Soothsayers of doom are making a tidy living out of propagating the message that there is a growing inevitability about an Irish economic crash. Not surprisingly the housing market is identified as the most potentially dangerous area of the economy.

Just as the US economic boom is being driven by a consumer whose animal spirits have been aroused by the positive wealth effect of a strongly rising equity market, the domestic consumer is playing an increasingly important role in pushing the Irish economy to new heights.

Clearly, there are many factors fuelling the power of the Irish consumer, but the jobs' market and a housing induced wealth effect are two of the most important.

People lucky enough to own properties prior to the last couple of years in particular are obviously feeling a lot wealthier, on paper at least. This is spurring them to borrow and spend enthusiastically.

It is difficult to say if or when this story is going to come to an abrupt halt, but at the moment it is difficult to identify anything on the immediate horizon that threatens Armageddon.

In assessing the risks to the Irish economy and the housing market in particular, it is worth looking at experiences elsewhere. The New England region in the United States is an interesting case study and particularly the state of Massachusetts.

The regional economy of Massachusetts enjoyed boom conditions for much of the 1980s, a period that is now referred to as the Massachusetts Miracle.

This boom was primarily driven by Ronald Reagan's expansionary defence spending and strong growth in high technology industries, particularly minicomputers.

A vibrant financial services sector grew up on the back of these two sectors. The region also benefited from a national economic policy stance that was quite expansionary. It enjoyed a level of interest rates that was appropriate for the US as a whole, but was arguably too low for its own economic situation. The fiscal policy stance was also inappropriately lax. The result was an economic boom that eventually turned into a very painful bust.

The housing market was hit hard and the banking sector ended up being very badly exposed. Although the miracle period was roughly between 1978 and 1988, the boom became particularly vibrant between 1984 and 1988.

It was during these years that serious imbalances developed which resulted in the subsequent crash being extremely pronounced.

In 1984 the economy was looking very healthy. The unemployment rate stood at 6.3 per cent, almost half what it was a decade earlier and was falling gradually but steadily. Employment was growing at about 4.5 per cent per annum, and in terms of costs the state was quite competitive relative to the rest of the country. Average earnings were just more than 90 per cent of the national average.

Economic activity gathered momentum after 1984 and by July 1987, the state enjoyed an unemployment rate of just 2.4 per cent, which was by far the lowest in the US.

By 1988 the authorities were seeking to cope with the problems associated with full employment - a serious labour shortage developed, wages rose and the regions competitive position started to deteriorate.

As personal incomes increased, consumers went on a spending binge and added further fuel to the boom. Due to a combination of the booming local economy, sharply higher rental returns on residential and commercial property, tax incentives and intense competition among financial institutions as a result of banking deregulation, the supply of residential and commercial property increased sharply.

Commercial and office rents almost doubled in the four years up to 1988, and the median house price in Boston increased by more than 120 per cent. This compared to a national increase of just under 25 per cent. In Boston, house buyers paid inflated prices in the expectation that prices would rise a lot further in the future. Bank lending for real estate jumped dramatically during this period.

Figures from the Federal Reserve Bank of Boston show that in 1988 real estate accounted for 60 per cent of total lending, up from 38 per cent in 1984.

So by 1988, it was clear that the real estate boom had had a dramatic impact on the local economy, particularly in terms of job creation in construction and financial services, wages and bank lending.

Suddenly, as quickly as it had begun, the whole edifice came crumbling down after 1988. The employment base fell by almost 10 per cent from the peak of the economic cycle in late 1988 to the middle of 1991.

Construction, wholesale and retail trade, financial services and real estate were the worst hit sectors. Property prices and rents collapsed and the banking sector was thrown into a dramatic bad debt situation.

The collapse in the regional economy was driven by a national recession in 1990, sharp cutbacks in the defence budget following President Reagan's departure from office and the ending of the Cold War, and serious problems for the local high technology sector, particularly mini computers.

It was simply a story of an economy being wiped out by a number of unanticipated shocks, most of which were quite specific to the region.

The big question is if such a fate could befall the current Irish economic boom? There are quite striking parallels between the two economic booms.

For reasons which most of us are now familiar with, the Irish economy has enjoyed five years of unprecedented boom with exceptional job creation. It now faces a serious shortage of labour and a prospective sharp increase in wage costs. House prices have been the major beneficiary of the boom.

Paul Krugman and others have treated Massachusetts as a regional economy of the United States just as the Republic is now a regional economy of an increasingly integrated euro zone economy. One of the features of such a regional economy is that growth prospects largely depend on the regions export base.

Just as Massachusetts had a heavy dependence on a few industries, the Republic is now heavily dependent on a narrow base of high tech and pharmaceutical industries.

While these industries do not account for a very significant proportion of total employment, the rest of the economy has grown up on the back of these industries. As a result, the economy would be extremely vulnerable to some sort of external shock, such as a global retrenchment in high technology.

If, for example, a number of the larger multinationals were forced to disinvest from Ireland, the effect on the rest of the economy would be detrimental. Confidence would be shattered and the most inflated area of the economy, housing, would become extremely vulnerable.

Just as people have been paying inflated prices for housing over the past five years in the expectation that prices would rise further, the prospect of falling house prices would bring out a rash of sellers. The result would be a damaging downward spiral in house prices, forcing many people into a negative equity situation.

Such a scenario is difficult to envisage at the moment and in all probability is quite unlikely.

However, it would be reassuring to see house prices levelling off soon, but that too does not appear likely for at least the next couple of years.

Irish house prices have been partly propelled to unacceptable levels by an inappropriate level of interest rates as a result of EMU and the adjustment process has further to run.

Rising house prices benefit only investors and speculators and add nothing to the overall economic health and well being of a state.

Instead, they create social and financial problems that New England has taken almost a decade to get over.

While the Republic is not New England, there are enough parallels to prompt caution. It is a good case study in how such economic booms can go badly awry.

Jim Power is chief economist at Bank of Ireland Treasury. The views expressed here are personal.