Policy Failures and the Irish Economic Crisis

verfasst von: Dr. Ciarán Michael Casey

Verlag: Springer International Publishing

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book seeks to understand why almost all commentators on the Irish economy were unprepared for the scale of the recent economic crisis. It analyses the public contributions from a broad range of observers, including domestic and international agencies, academics, the newspapers and politicians. This approach gives new insights into the analytical and institutional shortfalls that inhibited observers from recognising the degree of the risk. The book demonstrates that most commentators were either impeded in what they could say, or else lacked the expertise to challenge the prevailing view. The findings have significant implications for a broad range of institutions, particularly the media and the Oireachtas (the Irish Parliament).

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract

The introduction gives a brief overview of the relevant existing literature. It then raises five broad questions about the discourse on the Irish economy during the boom period. It outlines the methodology and parameters of the study, both in terms of source material and the time period under investigation. The chapter distinguishes between the various levels of dissent expressed by commentators during the boom.

Ciarán Michael Casey

Chapter 2. An Irish Depression

Abstract

This chapter provides the necessary context for the reader on the Irish economic crash. It outlines the nature of the crisis, considering each of its key facets in turn. These include the banking crash, the property and construction crashes, the fiscal crisis, and the cost competitiveness crisis. It makes extensive use of the very worthwhile academic studies on the crisis itself, which is the subject of remarkable consensus. The chapter then considers the Irish crisis in the context of the broader European and international crises of 2008. It examines factors like the international drive towards lighter financial regulation over recent decades and the structural flaws in the EMU (European Monetary Union) project. The chapter argues that the decision made by the authors of the four officially commissioned inquiries into the banking crisis and the Department of Finance not to name the individuals who made key decisions was given inadequate justification and could potentially contribute to the culture of impunity that exacerbated the poor decisions made. The chapter observes that many commentators on the international crisis have pointed to the role of neoclassical economic theory in encouraging policymakers to conclude that financial markets are inherently stable. It argues, however, that essentially no commentator on the Irish economy during the boom period appealed to theory to justify their positions. By contrast, the most prescient analysts made use of the history of asset bubbles to anticipate how the Irish boom would end. The chapter then makes extensive use of the secondary literature on the history of asset bubbles to demonstrate that the Irish crisis should have been predictable on the basis of global financial history. Paradoxically, the frequency of asset boom/bust cycles across history is itself a function of a far more universal reluctance to learn from the past. The chapter also draws on the existing literature on behavioural economics, Irish banking regulation and fiscal policy, and the predictive capacity of experts. It argues that based on the empirical and historical evidence, the fact that most observers of the Irish economy failed to anticipate the crisis is in fact far from surprising.

Ciarán Michael Casey

Chapter 3. International Organisations

Abstract

This chapter draws on all the relevant publications in the period from the IMF, the OECD and the European Commission. Like all of the subsequent core chapters it analyses the commentary under four key headings, reflecting the facets of the crisis itself. These are competitiveness, fiscal policy, property and construction, and the financial sector. The chapter demonstrates that while the IMF and the OECD produced a lot of significant analysis of the Irish economy, the European Commission published relatively little. It also demonstrates that the opinions of these organisations were repeated quite extensively in the newspapers and in parliament, and were deemed to carry significant weight. It finds that the international organisations were strong in terms of warning about Ireland’s deteriorating competitiveness position during the period, and did so reasonably consistently. The Chapter argues that the IMF issued a crucial warning in 2000: that of nearly forty recent international examples of property booms that not one had ended without price falls. In view of the political and market sensitivities this was very likely the strongest possible warning that the Fund could issue. However, analysts failed to press home the point in subsequent years, and the warning drew essentially no public attention. Similarly, in 2006 the OECD warned that of a sample of 49 residential construction booms none had ended in a soft landing. Strikingly, however, a soft landing was exactly the prediction that analysts made for Ireland. The chapter argues that the discrepancy was either attributable to intentional obfuscation or a pronounced example of design by committee. The international organisations consistently warned the Irish Government to run balanced Budgets to maintain fiscal stability and avoid contributing to inflation. However, given the enormous reliance of the workforce and the Exchequer on the continuation of the construction boom this advice was to prove totally inadequate. It thus reflected the failure of the international organisations to correctly anticipate how the boom would end. Similarly, the IMF’s 2006 Financial Sector Assessment Programme concluded that the Irish banking system was fundamentally sound. The reason is clear from the methodology: while the Fund tested the system for House price falls of up to 50%, it conducted no comparable tests for a crash in the construction sector. Given that developer loans were of comparable magnitude, but with a much higher probability of default, this was a critical mistake.

Ciarán Michael Casey

Chapter 4. Domestic OrganisationsDomestic Organisations

Abstract

This chapter is based on analysis of all the relevant publications from the Central Bank and Financial Regulator, as well as the ESRI (Economic and Social Research Institute) from the period. It argues that both organisations completely missed the possible extent of a residential construction collapse because they assumed that in a worst-case scenario housing output would fall to what they estimated to be its underlying demand level (representing an output fall of between 35 and 48%). This level would still have been a multiple of the pre-boom level or of the per capita levels seen in other countries. There was no evidence given to suggest that this is what happens after a construction boom ends, and the OECD’s study examined in the previous chapter suggests that residential construction investment tends to revert towards its pre-boom levels once the peak has passed. When residential construction output fell by over 90% the analysts in these organisations were thus caught completely off-guard. It rendered their worst-case predictions for financial stability, the fiscal position and employment totally inadequate. The failure to anticipate the extent of the construction collapse should therefore be considered decisive. Like the IMF, with whom it conducted stress tests in 2006, the Central Bank did consider the implications of major House price falls for the Irish banking system. Again, however, it paid minimal attention to the enormous exposure to a small number of key developers. Analysts therefore mistakenly concluded that the banks would withstand a market collapse.

