David Archer, a loyal MR reader, writes to me:
That is a very good question; here are a few points:
1. A small country, especially one with a lot of FDI, can rise or fall more quickly than our usual economic intuitions otherwise might indicate.
2. The U.S. is a big (and growing, relative to the UK) part of Irish FDI. New York-based financial institutions (and don't forget Deutsche Bank and Credit Suisse do a lot of their business in New York) are more central to the Irish economy, or for that matter to the Canadian economy, than is often realized.
3. The key cause of the crisis was creeping overconfidence and complacency (I was pleased to hear Paul Krugman use refer to complacency in a recent talk of his on the crisis) and this was nearly global, Ireland included. Irish investors assumed that things were very likely to keep on getting better. Read Keynes's chapter 12!
4. Scott Sumner's to-the-point analysis blames the many manifestations of banking crises, internationally, on falling AD curves. My version of this story is less AD centered, and more about the revision of expectations (see for instance commentary from Bryan Caplan), and the revelation that past plans were overconfident and based on false complacency, but Sumner nonetheless makes some good points.
Addendum: Here is a good article on the spread of the downturn to India.
There was an enormous house price bubble here.
I think that’s something that folks should keep in mind.
Ireland also had severe cronyism. The political class, the bankers and the property speculators were hand in hadn. The
So the Irish taxpayer is now guaranteeing the liabilities of the Irish banks, and has nationalized 2.
The government also bought off the trade unions, in effect.
What would have been needed, when the Irish housing boom got going, was a dramatic tightening of taxation. Which wasn’t going to happen, and, to be fair, wouldn’t happen in most countries.
Tim Kane breaks it down.
James, you’re right that Ireland became “The New Hong Kong” for a while. But the only article I remember touting the greatness of Iceland was this from the Guardian.
Current
Given the Bank of Ireland could not control interest rates, it could have increased margin requirements: ie the downpayment on a flat as a % of purchase price, or other forms of credit control (strict lending to income ratio of 3 times etc.). It does have the power of financial regulation over its banks. This is one of the problems with allowing deregulation of finance, but for example in the UK the FSA can regulate at the point of contact with the consumer.
The Central Bank and the financial regulator have a lot of powers which are not strictly about interest rates.
However none of the above, nor increases in direct taxation to reduce the consumer bubble, would have been politically acceptable or possible.
This is where we get into the political economy of all this, or, in other words, crony capitalism. See the contributions by the sub prime industry to US politicians, detailed in today’s FT.
The bitter reality is that much of the Irish economic growth of the last 4-5 years turns out to have been apparent rather than real. The bubble fueling itself.
Of course I’ve yet to see a good analysis document growth of GDP, population growth, agricultural output, imports, exports, energy costs, etc. More banalities and superficialities from the punditry.
Of course I’ve yet to see a good analysis document growth of GDP, population growth, agricultural output, imports, exports, energy costs, etc. More banalities and superficialities from the punditry.
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