Monday, March 8th, 2010

Paul Krugman has a piece in today’s New York Times discussing the similarity and differences between the financial crash in the US and Ireland, drawing on the work of Irish economists, Gregory O’Connor, Thomas Flavin and Brian O’Kelly.  He argues that Ireland’s crash was due to “free market fundamentalism” and concludes that, “we have to focus as much on the regulators as on the regulations”.  Sounds like commonsense, but clearly this was in short supply in the lead up to the crash (and we can debate how much it is been in evidence since).  Rather than summarise, here is the core of the piece:

“Ireland’s bust wasn’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 “ ‘deep’ causal factors.”

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 America’s case, much of the cheap money came from China; in Ireland’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: “Rogue-bank heads retired with their large fortunes intact.” There was a lot of this in the United States, too: as Harvard’s Lucian Bebchuk and others have pointed out, top executives at failed U.S. financial companies received billions in “performance related” pay before their firms went belly-up.

But the most striking similarity between Ireland and America was “regulatory imprudence”: the people charged with keeping banks safe didn’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 … What really mattered was free-market fundamentalism.  … It was largely thanks to this ideology that regulators ignored the mounting risks.”

Which broadly translates as rampant neoliberalism.  Interestingly, the solution to the failure of neoliberalism in Ireland has been to implement another round of neoliberal policies (see our post from last week), rather than look to something different, as for example advocated by TASC in today’s Irish Times.

(And congrats to O’Connor, Flavin and O’Kelly for gaining the coverage in the US broadsheet)

There has been a certain amount of confusion concerning housing vacancy rates in Ireland over the past few weeks.  This is mainly a function of different data being conflated and how the results were reported and discussed (as noted by Pat McArdle in the Irish Times a couple of weeks ago).  Each study has produced three comparable pieces of data – vacancy including holiday homes, vacancy excluding holiday homes, and potential overhang (housing in excess of an expected base vacancy rate – there will always be some vacancy in a market).  The confusion has been caused, in part, by the comparison of the DKM/DEHLG overhang figure (122-147K), the NIRSA vacancy exc. holiday home figure (302K) and the UCD vacancy inc. holiday home figure (345K) as if they are estimating the same thing.  This has further been confused by CIF estimating that the overhang of brand new, unsold homes is c.40K.  Excluding the CIF estimate, there is general alignment between the four sets of estimates that have been put forward (the fourth set produced by Goodbody’s; there was also a global estimate put forward on propertypin that also has alignment).  All four organisations estimate that vacancy including holiday homes is over 300K, that vacancy excluding holiday homes is over 228K, and that the potential overhang is over 100K (and if the top rates are used for DKM/DEHLG and Goodbody then the alignment is relatively strong). (more…)