Part 2--The Beginning Of The Housing Bubble

24/03/2001                                  21/04/2001                               30/03/2002

Following the collapse of the dot com bubble , the American and world economy experienced a significant slow down. For example, $10 trillion was wiped off global share values from 2000 to 2001, the net worth of American households fell in 2000 for the first time since records began 55 years ago and America's corporate sector suffered its deepest recession since the 1930s

Moreover, the Japanese economy, the second biggest economy in the world at time was on the verge of re-entering a recessionary and deflationary period.

This economic situation was destabilized further by the September 11th terrorist attacks.

In order to avoid a deep recession and to stimulate economic growth in light of these events, Alan Greenspan, chairman of the federal reserve cut interest rates from 6.5 % in November 2000 to 1.75% in July 2002.

These reductions allowed credit to become cheap and easy to obtain. For example, in 2003, there was wide spread promotion of mortgages with low introductionary rates. All this cheap money filtered into other sectors of the American economy and allowed consumers to go shopping once more.

Perhaps, the economist magazine put it best when it wrote of these interest rates reductions " as one bubble burst, another started to inflate. "

Short Termism-Myopia

my·o·pi·a-- Lack of discernment or long-range perspective in thinking or planning

Short Termism-Government

The symptoms of an economic bubble include prices deviating strongly from intrinsic values and market players acting irrationally. Example of such behaviour in Ireland include Sean Dunne spending €54 million per acre for a hotel in Dublin 4 to middle class famillies owning three or four investment properties.

Though there is plenty of evidence from economic history such as Japan(1990-2003) and Tulip mania(1630's), to suggest that "the bigger the boom the bust" this government did nothing to prevent or limit the size of this bubble.

Why? Any action by the government to limit the size of the bubble would damage its survival because its fate was inextricably linked with that of the construction sector. Evidence to suggest this includes;

• in 2004 the construction sector represented 12% of GDP, there were 262,700 people employeed in the sector (as opposed to 165,200 in 2002),
• One eighth of workforce employed in construction; 1 in 5 of private sector workforce depending on construction ,
• And finally a Davy Stockbrokers report says tax revenue from the property market - including VAT, stamp duty and capital gains tax - has tripled since 2002 and will account for almost 17% of tax receipts this year. This report finished by stating "the public finances are now exposed to a downturn in the property market."

Therefore, they did nothing because they were only concerned with the short term; winning the next news cycle, the next opinion poll or the next election.