EC4024 Financial Economics Lecture 8: Crisis In Ireland: What to do?

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EC4024 Financial Economics Lecture 8: Crisis In Ireland: What to do?

  1. 1. EC4024 Lecture 8 Financial Crises II: What went wrong in Ireland
  2. 2. Last Time 1. Financial Fragility Thesis 1. Innovations in Finance destablise economy 2. Govt legitimates innovations 3. Things calm down, banks deleverage 4. Cycle restarts
  3. 3. This Time Financial Fragility in Ireland: What went wrong? Two contexts: International, and Domestic
  4. 4. 1. International
  5. 5. Bears: One More Time Period Decline from peak to trough (%) 1834-1842 -50% 1850-1857 -62% 1905-1920 -70% 1928-1948 -56% 1968-1981 -55% 1999-2008* -51%* * So Far. Major US Bears in Constant Dollars
  6. 6. This recession is different.
  7. 7. 2. Domestic
  8. 8. Traditional Irish Development Model 1. Low relative w/p 2. Low inflation 3. High (ish) unemployment. No upward pressure on wages, implies dw/dt pretty static. Good for employers, lowers uncertainty for FDI investment 4. Social partnership guarantees this. 5. Business Friendly policies: low corp. tax, subsidies all over the place, etc 6. ‘loadsamoney’ from the EU 7. Demography + Education in our favour
  9. 9. Cue Celtic Tiger Real GDP Growth, Change Year on Year Tiger Ends Tiger Starts 0.10 0.08 0.06 1995 1998 2000 2002
  10. 10. Why did it end? None of the benefits existed anymore. (Yet: Caution on Wage Argument)
  11. 11. Cue Property Boom 12% of GDP in 2007/8 6x more house starts than UK with 16x the population 1/5 men working in construction Huge Service sector dependent on this.
  12. 12. Cue Property Bust Mass Unemployment as demand drops in 2008/9 Overstocked by 40k-80k units Drops in Y, C, I. as a result.
  13. 13. Cue Banking Crisis
  14. 14. Project Atlas - Anglo Irish Bank Corporation plc Summary Report Extracts 20 February 2009 Strictly Private and Confidential Transaction Services
  15. 15. Situation now Economy forecast to contract by 4-6% A Keynesian recession Highly indebted population Large hole in govt. finances, plugged by borrowing
  16. 16. What to do now? Focus on growing our own SMES: www.bizcamplimerick.com Sort banks out New Banks Change Corp. Governance Good/Bad Banks
  17. 17. Next Time Financial Fragility & Corporate Governance in Ireland, on the site. Pilbeam, Cht 4 Donna will do Portfolio Analysis in Tutorials. No Lecture Friday or Monday. Check site for lecture cast.

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