The 2008 financial crisis was caused by a combination of factors, including loose government policies, reckless banking practices, an overreliance on the construction sector, and external global events. Ireland experienced a property bubble and credit-fueled construction boom from 1998-2006, with house prices quadrupling and construction accounting for 15% of GNP. When the bubble burst in 2008, it devastated the Irish economy and led to a banking crisis, soaring unemployment, and budget deficits. Lax financial regulation and a policy of bailing out the banks at all costs exacerbated the crisis in Ireland.

1. SSJ10050 – The FinancialCrisis
What were dominantfactors in the outbreak of the 2008 thefinancial crisis?
Student no: 13559673
2008 was the year when the greatest period in the country’s economic development and
growth began to unravel. For the next six years the country was faced with a decline in its
social/cultural, economic and human fabric. There were many and varied reasons for this
devastation that caused such human misery and distress and created a landscape that was
so different and unexpected to that which the population had become accustomed to. This
essay will examine a number of these factors including the role of the banks, government
policy, the building/construction sector and external global events which though not directly
the cause of the country’s downfall, nevertheless did not help an already dire situation.
From its independence in 1922 until the beginning of the 1990’s Irelands economic progress
had been exceedingly slow and the country was prone to intermittent recessions and short
term growth spurts. However political influences, a sustained global boom of the 1990’s and
a shift in socio-cultural mores and attitudes enabled a more enlightened people to take
advantage and bring the country into a period of prosperity in every way.
Morgan Kelly in a discussion paper Whatever Happened to Ireland, tells us that, “fifteen
years of an economic boom allowed the Irish government to cut income taxes, increase
spending and run a budget surplus by relying heavily on expenditure taxes.” When Fianna
Fail and The Progressive Democrats took office 1997 they inherited a stable economy and a
budget surplus for the first time. Ireland was reaping the rewards of a global boom. This
new government was predominantly influenced by the ideology of the PD’s. Charlie
McCreevy as Minister of Finance pursued a policy of free market globalisation that dragged
Ireland firmly to the right. Their low tax, light regulation running of the economy was
strongly supported by a Fianna Fail party who believed in pleasing the electorate at all times
to ensure their re-election. Corporation tax at 12.5% was the lowest in Europe and attracted
multi-national companies particularly American who established themselves in Ireland and
availed of this generous tax facility often finding means and ways to reduce this amount and
subsequently paying far less than the 12.5%. The removal of hundreds of thousands of
people from the tax net and lowering the tax rates ensured that people had more spending
power. This drove a spending boom in local economies. An exercise in bench-marking was
under taken to compare salaries in the private sector versus the public sector and the
perceived inequality in the public sector was amended and resulted in huge increases for
public sector workers. Charlie McCreevys credo was a textbook statement of
macroeconomic illiteracy: “When I have the money I spend it, when I don’t have it I don’t
spend it.” This was a lethal cocktail of global ideology and Irish habits which Ahern,
McCreevy and Harney, though bright people, fostered.

2. All of this was financed to a great extent with tax returns from a booming construction
sector where “Economists had been noting for some time that the boom in Irish exports
which had fuelled spectacular growth in the 1990’s had been supplanted by a boom in
construction. Between 2000-2006 house prices had doubled relative to income and rents,
and some 15% of our GNP was being generated from the construction of new houses and
apartments- 3 times as much as in other developed countries.” (McDonald and Sheridan). In
December 2006, Morgan Kelly, Professor of Economics in UCD, in an Irish Times article
noted when house prices were still skyrocketing “we are likely to spend a painful few years
as we unlearn that lesson.” Professor John Fitzgerald of the ERSI told Richard Curran in an
RTE documentary called Future Shock: Property Crash, “We have allowed building
construction to grow too rapidly and take up too big a share of the economy.” (McDonald
and Sheridan).
In the eight years from 1998 to 2006 a credit fuelled property market and construction
frenzy was in full swing. Builders became developers incentivized by generous tax breaks for
building, refurbishment and urban renewal developments all over the country. Every plot of
land, every small village every building seemed to have the potential to be turned into a pot
of gold. This was facilitated by cheap credit and extensive competition between the main
banks in Ireland, no one wanted to miss out. Money was widely available to the Irish banks
from German banks, hedge funded companies and bond holders among others. There was
an endless supply to the Irish banking systemand government policy of not upsetting the
competitive position of the domestic banks while encouraging the financial services industry
at the expense of prudent behaviour meant “the banking business was oiling the economy
and the politicians didn’t want it to end.” (Matt Copper). A more significant issue was the
bullying of the financial regulators by the banks by going above their heads to their bosses.
The Regling- Watson report on the financial crash stated that “the regulation was not hands
on or pre-emptive and was insufficiently intrusive and forceful.” “The regulators had
seriously underestimated the funding risks linked to the banks over exposure to property.
The fact is that supervisors, right to the end, clung onto the hope of a soft landing for the
economy and the property market.” (Matt Cooper). The crash when it came involved a
banking collapse of unprecedented scale and a housing market meltdown which in turn led
to soaring unemployment which the Irish government could not handle on its own. (Karl
Whelan). All of the banks were to blame for the economic catastrophe but if one bank is to
take the main share of the blame it has to be Anglo Irish Bank and its Chairman Sean
Fitzpatrick. “Anglo’s loses were bigger than any other banks in the world in both 2009 (12
billion) and 2010 (17 billion), its need for state supplied capital more voracious, the
behaviour of its top executives more egregious.” “The cost of cleaning up Anglo would
continue for the Irish citizen for a decade to come, creating a bill of thousands of euro per
head to be paid for by increased taxes and reduced public services.” (Matt Cooper).
Up to the beginning of the year 2000 Ireland had a relatively small housing stock. The
population of the country was increasing rapidly which resulted in a demand for housing.
The high mortgage rates of the 1980’s and early 1990’s were dramatically reduced to almost
half by the provision of low interest finance from European banks to Irish mortgage lenders.
One of the consequences of this was that house prices quadrupled between 1996 and 2007

