After the bailout: the chastened consumer

December 14, 2013


Things could hardly have looked sunnier for Irish consumers in the summer of 2006. The savings scheme introduced by former minister for finance Charlie McCreevy in 2001 to encourage people to put cash aside for a rainy day – one of those was likely in an economic powerhouse such as Ireland – matured and poured more than €2 billion into the economy.

Extensions were planned, cars bought, holidays booked. By the end of August nearly 170,000 cars with 06 registrations were crisis-crossing the State’s motorways. This was an increase of 4.9 per cent on the previous year, which itself had been a bumper one for car sales. As the year progressed we spent €5 billion on six million trips overseas, which was an increase of almost 40 per cent in just five years.

In June, a report had shown that house prices had climbed 270 per cent in a decade, compared with inflation over the same period of 30 per cent. Thousands of jobs were being created every month and immigration was rising.

Ireland was the best little country in the world. The OECD told us it was true. So did the Economist and the Financial Times. And we loved it.

Adrian Shanahan is a consulting engineer from Kilkenny. At the height of the boom he employed seven people and had a lifestyle typical of the times. “We went skiing and took a summer holiday as well as a few weekend breaks. Planning them was never much of a concern, even though we were quite frugal.”

As a mortgage broker Karl Deeter spent 2006 riding the property wave. “I remember the day we cracked open champagne in the office after we closed €1 million worth of loans every day for a whole month.”

But at the year’s end The Irish Times published an article that rattled optimists. “If the experiences of economies similar to ours are anything to go by, we may be looking at large and prolonged falls in real house prices of the order of 40 to 50 per cent and a collapse of housebuilding activity,” wrote Morgan Kelly, a professor of economics at University College Dublin. Some saw Kelly as a killjoy, but he was right in almost every respect.

The economist David McWilliams had been making a similar point for some time. The author Julian Gough had also been writing about the inevitability of the collapse. “We were coming out of centuries of relentless, grinding national poverty,” says Gough. “When you’re poor you don’t need to cultivate a habit of restraint. You spend till you run out of money; you drink till you run out of drink. Poverty stops you killing yourself drinking, and lack of credit stops you killing yourself with debt. But give a poor society unlimited drink, or unlimited credit, and it’s likely to end badly.”

Dr Pete Lunn is an economist, neuroscientist and former journalist who has worked at the Economic and Social Research Institute since 2006. He spends his working days trying to understand our economic decision-making processes.

“We collectively fell for an economic illusion,” he says. Irish consumers were neither greedy nor stupid but relied too heavily on “extrapolation bias”. By this theory, people operate on the basis that the “best guide to the future is what has just happened, and back then all we had to look back on were boom times. It went on for so long that people stopped paying attention to past trends. There was no memory, either institutional or personal, warning us about what was happening.”


Between 2002 and 2008 Irish households saw their disposable income grow by 60 per cent, and spending had risen with it.

But in 2007 house prices fell by more than 7 per cent. A sharp decline in consumer confidence followed. Car sales dropped. There were 1,748 new cars sold in October 2008, down 55 per cent on October 2007. Just two years earlier we had been buying almost 20,000 cars a month.

By 2008 Deeter’s mortgage business had started to falter. The doors stayed open, but the money coming through them fell by more than 90 per cent. The great calamity of 2008, however, was the bank collapse. “After Lehman Brothers we saw fear on the faces of people coming through the door,” says Deeter. “They were very dark days.”

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