When I first came to the United States from Ireland in the early 1990s, Americans thought of my home country as a land of green fields, bibulous peasants, and perhaps the occasional leprechaun. Once, on a bus from Ann Arbor to Detroit, a fellow passenger heard my accent and asked if she could touch me for good luck. But something changed over the course of the 1990s and 2000s, as Ireland started to enjoy remarkable levels of economic growth. Blather about Guinness and the Little People made way for a new story line: the success of the Celtic Tiger economy. Between 1995 and 2007, Irish GDP grew at an average rate of 6 percent every year. Housing prices rose by 270 percent between 1996 and 2006. A country that had long been notorious for its high emigration rates started to import people instead. Gorta tiny town in Galwayacquired a large population of South American immigrants, while Dublin supported no less than three Polish-language newspapers.
But the boom didnt last. Over the last eighteen months, Ireland has seen a devastating economic collapse. GDP fell by an estimated 7.25 percent in 2009, while unemployment rose to 12.6 percent and is forecast to rise to 14 percent this year. House prices have plummeted 30 percent since their peak, and are likely to fall much farther. The immigrants are going back to Poland and Brazil.
Irelands economic problems started, like Americas, in the real estate market. Just as in the U.S., free-market ideology and comfortable relationships between businessmen and politicians encouraged the creation of a housing bubble. As a recent report by three National University of Ireland economists emphasizes, Irelands financial institutions did not fall prey to exotic financial instruments, but to lax regulation and bad business judgment. The report is tactfully silent regarding the reasons why Irish regulators made “obviously flawed” judgments, although its mention of the fact that “most large property developers in Ireland have been very closely connected to the ruling political party, Fianna Fil,” offers some clues.
Political commentators may rush in where economists fear to tread. Fintan OToole is a longtime columnist for the Irish Times, and a relentless critic of Irelands altogether-too-comfortable relationship between business and politics. He is also a world-class cultural critic. His new book, Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger, an account of the facts of the Irish collapse, is excellent, crisp, and damning, but its real contribution is in explaining the cultural and political presuppositions that helped cause the crisis.
Both U.S. pundits and Irish politicians believed that Ireland was like a post-Reagan United Statesand that this was a good thing. American commentators and politicians saw Ireland as an emerald-garbed Mini-Me, embodying U.S. values of free markets and minimal regulation. There was no shortage of American pundits willing to extol the Celtic Tiger. OToole singles out Benjamin Powell of the Cato Institute and Daniel Mitchell of the Heritage Foundation. He might equally have pointed to Thomas Friedman, who, in an unfortunately titled New York Times op-ed column, “Follow the Leapin Leprechaun,” informed continental European states that they either had to “become Ireland or become museums.” John McCain made the even more absurd claim in a presidential debate that the U.S. needed to cut business taxes to Irish levels to stop firms from relocating elsewhere. Ireland had become so Americanized that America itself had to run to catch up.
Irish people too swallowed this codswallop. Deputy Prime Minister Mary Harney famously suggested that Ireland was spiritually closer to Boston than Berlin. Dublin audiences gaped at Michael Flatleys dance spectacular The Celtic Tiger, which culminated with Cathleen n Houlihan, William Butler Yeatss embodiment of oppressed Ireland, performing a grotesque striptease to reveal bra and panties emblazoned with the Stars and Stripes.
This rhetoric of free-market empowerment reinforced long-standing problems of the Irish government. State institutions, while mostly noncorrupt, were prone to inaction, especially when active regulation might have discommoded powerful interests. Oversight of the banking sector was particularly problematic. Irelands Central Bank proved consistently unwilling to exercise any independent role on politically ticklish issues. When the Central Bank discovered that the Ansbacher Bank was breaking the law by running a major tax evasion scam for the benefit of a small group of individuals (which included Charles Haughey, a longtime Irish prime minister noted both for his personal vindictiveness and his lavish lifestyle), it declined to discipline the bank for abusing its license, or indeed to inform the taxation authorities. This minimalist approach to oversight was later to wreak havoc, as the bank turned a deliberate blind eye to the problematic accounting practices of well-connected banks.
Electoral politics were little better. The dominant party, Fianna Fil, was notorious both for its flexibility on matters of legal ethics and its ties to agribusiness and the construction industry. At the height of the boom, it went into coalition with the Progressive Democrats, who advocated the slashing of taxes, the minimization of regulation, and the liberalization of social mores. The coalitions pro-business agenda allowed Fianna Fil to look after its clients as they swapped their mohair suits for Mediterranean yachts. But it also allowed the Progressive Democrats to try to remake Ireland along broadly libertarian lines. Neither party exhibited any very great enthusiasm for beefing up the power of regulators to keep pace with the ever-more-aggressive lending practices of the nations banks. Nor was either party able to control government spending. The Progressive Democrats killed off the “Bertie Bowl,” a horrendously expensive proposed sports stadium, but failed significantly to stop the state sector from expanding, even as business and income taxes fell. The fiscal shortfall was made up by transaction taxes on a booming property market.