3. which was twice the rate of increase of the United States. “The response to this increase in
housing demand was an extraordinary construction boom. The total stock of dwellings—
which had stood at 1.2 million homes in 1991 and had gradually increased to 1.4 million
homes in 2000—exploded to 1.9 million homes in 2008. House completions went from
19,000 in 1990 to 50,000 in 2000 to a whopping 93,000 in 2006.” (Karl Whelan). Houses
were built where there was no demand. Sites were developed on unsuitable land, for
example many housing estates were built on flood plains which resulted in catastrophic
situations for residents. The quality of building materials was suspect and scant regard was
given to fire safety and health regulations which came to light in developments like Priory
Hall. The result of all of this was when the collapse came the country was dotted with ghost
estates unfished and mainly unoccupied. Developers consisted of all types of individuals.
Fintan O’Toole highlights one such high profile developer in his book Ship of Fools, “Sean
Dunne pushed Irish property prices to new heights by buying the Jurys and Berkeley court
hotels in Ballsbridge, Dublin, for €260 million, with the intention of demolishing them to
build a new high-rise city quarter to rival London’s Knightsbridge. He paid €53.7 million per
acre for the land: the previous record was €35 million. He then bought a small adjacent site,
Hume House, for the equivalent of €195 million an acre- believed to be one of the highest
prices to be paid for a piece of real estate ever, anywhere. In all he spent €379 million on his
Ballsbridge site.” As O’Toole tells us, this inevitably became another toxic debt to the Irish
state that was unlikely to ever be repaid in full. The other extreme of this was the average
PAYE worker, small time business man and one time builder who bought properties at
highly inflated prices and subsequently found themselves in negative equity when the
collapse came, often resulting in these people becoming homeless and destitute. There was
a high social price to be paid by so many for this frenzy that consumed the country.
The European Central Bank dictates how each member states central bank operates in
relation to interest rates, responding to inflation and the management of budget deficits.
These decisions were enshrined in the European Union after numerous referenda which
were designed to manage and stabilize the union as a monetary entity. The economic
collapse when it happened, hit some countries harder than others for various reasons.
Unlike Great Britain and The United States whose treasury and Federal Reserve were able to
increase or decrease interest rates as necessary and also to print money so as to stimulate a
faltering economic situation, Ireland was at the mercy of an EU and an ECB that failed to
take account of the effects of consistent low interest rates which facilitated the availability
of a never ending supply of cheap money to banks which fuelled the construction boom.
Irish government policy was first and foremost to save the banks, at the expense inevitably
of its citizens. The first big banking collapse in USA was Lehman Brothers and what shocked
European countries was the fact that the Federal Reserve allowed Lehman’s and others
subsequently to fail so as to protect the US economy. Professor Patrick Honohan the
subsequent Governor of The Central Bank in his report of 2010 says, “the weakness of the
Irish banks had been caused not by the collapse of the US bank Lehman Brothers but by their
over exposure to property lending,” and “Anglo and Irish Nationwide were well on the road
to insolvency by the time of the Lehman collapse and AIB and Bank of Ireland could have
survived without state supported bailout only if the International financial markets had

4. calmed.” (Matt Cooper). The reaction of the financial markets was also instrumental in the
instability around the Irish banks and the economy itself.
While the Celtic Tiger era, contributed in a very significant way to the growth and
development of a New Ireland, in many other ways it could be said that it was a house of
cards, built on quick sand. There were many good things that the government achieved.
Infrastructure, rejuvenation and psychologically a feel good factor that infected the country
as a whole. Sadly it was short lived. Could it have been handled in a better way? The answer
has to be yes, if, a number of things were approached differently. There are many ifs. If the
government had been more prudent using the budget surplus and the massive increases in
salaries and social welfare benefits which were subsequently seen to be unsustainable. If
the banks hadn’t been caught up in a frenzy of lending trying to outdo each other. If the
financial regulator hadn’t been asleep and largely ignoring the warning signs of the dangers
of overheating and an over reliance on tax returns from one aspect of the economy. If the
European Central bank had seen fit to use its powers over interest rates and overseeing of
individual central banks. Now in 2015 the recovery is underway. The harsh lessons have
been painfully felt by the vast majority of the Irish citizens. Hopefully these lessons will be
heeded if and indeed probably when there is the inevitable next time.
Reference list:
Kelly, M 2010, Whatever Happened to Ireland, University College Dublin, Discussion paper
NO.7811 Available. http://www.voxeu.org/article/whatever-happened-ireland
Mcdonald, F, Sheridan, K 2008, The Builders, how a small group of property developers
fuelled the building boom and transformed Ireland, Dublin, Penguin Ireland.
Cooper, M 2011, How Ireland Really Went Bust, Dublin, Penguin Ireland.
O’Toole, F 2009, Ship of Fools, London, Faber and Faber LTD.
Whelan, K 2013, The Good, the Bad and the Ugly, University College Dublin, UCD School of
Economics, Available: https://www.ucd.ie/t4cms/WP13_06.pdf