Michael Lewis reviews Ireland's economic situation

Michael Lewis (of Liar Poker fame) writes this superb account (as always) of Ireland’s economic situation.

He covers so many areas that it is amazing. He covers:

• Irish economists who predicted the crisis (in particular – Morgan Kelly of Universtiy College of Dublin; He is a star now though does not like the attention)
• Irish economists who missed the crisis and believed the bubble was real growth,
• How political system in Ireland was caught on the wrong foot? Despite economy in such a slump, the political parties have survived well.
• How one decision of Ireland govt. guaranteeing the liabilities of the entire banking system dumped the whole country.
• How Irish don’t discuss their problems and keep them close to heart. As a result, there has not been much of a revolt unlike what we saw in Greece. There was just one interesting case of a guy who threw rotten eggs at board meeting of Allied Irish Banks. Hence, there is this interesting aspect of society and culture. Ireland is seen more as an Anglo Saxon country where people are generally more open. Irish are not.
• How Irish banks along with real estate developers drove the country into a huge slump. The Irish banks were seen as giving riskier loans than British banks in UK.

I was particularly interested in economic research on Ireland. First what explained Ireland’s high growth before the crisis?

How did any of this happen? There are many theories: the elimination of trade barriers, the decision to grant free public higher education, the persistent lowering of the corporate tax rate, beginning in the 1980s, which turned Ireland into a tax haven for foreign corporations. Maybe the most intriguing was offered by a pair of demographers at Harvard, David E. Bloom and David Canning, in a 2003 paper called “Contraception and the Celtic Tiger.” Bloom and Canning argued that a major cause of the Irish boom was a dramatic increase in the ratio of working-age to non-working-age Irish brought about by a crash in the Irish birthrate. This had been driven mainly by Ireland’s decision, in 1979, to legalize birth control. That is, a nation’s fidelity to the Vatican’s edicts was inversely proportional to its ability to climb out of poverty: out of the slow death of the Catholic Church arose an economic miracle.

Then how Kelly predicted the upcoming slump:

Morgan Kelly is a professor of economics at University College Dublin, but he did not, until recently, view it as his business to think much about the economy under his nose. He had written a handful of highly regarded academic papers on topics (such as “The Economic Impact of the Little Ice Age”) considered abstruse even by academic economists. “I only stumbled on this catastrophe by accident,” he says. “I had never been interested in the Irish economy. The Irish economy is tiny and boring.” Kelly saw house prices rising madly and heard young men in Irish finance to whom he had recently taught economics try to explain why the boom didn’t trouble them. And they troubled him. “Around the middle of 2006 all these former students of ours working for the banks started to appear on TV!” he says. “They were now all bank economists, and they were nice guys and all that. And they were all saying the same thing: ‘We’re going to have a soft landing.’ ”

The statement struck him as absurd: real-estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations.

 

Googling things, Kelly learned that more than a fifth of the Irish workforce was employed building houses. The Irish construction industry had swollen to become nearly a quarter of the country’s G.D.P.—compared with less than 10 percent in a normal economy—and Ireland was building half as many new houses a year as the United Kingdom, which had almost 15 times as many people to house. He learned that since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of the city, rents had fallen to less than 1 percent of the purchase price—that is, you could rent a million-dollar home for less than $833 a month. The investment returns on Irish land were ridiculously low….

 

 

His warnings started by writing to small-circulation paper- Irish Times.  People ignored him calling him an egghead. His next article was linking the housing prices to bank lending. If former falls, latter would do as bad as much of the money came from banks.After being ignored by larger circulation newspapers, he again sent to Irish TImes. This time he was cornered by one of the bank chief who said all was safe.

 

Just like we see in the case of top academic papers. They are often ignored by the journals — Akerlof’s lemons, Black-Sharpe option pricing model, etc. And then some small journal publishes the paper which turns out to be a path breaking paper. The journal too becomes famous.

Read the whole thing. Very interesting. Typical Lewis style.

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