While the global financial crisis aggravated the situation, Ireland’s banking crisis was mostly caused by domestic factors. The collapse of the domestic property sector triggered the crisis, which resulted in a drop in national output. Its main cause is located in Irish banks’ ineffective risk management methods and the financial regulator’s failure to effectively regulate these processes.
What were the three main reasons of the 2008 recession?
- The Great Recession, which ran from December 2007 to June 2009, was one of the worst economic downturns in US history.
- The economic crisis was precipitated by the collapse of the housing market, which was fueled by low interest rates, cheap lending, poor regulation, and hazardous subprime mortgages.
What triggered Ireland’s financial crisis in 2008?
The banking crisis was caused by a mix of macroeconomic events, plentiful global liquidity, procyclical fiscal policies, and hazardous bank practices. While economic development was strong in the 1990s, the foundations of the economy began to deteriorate in the early 2000s, and growth became more concentrated on the local market.
What was the solution to the 2008 financial crisis?
1 Congress approved a $700 billion bank bailout in September 2008, which is now known as the Troubled Asset Relief Program. Obama proposed the $787 billion economic stimulus package in February 2009, which helped avert a global depression. The following is a timeline of key events during the Great Recession of 2008.
Who is the main perpetrator of the 2008 financial crisis?
The Lenders are the main perpetrators. The mortgage originators and lenders bear the brunt of the blame. That’s because they’re the ones that started the difficulties in the first place. After all, it was the lenders who made loans to persons with bad credit and a high chance of default. 7 This is why it happened.
When did Ireland emerge from the Great Recession?
The massive fiscal adjustment required to bring the public finances back into line began in 2009 and has continues to this day. There are obvious evidence, however, that the economy began to develop again in 2012, and that this recovery has continued into 2013 and 2014.
Ireland has experienced how many recessions?
The Republic of Ireland’s economy has a highly developed knowledge economy, with high-tech, life sciences, financial services, and agriculture, particularly agrifood, as its main sectors. Ireland is an open economy that ranks first in high-value foreign direct investment (FDI) flows (5th on the Index of Economic Freedom). Ireland is ranked 4th out of 186 countries in the IMF table and 4th out of 187 countries in the World Bank table in terms of GDP per capita.
The post-2008 Irish financial crisis severely impacted the economy, adding domestic economic woes connected to the bursting of the Irish property bubble, after a period of unbroken yearly expansion from 1984 to 2007. Ireland went through a technical recession from Q2 to Q3 2007, followed by a recession from Q1 to Q4 2009.
Following a year of economic stagnation in 2010, Ireland’s real GDP increased by 2.2 percent in 2011 and 0.2 percent in 2012. Improvements in the export industry were primarily responsible for this growth. In Q3 2012, a new Irish recession began as a result of the European sovereign-debt crisis, which was still persisting in Q2 2013. Ireland’s economic growth rates would recover to a positive 1.1 percent in 2013 and 2.2 percent in 2014, according to the European Commission’s mid-2013 prediction. Officially, tax inversion techniques by corporations transferring domiciles contributed to an exaggerated 2015 GDP growth of 26.3 percent (GNP growth of 18.7%). Apple Inc.’s restructuring of its Irish business in January 2015, called “leprechaun economics” by American economist Paul Krugman, was proved to be the driving force behind this GDP growth. The Central Bank of Ireland proposed an alternative metric (modified GNI or GNI*) to more precisely reflect the true status of the economy from that year forward due to the manipulation of Ireland’s economic statistics (including GNI, GNP, and GDP) by the tax tactics of some corporations.
Foreign-owned multinationals continue to play an important role in Ireland’s economy, accounting for 14 of the top 20 companies in terms of revenue, employing 23% of the private sector workforce, and paying 80% of the corporate tax collected.
As of mid-2019, Ireland’s economic growth was expected to slow, particularly in the event of a chaotic Brexit.
How long did Ireland’s recession last in 2008?
The economic downturn that occurred between 2008 and 2010 was severe. Each of these three years saw a drop in real GDP, with a total drop of almost 10%.
What triggered the financial crisis of 2008?
The financial industry’s deregulation was the fundamental cause of the 2008 financial crisis. It enabled for derivatives speculation backed by cheap, indiscriminately issued mortgages, making them accessible to even individuals with questionable creditworthiness.
How long did it take to recover from the financial crisis of 2008?
When the decade-long expansion in US housing market activity peaked in 2006, the Great Moderation came to an end, and residential development began to decline. Losses on mortgage-related financial assets began to burden global financial markets in 2007, and the US economy entered a recession in December 2007. Several prominent financial firms were in financial difficulties that year, and several financial markets were undergoing substantial upheaval. The Federal Reserve responded by providing liquidity and support through a variety of measures aimed at improving the functioning of financial markets and institutions and, as a result, limiting the damage to the US economy. 1 Nonetheless, the economic downturn deteriorated in the fall of 2008, eventually becoming severe and long enough to be dubbed “the Great Recession.” While the US economy reached bottom in the middle of 2009, the recovery in the years that followed was exceptionally slow in certain ways. In response to the severity of the downturn and the slow pace of recovery that followed, the Federal Reserve provided unprecedented monetary accommodation. Furthermore, the financial crisis prompted a slew of important banking and financial regulation reforms, as well as congressional legislation that had a substantial impact on the Federal Reserve.
