I have to say I'm kind of surprised by Paul Krugman's column today, where he diagnoses Ireland's current troubles as a mad rush into unregulated financial markets, and warns that we may suffer the same fate.
Ireland's problems are, to be sure, large--and to some extent, a rebuke to conservatives who liked to wave it as an example of supply side economics. Ireland's low corporate income tax rate did spur massive growth in the country, but this was at least as much because it made it an attractive place for eurozone countries to locate as from any impact on capital formation. The mad rush to Irish backoffice played havoc with national accounts--Ireland's Gross Domestic Product was significantly larger than its Gross National Product, which is not usual for developed countries. And it turned the whole economy into a volatile mirror of the world economy. When world GDP grew, Ireland's grew faster. When world GDP shrank, Ireland raced towards the bottom.
The problem of the banking system are large, but they are the problems of a small country that is tightly integrated with big neighbors. We are not going to have that problem--we're the neighbors. Moreover, the particular problem that Krugman describes, of their treasury having to massively tighten its belt in order to preserve the banking system and its credit ratings, is related not just to the size of the country (and its economy) but the ratio of bank assets to GDP. This table is a little dated, but it illustrates the problem well enough. By the time of the crisis, bank assets in America just about equalled GDP. In much of Europe, including Ireland and Iceland, they were 3-5 times national output.