go? ” in terms that, while complicated, are amenable to answer. for the difference between the actual and this counterfactual tells us where that money went. start with the capital gains and losses from credit - financed property transactions at what turned out to be evanescent bubble prices. the counterfactual economy would not have seen these transactions which left some sellers richer and many buyers poorer. note that, in principle,

and attachments at exemplary institutions. in addition mefmi arranged a “ one - to - one ” mentoring and coaching programme to all fellows with leading experts in the subspecialty chosen. having personally participated in these activities as a resource person, i can vouch for the quality of the process. 3. today we have witnessed the largest group of 25 fellows ever graduating, at once, since the inception of mefmi. this crop will bring the total number of graduate fellows to 36. the number for the accredited fellows now stands at 19 following the 3 that have qualified today. i am also told that currently there are 12 candidate fellows under training who will be graduating early in 2008. in addition, tomorrow the secretariat will be conducting rigorous interviews to recruit a new group of 17 fellows, which will bring the total number of fellows under training to 29. these developments are a clear demonstration that the fellows programme is rising to greater heights than was the case at the beginning. this is evident from not only the number of graduating fellows but also the diversity of the specialty areas. the diverse areas now include : post hipc debt strategy formulation and analysis ; public debt strategy formulation ; financial supervision of pension funds ; payments systems ( oversight ) ; banking supervision ( basel ii ) ; financial programming ; and policy and economic modelling that reflect the emerging capacity building needs of the member states. the expertise acquired by the fellows will be utilized in assisting member states in designing appropriate policies and strategies for enhancing economic growth relevant for poverty reduction. although mefmi may have registered success in the fellows development programme because of the notable outputs, the demand for capacity far outstrip the supply. mefmi ’ s vision is to realise that dream of a critical mass of accredited fellows being available in each institution of the member state. 4. your excellencies, distinguished ladies and gentlemen, one of the gains of the fellows programme is the benefit of high quality expertise at a minimal cost. as you may well know, for decades, africa has been grappling with problem of limited capacity in specialist areas. long term technical assistance provided from overseas has been perceived as a solution. experiences in the region, however, indicate that technical assistance perpetuated and turned into great dependency. the coming of institutions such as mefmi, with the noble approach of empowering its member states officials and reducing use of external experts. this aspect has become a route towards sustainable and self - generating capacity for mefmi. ladies and gentlemen : allow