A research paper co-authored by Prof.
Brian O'Kelly of DCU Business School has been cited by Paul Krugman,
Nobel Prize Winner for Economics, in an article published in The New
York Times on 7th March 2010.
Krugman cites the research paper,
titled Irish Economy Note 10
in his comparison of the economic crisis in Ireland to that
experienced in the USA:
Well, in a way the sheer scale of the
crisis â€” the way it affected much, though not all, of the world â€” is
helpful, for research if nothing else. We can look at countries that
avoided the worst, like Canada, and ask what they did right â€” such
as limiting leverage, protecting consumers and, above all, avoiding
getting caught up in an ideology that denies any need for
regulation. We can also look at countries whose financial
institutions and policies seemed very different from those in the
United States, yet which cracked up just as badly, and try to
discern common causes.
So letâ€™s talk about Ireland.
As a new research paper
<http://www.irisheconomy.ie/Notes/IrishEconomyNote10.pdf> by the
Irish economists Gregory Connor, Thomas Flavin and Brian Oâ€™Kelly
points out, â€œAlmost all the apparent causal factors of the U.S.
crisis are missing in the Irish case,â€ and vice versa. Yet the shape
of Irelandâ€™s crisis was very similar: a huge real estate bubble â€”
prices rose more in Dublin than in Los Angeles or Miami â€” followed
by a severe banking bust that was contained only via an expensive
Ireland had none of the American rightâ€™s favorite villains: there
was no Community Reinvestment Act, no Fannie Mae or Freddie Mac.
More surprising, perhaps, was the unimportance of exotic finance:
Irelandâ€™s bust wasnâ€™t a tale of collateralized debt obligations and
credit default swaps; it was an old-fashioned, plain-vanilla case of
excess, in which banks made big loans to questionable borrowers, and
taxpayers ended up holding the bag.
So what did we have in common? The authors of the new study suggest
four â€œ â€˜deepâ€™ causal factors.â€
First, there was irrational exuberance: in both countries buyers and
lenders convinced themselves that real estate prices, although
sky-high by historical standards, would continue to rise.
Second, there was a huge inflow of cheap money. In Americaâ€™s case,
much of the cheap money came from China; in Irelandâ€™s case, it came
mainly from the rest of the euro zone, where Germany became a
gigantic capital exporter.
Third, key players had an incentive to take big risks, because it
was heads they win, tails someone else loses. In Ireland this moral
hazard was largely personal: â€œRogue-bank heads retired with their
large fortunes intact.â€ There was a lot of this in the United
States, too: as Harvardâ€™s Lucian Bebchuk and others have pointed
out, top executives at failed U.S. financial companies received
billions in â€œperformance relatedâ€ pay before their firms went
But the most striking similarity between Ireland and America was
â€œregulatory imprudenceâ€: the people charged with keeping banks safe
didnâ€™t do their jobs. In Ireland, regulators looked the other way in
part because the country was trying to attract foreign business, in
part because of cronyism: bankers and property developers had close
ties to the ruling party.
There was a lot of that here too, but the bigger issue was ideology.
Actually, the authors of the Irish paper get this wrong, stressing
the way U.S. politicians celebrated the ideal of homeownership; yes,
they made speeches along those lines, but this didnâ€™t have much
effect on lendersâ€™ incentives.
What really mattered was free-market fundamentalism. This is what
led Ronald Reagan to declare that deregulation would solve the
problems of thrift institutions â€” the actual result was huge losses,
followed by a gigantic taxpayer bailout â€” and Alan Greenspan to
insist that the proliferation of derivatives had actually
strengthened the financial system. It was largely thanks to this
ideology that regulators ignored the mounting risks.
So what can we learn from the way Ireland had a U.S.-type financial
crisis with very different institutions? Mainly, that we have to
focus as much on the regulators as on the regulations. By all means,
letâ€™s limit both leverage and the use of securitization â€” which were
part of what Canada did right. But such measures wonâ€™t matter unless
theyâ€™re enforced by people who see it as their duty to say no to
Thatâ€™s why we need an independent agency protecting financial
consumers â€” again, something Canada did right â€” rather than leaving
the job to agencies that have other priorities. And beyond that, we
need a sea change in attitudes, a recognition that letting bankers
do what they want is a recipe for disaster. If that doesnâ€™t happen,
we will have failed to learn from recent history â€” and weâ€™ll be
doomed to repeat it.
Paul Krugman, a professor at
Princeton and a columnist for The New York Times, won the Nobel
Prize for his work on global trade patterns.