However, it is important to note that the way of economic growth after 2000 was completely different from what it used to be. During the 1990s, the Irish government adopted positive policies which enhanced the country’s competitiveness, followed by the rising employment. Compared with this, though competitiveness fell from 2000, employment still grew speedily driven by the construction boom (Kelly, 2010, p.7). It indicates that the development of Irish economy was in an abnormal way. To be specific, more and more people got involved in the construction boom either by building houses, selling houses or buying houses. By selling houses to those who got jobs building houses, the country became richer and this could be called as a multiplier-accelerator process (Kelly, 2006, p.3). This kind of economic growth mode itself was unsteady and might easily lead to a crisis.
Moreover, the rise of house prices “contained the seeds of its own collapse” (Kelly, 2010, p.3), which is another evidence of the predictable financial crisis. The research of Kelly (2010) shows that average secondhand house price in Dublin was 17 times earnings in 2006 while it was only 4 times earnings in 1995. Though some people were looking forward to a soft landing, the prices were likely to crash soon (Kelly, 2006), as the rising prices were simply based on the belief of the further growth of house prices (Kelly, 2010).Once it hit the limit, the crisis would became inevitable. Therefore, it could possibly be argued that Irish Financial Crisis was predictable.
The main reason why Irish Financial Crisis was considered to be unpreventable is probably the uncontrollable low interest rate. As a member of euro, the Irish Central Bank did not have the right to set interest rate. Thus the uncontrollable low interest rate was obviously inappropriate for Ireland due to inflation (Heath, 2010). However, it seems that the low interest rate did not play such an important role in the property bubble. Given the formula
, it can be seen that
the lending rate, has a small impact on
the price of a new house, compared with the strong effect of
the mortgage (Kelly, 2010, p.12). Besides, Iceland, a country outside euro, could not get rid of a similar financial crisis (Blackburn, 2010, p.14).
There are also some negative attitudes towards the issue that Irish Financial Crisis was preventable. Banks only focused on their own benefits by increasing lending without considering the predictable risky consequence. Meanwhile, the regulator chose to be silent as they did not want to be the one who stopped the growth economy. Sharing the same interests with the bankers, the Irish government was also reluctant to set regulations (Blackburn, 2010, p.14).
However, despite these problems there are evidences to suggest that Irish Financial Crisis was preventable. Firstly, unlike the interest rate, mortgage size- the main factor led to the crisis-was still under the regulator’s control. As long as the Irish Central Bank limited mortgages to a normal level, house prices would rise mildly and the crisis could be prevented (Kelly, 2010, p.21). Moreover, both theoretical and practical facts were provided to the Irish government and the regulator as experience. For example, studies of Mendoza and Terrones (2008) show how relaxed regulation caused lending booms (Kelly 2010 p.20). The government could also learn a lesson from the housing booms of Finland and the Netherlands. Thus it is reasonable to suggest that Irish Financial Crisis was preventable.
In conclusion, this essay has attempted to argue that although Irish Financial Crisis came in a sudden with destructive force, it was possible to predict and prevent it. However, the fact is the irresponsibility of the Irish banks; regulator and government made the Ireland economy a tough problem. It will still take a long time to see whether the bailout from the Irish government and the western society could work out at last.
Bibliography
Morgan, Kelly (2010), whatever happened to Ireland? International Macroeconomics.
Morgan, Kelly (2006), how the housing corner stones of our economy could go into a rapid freefall, The Irish Times.
Morgan, Kelly (2007), banking on very shaky foundations, The Irish Times.
Allister Heath (2010), how the euro caused Ireland’s crisis, City AM Friday.
David Blackburn (2010), Ireland’s crisis is the fault of Fianna Fail, not just the euro, The Spectator.
Matthew Sinclair (2010), the British taxpayer should not be bailing out Ireland, The Spectator.