Irish people did not party during the economic boom "but they lived a bit better than they might have done because of the bubble", an international banking expert has told the first day of public hearings in the Oireachtas banking inquiry.

Finnish academic and finance expert Peter Nyberg said if there is a systemic crisis “you have everybody involved, including households. It doesn’t imply the households caused the crisis but they are involved”.

Mr Nyberg was questioned today over his 2011 government-commissioned report into the banking crisis.

The Joint Committee of Inquiry into the Banking Crisis is expected to hear from major international institutions. Joint Committee chairman Ciaran Lynch said: "It is an opportunity to shine a light on a dark and painful recent time in our past, an opportunity to piece together the events of that time, an opportunity to learn from the mistakes that were made and an opportunity to ensure that those mistakes are not repeated."

Today Mr Nyberg said Ireland had misjudged risky behaviour by banks and international institutions before the collapse of its financial system.

The then government guaranteed the nation’s ailing banks in 2008 in the belief that they were stable - a decision which eventually led to a €64 billion rescue of the financial system and an international bailout of the state.

It followed a massive property price bubble enabled by banks borrowing from international money markets then lending to investors who swelled public coffers through housing taxes.

That produced higher wages and costs, Mr Nyberg told a parliamentary investigation, until overstretched banks were nationalised to prevent them running out of money and the international community intervened with emergency loans.

He added: “Judging by the consequences, which were larger in Ireland than anywhere else, the Irish institutions were pretty good at misjudging risk internationally.”

The rescue package from the EU and IMF came with a range of austerity conditions which sparked years of increased unemployment and dramatic cutbacks in public expenditure. The European Central Bank (ECB) had discussions with its Irish counterparts prior to the government's bank guarantee, Mr Nyberg said.

However, the ECB has declined to participate in the parliamentary inquiry. He said the Irish government had taken the safe option in deciding to underwrite ailing banks saddled with too many bad loans after the property price bubble.

“When decision-makers are faced with that situation, what one tends to do is take the safe decision even though afterwards it might not seem so wise, and that is what I think the government did.”

He understood but did not necessarily condone the move. “It is a culmination of a lot of mistakes that were made before but the mistakes were not made on that night, the mistakes were made several years before and not only by the government but really by everyone else.”

Overheating of the Irish economy was not a unique phenomenon and could be compared to developments in Spain and Scandinavia, Mr Nyberg said. Despite this, it was “home grown”.

He said the blame for the handling of the crisis was more widespread than just the government, which had to assure the markets that the banks were solid enough to lend to, but extended to bank officials, public figures and borrowers. There was an underlying assumption before the collapse that financial institutions were stable and efficient, Mr Nyberg added.

“That is something which I would classify as ‘group think’ - thinking as your peers do in order to not stick your head up too far - and it would explain to quite some extent the fact that everyone was unprepared for the crisis when it came and everyone was willing to accept the case of risky behaviour on the part of the banks and passivity on the part of the public sector.”

He said the hoped for “soft outcome” for the economy following an international slump which spread from the US had been unlikely to happen because Irish banks showed little inclination to change their behaviour as the crisis started to unfold. The expert said there were doubters.

“People are smart but it is very difficult. People doubted in the beginning but once your doubts have proven unfounded year after year you might change your mind.” The Government was reinvesting boosted tax takes in higher public sector wages, better social security and “onerous” costs for public sector services.

Mr Nyberg said: “A lot of people had concrete joy from the bubble as long as it lasted. Once the bubble burst these advantages were no longer available.” He said hundreds of individual decisions had to be examined, by people who felt they did not do anything wrong but which made the crisis possible.

Mr Nyberg said borrowers had to decide whether they could meet repayments. He pointed to lack of implementation of existing regulation: “It does indicate that the existence of supervision and regulation is not enough to hinder systemic crises.”

Ireland has exited its bail out scheme and re-entered the international money markets. The Government has scaled back austerity measures forced on it as a condition of the international loans ahead of the next general election - which is due within the next year and a half.

Earlier, Minister for Finance Simon Coveney said it is unacceptable for the European Central Bank to decline to participate in the banking inquiry.

The president of the ECB Mario Draghi outlined the bank's decision in a letter to the committee of inquiry's chairman Ciaran Lynch. He said the bank "does not see itself in a position to participate in inquiries conducted by national parliaments and will therefore not appoint a dedicated contact person."

Mr Simon Coveney on Wednesday morning said “this is the wrong decision by the ECB”. Speaking on RTÉ’s Morning Ireland, he said the ECB played a role in Irish banking over the past number of years and he hoped the bank would reconsider its decision.

“We’re setting up a banking inquiry involving all political parties so that we can get a detailed understanding and explanation of what has happened in banking over the last five to 10 years because it has had a huge impact on the lives of Irish people,” he said.

“And whether the ECB like it or not they were part of that story and they have an obligation, in my view, to be part of the explanation for what unfolded in banking over the last 10 years.”

Mr Coveney said he expected Mr Lynch will write to the ECB and ask them to reconsider and “I certainly hope they will reconsider”.