Ciarán Michael Casey

Chapter 5. Academia

Abstract

This chapter examines the commentary by academics on Irish economic policy and the key vulnerabilities that contributed to the crisis. It encompasses all of the articles published in the three main Irish economics journals in the period, namely the Economic and Social Review, the Irish Banking Review, and the Journal of the Statistical and Social Inquiry Society of Ireland. It also incorporates many publications from key academics that were published elsewhere, including several from the 1990s. The chapter argues that academics were poorly incentivised to consider the contemporary Irish economy in their writings. Nonetheless, several high-profile academics did, providing some of the best explanations for the origins and timing of the Celtic Tiger. Of those academics who published on the contemporary Irish economy only one, Morgan Kelly, recognised the risks facing the property and construction sectors, and the attendant threats to the Exchequer and the labour market. The chapter also examines the contributions of two academics who were explicitly sanguine about property valuations and market stability. It argues that analysts relied too much on Ireland’s limited economic experience in predicting how the boom would end, and would have been better-served by taking a broader perspective of the history of asset booms.

Ciarán Michael Casey

Chapter 6. The Newspapers

Abstract

The commentary on the Irish economy and economic policy in the newspapers during the boom has received more academic attention than the subjects of the other chapters. There are three publications based on a series of interviews that a group of academics from Dublin City University (DCU) conducted with journalists from the period. Furthermore, Julien Mercille from University College Dublin (UCD) has published an article arguing that the newspapers intentionally talked up the property boom to promote the interests of their owners and managers (Julien Mercille, ‘The Role of the Media in Sustaining Ireland’s Housing Boom’, New Political Economy, vol. 9, no. 2 (2014), 282–301). This chapter first argues against the Mercille thesis, arguing that the purchase of large property websites by the two main broadsheet newspapers in 2006 strongly suggests that newspaper owners were genuinely convinced that the property market would remain robust. The chapter then offers a competing explanation for why the newspapers were unduly sanguine about the boom. Both The Irish Times and The Irish Independent were enormously reliant on outside experts to provide analysis, both in comment pieces and as sources. This almost certainly emanated from the economic realities of running a newspaper rather than any intentional bad faith. However, economists from the organisations most closely tied to the property sector had an explicit incentive to shape the debate. It was also highly unlikely that they would ever warn of an impending crash. The chapter empirically demonstrates that these sources dominated the economics sections of the newspapers. It contrasts the performance of the Irish newspapers with The Economist, which consistently warned of a property market crisis in countries including Ireland from as early as 2002. The crucial distinction was the level of internal expertise (and attendant self-confidence) that The Economist enjoyed. As a weekly publication with a much broader remit, it also considered the Irish economy far less frequently, allowing for a much more considered and consistent message.

Ciarán Michael Casey

Chapter 7. Politics

Abstract

The political debates on the Irish economy have received no academic attention to date. This chapter is based on a reading of all the relevant Dáil debates from 2000 to 2006. It draws on secondary literature arguing that Irish politics in the twentieth century was characterised by localised interests and brokerage, suggesting that these preoccupations survived into the new millennium. It considers the Fianna Fáil/Progressive Democrat Government coalitions of the period, drawing on the parliamentary debates to explain the economic choices that were made. With some exceptions, the chapter is critical of the lack of expertise or even interest in economic or financial stability issues exhibited in the Dáil. The standout example of a politician engaging with a meaningful economic issue was Eamon Gilmore’s championing of the key proposal advocated in the ‘Kenny Report’, published in 1974. The report advocated that local authorities should be enabled to compulsorily purchase development land in areas designated by a high court judge at agricultural prices plus a 25% premium. Several opposition politicians resuscitated the proposal in the millennial period as a possible solution to rampant property price inflation. The chapter follows the Government’s response to the proposal, which several senior ministers professed to support, including Bertie Ahern as Taoiseach. Action was repeatedly deferred, however, until eventually the proposal fell off the political agenda. The chapter argues that the most likely explanation was that it was a politically unpalatable solution that could not be rejected upfront. It contends that this exposes the limits of what politicians were willing to countenance in order to address the issue.

Ciarán Michael Casey

Chapter 8. Conclusion

Abstract

The conclusion summarises the extent to which commentators understood the risks to the Irish economy, providing a table outlining the most notable warnings issued in the period. It argues that international historical precedent provided the best means to ascertain how the Irish boom would end, suggesting that the contemporary discourse was largely characterised by analysts ignoring or misinterpreting pertinent episodes. It reconsiders the institutional shortcomings that hampered many analysts, though recognises that these were not decisive and that analytical errors were also key. The chapter considers some of the possible options that were available to dissenters to secure change, concluding that they inevitably faced a formidable task. It outlines the policy changes that should have been implemented at the time, before turning to the institutional reforms necessary to improve policy debate in the future.

Ciarán Michael Casey

Backmatter

Titel: Policy Failures and the Irish Economic Crisis
verfasst von: Dr. Ciarán Michael Casey
Verlag: Springer International Publishing
Electronic ISBN: 978-3-319-90182-4
Print ISBN: 978-3-319-90181-7
DOI: https://doi.org/10.1007/978-3-319-90182-4