The bust of a property bubble precipitated a banking crisis, which caused a sovereign crisis for the bank bailouts. The bank paid for its reckless lending, and the taxpayers paid for its reckless banks.
However, what first caught my eye in the Ireland chapter is: “Bloom and Canning argued that a major cause of the Irish boom was a dramatic increase in the ratio of working-age to non-working-age Irish brought about by a crash in the Irish birthrate. This had been driven mainly by Ireland’s decision, in 1979, to legalize birth control.” I guess not many Chinese would have imagined their birth control policy was somehow implemented around the same time in a “far-western” country. And it had positive effect – falling dependency ratio and expanding labor force – until the demographic dividend inevitably phased out after three decades. I am sure people from both countries have enjoyed its benefit, mostly notably rising living standard. One difference is, Ireland hasn’t polluted its sky while China has.
About the bubble, “he [Morgan Kelly] learned that since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of the city, rents had fallen to less than 1 percent of the purchase price—that is, you could rent a million-dollar home for less than $833 a month.” No matter how one argues there being a “new normal” in any country (including China) that supports superior price-to-rent ratio, 100 times is definitely a sign of bubble. I hope the current property market crackdown in China can sustain to the time when the country has taken the bullet and adjusted the imbalance in its economy.
About the Irish government bailing out banks, many Irish political leaders would have thought “promise to eat all losses, and markets would quickly settle down—and the Irish banks would go back to being in perfectly good shape. As there would be no losses, the promise would be free. ” – quote from the book. What they failed to see was, the bank problem was not a liquidity problem, but a debt overhang problem that the whole economy suffered. To relate this to China, while the Chinese government has enough fiscal firepower to “bail out” domestic banks thanks to its large holding in SOEs and strong taxing power, the rapidly growing total debt in the economy could not be properly addressed by a simple transfer of debt from bank book to sovereign book. The debt overhang problem in the economy could well eat into the otherwise strong growth potential in the future.