As the boom (in Prime Minister Bertie Aherns description) “became more boomier,” Ireland became ever more unequal. A well-connected group of elite property developers bought up large tracts of land around Dublin, which they then let trickle onto the market in order to keep demand high. Not only did developers pay off local politicians to ensure that zoning decisions went the right way, but they blocked repeated efforts to introduce national legislation for compulsory purchase schemes. A 1973 report argued that local authorities ought to be able to purchase land compulsorily at current market value plus 25 percent to stop speculators from manipulating the market and making windfall gains. Government after government agreed with this proposal in principle, throughout the 1970s, 80s, 90s, and 2000sbut curiously, implementing legislation was never introduced. In OTooles description, Fianna Fil “would sooner have personally insulted the Pope, Nelson Mandela and Mother Teresa” than offended the land speculators who helped fund their party. By the early 2000s, not only Fianna Fil but the state itself needed to keep the property market buoyant. If the party ever stopped, both would face serious holes in their finances.
Both market rhetoric and dense webs of political and commercial connections encouraged banks to lend large amounts of money to a favored group of developers. Anglo Irish BankIrelands third-largest bank and the most spectacular exemplar of the Celtic Tigers flameoutbet its future on loans to well-connected property developers. OToole suggests that “[i]t may be an exaggeration to call Anglo Irish a private bank for Fianna Fils more flamboyant friendsbut only a small one.” Not only did Anglo Irish itself invest heavily in the property market, but it lent more than 100 million euros to its chairman (as well as smaller sums to other directors) to speculate in property on his own account, and then hid the loan on its balance sheet through sleight of hand. The Central Bankbased regulator charged with regulating financial services knew about both the loans and the cover-up but declined to act. To borrow University College Dublin economist Morgan Kellys term, Anglo Irish was “too connected to fail”no serious regulatory response was possible.
When Anglo Irish began to get into trouble, a “golden circle” of ten investors borrowed money from the bank itself to invest in its own shares and hence keep the share price from tanking. Seventy-five percent of the loans were backed by the shares themselves. Six members of the golden circle are known; most of them have strong Fianna Fil connections. Anglo Irish executives and board members were also allegedly given loans to buy shares to help “counter negative publicity.”
When things started to go bad, they went bad quickly. Government revenues and property prices collapsed. Ordinary citizens were left holding houses that were worth far less than their purchase prices. Large tracts of housing in rural Ireland are empty, and likely to remain so. The banking sector has been recapitalized by the Irish government at enormous cost. Anglo Irishs chairman has, as the Irish press puts it, recently been brought in to help the Irish police with their inquiries under the Theft and Fraud Offences Act. He is also being sued by his bank for 70 million euros in unpaid loans. However, the bank itself was nationalized on the dubious justification that it was “of systemic importance to Ireland.” Irish taxpayers are now on the hook for its mismanagement and misdeeds, and for the bad loans of other major banks. Ireland will be struggling with the consequences for at least a generation. “Too connected to fail” is not a sound strategy for long-term economic growth, especially when it is reinforced by an ideological antipathy toward regulation and political accountability.
Irelands economic fairy tale has had a very unhappy ending. Still, some useful lessons can be drawn from it. As OToole suggests, the wreck of the Irish economy can be seen with equal validity as a tragedy of parish pump politics writ large, or of globalized economics writ small. Personal relations between politicians and businessmen were reinforced by an antiregulatory mythology of globalization and free markets. It is the very great virtue of OTooles book that it captures both of these facets of Irish politics, and shows how they are related.
Yet is American politics so very different? Irish politics is profoundly shaped by perceptions regarding the difference between those who have influence within the system and those who are relegated to the periphery. As OToole describes it,
[A system in] which everyone is trying to size up whos in and whos out is more insidious than [one which is obviously corrupt] and in some respects even more corrosive. Because it is fluid and unspoken, it is also unbounded. For those who see themselves as insiders, it generates a sense of being untouchable. And for those who see themselves as outsiders, it creates a sense of fear. They never feel that they quite know whats going on.
This is as plausible a description of the United States as of Ireland. In the U.S. system, too, the broad imperatives of globalization are marshaled by well-connected and “untouchable” business interests to defeat regulatory oversight, of the financial system and elsewhere. The American version of these interests is less roughly spoken than its Irish equivalents, and wears better suits, but otherwise it is not very different from the forces that brought Ireland to near collapse. If Ireland once seemed like a miniature America, America looks increasingly like an oversized Ireland. A comparison that was once all too self-congratulatory now has disturbing implications.
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