Boomerang_ Travels in the New Third World - Michael D. Lewis [39]
The problem for Kelly, once he had these thoughts, was what to do with them. “This isn’t my day job,” he says. “I was working on medieval population theory.” By the time I got to him Kelly had angered and alienated the entire Irish business and political establishment, but he was himself neither angry nor alienated, nor even especially public. He’s not the pundit type. He works in an office built when Irish higher education was conducted on linoleum floors, beneath fluorescent lights, surrounded by metal bookshelves, and generally felt more like a manufacturing enterprise than a prep school for real estate and finance—and likes it. He’s puckish, unrehearsed, and apparently—though in Ireland one wants to be careful about using this word—sane. Though not exactly self-denying, he’s clearly more comfortable talking and thinking about subjects other than himself. He spent years in graduate school, and collected a doctorate from Yale, and yet somehow retained an almost childlike curiosity. “I was in this position—sort of being a passenger on this ship,” he says. “And you see a big iceberg. And so you go and ask the captain: Is that an iceberg?”
HIS WARNING TO his ship’s captain took the form of his first ever newspaper article. Its bottom line: “It is not implausible that [Irish real estate] prices could fall—relative to income—by 40 to 50 percent.” At the top of the market, he guessed, prices might fall by a staggering 66 percent. He sent his first piece to the small-circulation Irish Times. “It was a whim,” he says. “I’m not even sure that I believed what I was saying at the time. My position has always been, ‘You can’t predict the future.’” As it happened, Kelly had predicted the future, with uncanny accuracy, but to believe what he was saying you had to accept that Ireland was not some weird exception in human financial history. “It had no impact,” Kelly says. “The response was general amusement. It was what will these crazy eggheads come up with next? sort of stuff.”
What the crazy egghead came up with next was the obvious link between Irish real estate prices and Irish banks. After all, the vast majority of the construction was being funded by Irish banks. If the real estate market collapsed, those banks would be on the hook for the losses. “I eventually figured out what was going on,” says Kelly. “The average value and number of new mortgages peaked in summer 2006. But lending standards were clearly falling after this.” The banks continued to make worse loans, but the people borrowing the money to buy houses were growing wary. “What was happening,” says Kelly, “is that a lot of people were getting cold feet.” The consequences for Irish banks—and the economy—of the inevitable shift in market sentiment would be catastrophic. The banks’ losses would lead them to slash their lending to actually useful businesses. Irish citizens in hock to their banks would cease to spend. And, perhaps worst of all, new construction, on which the entire economy was now premised, would cease.
Kelly wrote his second newspaper article, more or less predicting the collapse of the Irish banks. He pointed out that in the last decade the Irish banks and economy had fundamentally changed. In 1997 the Irish banks were funded entirely by Irish deposits. By 2005 they were getting most of their money from abroad. The small German savers who ultimately supplied the Irish banks with deposits to re-lend in Ireland could take their money back with the click