Rise and Fall of the Housing Market
Following a long period of expansion in US house building, home prices, and housing loans, the recession and crisis struck. This boom began in the 1990s and accelerated in the mid-2000s, continuing unabated through the 2001 recession. Between 1998 and 2006, average home prices in the United States more than doubled, the largest increase in US history, with even bigger advances in other locations. During this time, home ownership increased from 64 percent in 1994 to 69 percent in 2005, while residential investment increased from around 4.5 percent of US GDP to nearly 6.5 percent. Employment in housing-related sectors contributed for almost 40% of net private sector job creation between 2001 and 2005.
The development of the housing market was accompanied by an increase in household mortgage borrowing in the United States. Household debt in the United States increased from 61 percent of GDP in 1998 to 97 percent in 2006. The rise in home mortgage debt appears to have been fueled by a number of causes. The Federal Open Market Committee (FOMC) maintained a low federal funds rate after the 2001 recession, and some observers believe that by keeping interest rates low for a “long period” and only gradually increasing them after 2004, the Federal Reserve contributed to the expansion of housing market activity (Taylor 2007). Other researchers, on the other hand, believe that such variables can only explain for a small part of the rise in housing activity (Bernanke 2010). Furthermore, historically low interest rates may have been influenced by significant savings accumulations in some developing market economies, which acted to keep interest rates low globally (Bernanke 2005). Others attribute the surge in borrowing to the expansion of the mortgage-backed securities market. Borrowers who were deemed a bad credit risk in the past, maybe due to a poor credit history or an unwillingness to make a big down payment, found it difficult to get mortgages. However, during the early and mid-2000s, lenders offered high-risk, or “subprime,” mortgages, which were bundled into securities. As a result, there was a significant increase in access to housing financing, which helped to drive the ensuing surge in demand that drove up home prices across the country.
Effects on the Financial Sector
The extent to which home prices might eventually fall became a significant question for the pricing of mortgage-related securities after they peaked in early 2007, according to the Federal Housing Finance Agency House Price Index, because large declines in home prices were viewed as likely to lead to an increase in mortgage defaults and higher losses to holders of such securities. Large, nationwide drops in home prices were uncommon in US historical data, but the run-up in home prices was unique in terms of magnitude and extent. Between the first quarter of 2007 and the second quarter of 2011, property values declined by more than a fifth on average across the country. As financial market participants faced significant uncertainty regarding the frequency of losses on mortgage-related assets, this drop in home values contributed to the financial crisis of 2007-08. Money market investors became concerned of subprime mortgage exposures in August 2007, putting pressure on certain financial markets, particularly the market for asset-backed commercial paper (Covitz, Liang, and Suarez 2009). The investment bank Bear Stearns was bought by JPMorgan Chase with the help of the Federal Reserve in the spring of 2008. Lehman Brothers declared bankruptcy in September, and the Federal Reserve aided AIG, a significant insurance and financial services firm, the next day. The Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation were all approached by Citigroup and Bank of America for assistance.
The Federal Reserve’s assistance to specific financial firms was hardly the only instance of central bank credit expansion in reaction to the crisis. The Federal Reserve also launched a slew of new lending programs to help a variety of financial institutions and markets. A credit facility for “primary dealers,” the broker-dealers that act as counterparties to the Fed’s open market operations, as well as lending programs for money market mutual funds and the commercial paper market, were among them. The Term Asset-Backed Securities Loan Facility (TALF), which was launched in collaboration with the US Department of Treasury, was aimed to relieve credit conditions for families and enterprises by offering credit to US holders of high-quality asset-backed securities.
To avoid an increase in bank reserves that would drive the federal funds rate below its objective as banks attempted to lend out their excess reserves, the Federal Reserve initially funded the expansion of Federal Reserve credit by selling Treasury securities. The Federal Reserve, on the other hand, got the right to pay banks interest on their excess reserves in October 2008. This encouraged banks to keep their reserves rather than lending them out, reducing the need for the Federal Reserve to offset its increased lending with asset reductions.2
Effects on the Broader Economy
The housing industry was at the forefront of not only the financial crisis, but also the broader economic downturn. Residential construction jobs peaked in 2006, as did residential investment. The total economy peaked in December 2007, the start of the recession, according to the National Bureau of Economic Research. The drop in general economic activity was slow at first, but it accelerated in the fall of 2008 when financial market stress reached a peak. The US GDP plummeted by 4.3 percent from peak to trough, making this the greatest recession since World War II. It was also the most time-consuming, spanning eighteen months. From less than 5% to 10%, the jobless rate has more than doubled.
