In their regular column, Peter Boone and Simon Johnson warn that there are increasing reasons to fear another financial disruption, stemming from the latest developments in Ireland.

Ireland was the poster child for the excess that preceded the current crisis, as the authors remind us:

Ireland’s difficulties arose because of a massive property boom financed by cheap credit from Irish banks. Ireland’s three main banks built up loans and investments by 2008 that were three times the size of the national economy; these big banks (relative to the economy) pushed the frontier in terms of reckless lending. The banks got the upside, and then came the global crash in fall 2008: property prices fell more than 50 percent, construction and development stopped, and people stopped repaying loans. Today roughly one-third of the loans on the balance sheets of major banks are nonperforming or “under surveillance”; that’s an astonishing 100 percent of gross national product, in terms of potentially bad debts.

Not surprisingly, with gravity-defying numbers such as the above…..

Ireland, simply put, appears insolvent under plausible scenarios with current policies. The idea that Ireland, Greece or Portugal can cut spending and grow out of overvalued exchange rates with still large budget deficits, while servicing all their debts and building more debt, is proving – not surprisingly – wrong. Such policies leave nations burdened with large debt overhangs that effectively tax businesses and borrowers – because interest rates must stay high to reflect risk.

Investors must wonder whether businesses and homeowners can afford these higher interest rates, so banks and investors cut credit lines and reduce lending. This strangles economies, even when the fiscal authorities take tough steps needed to cut deficits.

We can all instinctively appreciate that the wilder the party is and the longer it lasts, the bigger the bill must be at the end, and obviously someone always has to pay the bill. Must it always be “businesses and borrowers”? Not necessarily….

Ireland had more prudent choices. It could have cut the budget deficit while also acknowledging insolvency and requiring creditors to share some of the burdens. But a strong lobby of real estate developers, the investors who bought banks’ bonds and politicians with links to the failed developments (and their bankers) prefer that taxpayers rather than creditors pay. The European Central Bank, the European Union and the International Monetary Fund share some responsibility; they advocate these unlikely programs in order that European and global banks, which provided the funds to the Irish banks, do not suffer losses from such bad lending decisions.

And there we have a key reason why the aftermath of the bursting of gigantic credit bubbles lasts so much longer than the aftermath of ordinary recessions. It is because the very same elites that enriched and entrenched themselves as the bubble was being blown have enough of a grip on the levers of power to ensure that most of the bill for their wild party is paid by everyone else, except for them.