ec4024 financial economics lecture 8: crisis in ireland: what to do?
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EC4024Lecture 8
Financial Crises II: What went wrong in Ireland
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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
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This Time
Financial Fragility in Ireland: What went wrong?
Two contexts: International, and Domestic
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1. International
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Bears: One More TimePeriod 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
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This recession is different.
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2. Domestic
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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
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Cue Celtic Tiger
Tiger EndsTiger Starts
1995 1998 2000 2002
0.06
0.08
0.10
Real GDP Growth, ! Change Year on Year
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Why did it end?
None of the benefits existed anymore.(Yet: Caution on Wage Argument)
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Cue Property Boom12% 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.
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Cue Property Bust
Mass Unemployment as demand drops in 2008/9
Overstocked by 40k-80k units
Drops in Y, C, I. as a result.
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Cue Banking Crisis
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Transaction Services
20 February 2009
Project Atlas - Anglo Irish Bank Corporation plc
Summary Report Extracts
Strictly Private and Confidential
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Situation now
Economy forecast to contract by 4-6%
A Keynesian recession
Highly indebted population
Large hole in govt. finances, plugged by borrowing
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What to do now?Focus on growing our own SMES: www.bizcamplimerick.com
Sort banks out
New Banks
Change Corp. Governance
Good/Bad Banks
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Next TimeFinancial 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.