This piece says pretty much the same thing as Dean Baker's piece
but it is related to Ireland.
NYT March 8, 2010
Op-Ed Columnist
An Irish Mirror
By PAUL KRUGMAN
Everyone has a theory about the financial crisis. These theories
range from the absurd to the plausible — from claims that liberal
Democrats somehow forced banks to lend to the undeserving poor
(even though Republicans controlled Congress) to the belief that
exotic financial instruments fostered confusion and fraud. But
what do we really know?
Well, in a way the sheer scale of the crisis — the way it affected
much, though not all, of the world — is helpful, for research if
nothing else. We can look at countries that avoided the worst,
like Canada, and ask what they did right — 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 let’s talk about Ireland.
As a new research paper by the Irish economists Gregory Connor,
Thomas Flavin and Brian O’Kelly points out, “Almost all the
apparent causal factors of the U.S. crisis are missing in the
Irish case,” and vice versa. Yet the shape of Ireland’s crisis was
very similar: a huge real estate bubble — prices rose more in
Dublin than in Los Angeles or Miami — followed by a severe banking
bust that was contained only via an expensive bailout.
Ireland had none of the American right’s favorite villains: there
was no Community Reinvestment Act, no Fannie Mae or Freddie Mac.
More surprising, perhaps, was the unimportance of exotic finance:
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. 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
didn’t have much effect on lenders’ 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 — the actual result was huge
losses, followed by a gigantic taxpayer bailout — 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, let’s limit both leverage and the use of securitization
— which were part of what Canada did right. But such measures
won’t matter unless they’re enforced by people who see it as their
duty to say no to powerful bankers.
That’s why we need an independent agency protecting financial
consumers — again, something Canada did right — 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 doesn’t happen, we will have failed to learn from recent
history — and we’ll be doomed to repeat it.
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