The ESRI failed to forecast the financial collapse in 2008, economist John FitzGerald told the Oireachtas Banking Inquiry today.

He said the ESRI did not draw the connection between the growth of a property market bubble and the risks to the Irish financial system. “I failed to foresee the impending financial collapse,” he said.

“We made a call that Ireland would probably escape it and we were totally wrong,” Mr FitzGerald said, adding that he made a “big mistake” by not spotting obvious difficulties on the balance sheets of Irish banks at the time.

Mr FitzGerald is a research affiliate at the ESRI, having retired in 2014 after many years of service. He was previously a research affiliate and a research professor at the ESRI and Programme Co-ordinator of the Macroeconomics Research Area. He told the inquiry that he was speaking in a personal capacity.

Mr FitzGerald outlined tensions that existed between the ESRI and the department of finance. He said the department was “thoroughly grumpy” about some of the measures that the ESRI called for in the medium term review of 2008, which included an increase in corporation tax.

But he insisted that this played no role in the findings published in the review and that the ESRI simply failed to spot the impending crash. “It was our mistake,” he said.

He said the Government did not consult with him on the banking guarantee prior to its introduction in September 2008. He met with the then minister for finance Brian Lenihan in January 14th and March 20th 2009 but “concentrated on issues other than the financial sector”.

The minister was advised to approach Professor Patrick Honohan, who was subsequently appointed as governor of the Central Bank, for advice on the financial sector.

Mr FitzGerald said the crash could have been prevented if the Government had implemented appropriate fiscal policies or the Central Bank had undertaken prudential regulation.

He said either could have stopped the crash while “both together” could have “prevented disaster”.

He said that if the Government had taken “any action” in 2007 to cool the property market the State would have been left with a “smaller problem” to deal with.

Earlier, Mr FitzGerald said a consequence of European monetary union in 1999 was that the interest rate could not be used to manage excess demand in an individual economy, and this had consequential effects on wage inflation.

He described 2003 as “probably the turning point” in the economy.

“The current account of the balance of payments was in deficit that year, though the size of the deficit was small. However, wages had been rising rapidly for a number of years and the loss of competitiveness was beginning to take a toll.

“House prices in 2003 returned to growth at more than 10 per cent a year. Finally, the demand for credit was outstripping the ability of the banks to fund it from domestic sources. As a result, the banks began borrowing an ever increasing amount of money abroad.”

Mr FitzGerald also noted that housing completions at nearly 70,000 a year were running “far ahead” of the actual increase in population and there was no sign of the rate of increase in house prices slowing.

“With a self-fulfilling expectation of a capital gain driving the user cost of housing negative, it was not surprising that demand for housing was very high. In turn this fuelled prices which fed back on people’s expectation about future prices. This was a bubble in the making,” he said.

Mr FitzGerald said it was impossible to identify when the “bubble became irreversible” and when a collapse became inevitable. “With the benefit of hindsight, probably the last chance to stop the build-up in debts and the loss of competion was in 2006,” he said.

“By the end of that year and moving into 2007, house prices were so far above their equilibrium level that a collapse became inevitable.”