Ireland's after the fact diagnosis

On the Newshour Wednesday, Peter Kirkegaard made a puzzling statement: “Ireland clearly exemplifies that you can do everything right, but, if you get your banking system wrong, then you're going to end up in the same situation as Greece was in.” The banking system was done in by a laissez faire ideology which permeated the financial and governing elite in Ireland. Bank officials and regulators turned a blind eye to the massive speculative real estate bubble and Ireland has been embroiled in a financial crisis ever since. Of course while Greece had been roundly disparaged over the past decade for being a fiscal basket case, very few people criticized the banking system of Ireland.

What were hugely criticized at the time was Ireland’s decision to protect its financial system, especially Ireland’s highly controversial decision at the end of 2008, to guarantee all bank deposits and debt. This decision was widely criticized at the time as a go-it-alone and beggar-thy-neighbor approach. Many people thought that investors would flee to what was perceived as the relative safety of Irish banks. Very few thought that the problem was in fact the opposite: that the banking system was gravely ill and that the Irish government would be left on the hook for large payouts that they couldn’t afford pushing them to the brink of sovereign default. Economists who sounded the alarm over Ireland’s debt problem were fustigated for being one-sided irresponsible and unpatriotic.