The FOMC cut its federal funds rate objective from 4.5 percent at the end of 2007 to 2 percent at the start of September 2008 in response to worsening economic conditions. The FOMC hastened its interest rate decreases as the financial crisis and economic contraction worsened in the fall of 2008, bringing the rate to its effective floor a target range of 0 to 25 basis points by the end of the year. The Federal Reserve also launched the first of several large-scale asset purchase (LSAP) programs in November 2008, purchasing mortgage-backed assets and longer-term Treasury securities. These purchases were made with the goal of lowering long-term interest rates and improving financial conditions in general, hence boosting economic activity (Bernanke 2012).
Although the recession ended in June 2009, the economy remained poor. Economic growth was relatively mild in the first four years of the recovery, averaging around 2%, and unemployment, particularly long-term unemployment, remained at historically high levels. In the face of this sustained weakness, the Federal Reserve kept the federal funds rate goal at an unusually low level and looked for new measures to provide extra monetary accommodation. Additional LSAP programs, often known as quantitative easing, or QE, were among them. In its public pronouncements, the FOMC began conveying its goals for future policy settings more fully, including the situations in which very low interest rates were likely to be appropriate. For example, the committee stated in December 2012 that exceptionally low interest rates would likely remain appropriate at least as long as the unemployment rate remained above a threshold of 6.5 percent and inflation remained no more than a half percentage point above the committee’s longer-run goal of 2 percent. This “forward guidance” technique was meant to persuade the public that interest rates would remain low at least until specific economic conditions were met, exerting downward pressure on longer-term rates.
Effects on Financial Regulation
When the financial market upheaval calmed, the focus naturally shifted to financial sector changes, including supervision and regulation, in order to avoid such events in the future. To lessen the risk of financial difficulty, a number of solutions have been proposed or implemented. The amount of needed capital for traditional banks has increased significantly, with bigger increases for so-called “systemically essential” institutions (Bank for International Settlements 2011a;2011b). For the first time, liquidity criteria will legally limit the amount of maturity transformation that banks can perform (Bank for International Settlements 2013). As conditions worsen, regular stress testing will help both banks and regulators recognize risks and will require banks to spend earnings to create capital rather than pay dividends (Board of Governors 2011).
New provisions for the treatment of large financial institutions were included in the Dodd-Frank Act of 2010. The Financial Stability Oversight Council, for example, has the authority to classify unconventional credit intermediaries as “Systemically Important Financial Institutions” (SIFIs), putting them under Federal Reserve supervision. The act also established the Orderly Liquidation Authority (OLA), which authorizes the Federal Deposit Insurance Corporation to wind down specific institutions if their failure would pose a significant risk to the financial system. Another section of the legislation mandates that large financial institutions develop “living wills,” which are detailed plans outlining how the institution could be resolved under US bankruptcy law without endangering the financial system or requiring government assistance.
The financial crisis of 2008 and the accompanying recession, like the Great Depression of the 1930s and the Great Inflation of the 1970s, are important areas of research for economists and policymakers. While it may be years before the causes and ramifications of these events are fully known, the attempt to unravel them provides a valuable opportunity for the Federal Reserve and other agencies to acquire lessons that can be used to shape future policy.
In 2008, who helped Ireland out?
Then-Taoiseach Brian Cowen confirmed on the evening of November 21, 2010, that Ireland had formally requested financial assistance from the European Union’s European Financial Stability Facility (EFSF) and the International Monetary Fund (IMF), a request that was warmly received by the European Central Bank and EU finance ministers. In a telephone conference call, the eurozone finance ministers gave their approval in principle to the request. Details of the financial agreement were not immediately agreed upon and would be resolved in the coming weeks, though the loan was estimated to be in the area of 100 billion, with the United Kingdom expected to contribute roughly 8 billion.
Following criticism of the action, Green Party leader John Gormley announced that his party would seek a General Election in January 2011, with the implicit threat of pulling out of government; with a number of Independent government TDs declaring that they would not continue to support the Government, and speculation mounting, Brian Cowen called a press conference in which he announced that the Government intended to introduce and pass legislation.
However, on November 23, dissident members of Brian Cowen’s ruling Fianna Fil party and opposition leaders demanded a vote of no confidence in the government and the dissolution of the Oireachtas before a vital budget vote on December 7, 2010, which would allow the rescue package to be adopted.
On November 28, the European Union, the International Monetary Fund, and the Irish government agreed to a 85 billion bailout package, which included 22.5 billion from the IMF, 22.5 billion from the European Financial Stability Facility (EFSF), 17.5 billion from the Irish sovereign National Pension Reserve Fund (NPRF), and bilateral loans from the UK, Denmark, and Sweden.
The deal comprises 10 billion for bank recapitalization, 25 billion for banking contingencies, and 50 billion for budget finance, according to Eurogroup President Jean-Claude Juncker.