Bet against the bubble - how to head off a subprime crisis

We all know what to do about this subprime mess, the credit-crisis final-end-of-capitalism farrago, don't we? Hang the bankers, hang them high, banish greed and stupidity from the human soul, bring in a very real change to our mass, crass, consumerism and usher in a society free from the shackles of late stage fiancierism? OK, …

[Anonymous Coward]

US or UK?

In the US they can build houses when they need more supply and they are not too upset at knocking down old building in their cities to create more supply. The UK is stuck with the Town and Country planning act which makes sure hardly any houses are built. In addition there is the welfare state creating huge levels of demand for rented accomodation. The end result is what we have now, sky high house prices. Its only because the credit crunch means people cant borrow as the banks have no cash that prices are falling, the real market price is very high because demand exceeds supply. Governments always cause markets to fail.....

[Steven Jones]

Market Dynamics

Asset price bubbles are always a problem - the issue over markets is their short term volatility and the short term pressures that drive valuations to extremes. As a simple example, and one close to the IT industry than property, was the dot com bubble. Those doing rational analysis on returns, potential values and so on were simply driven out of jobs an business by those speculating in the short term. The market dynamics drove short-term instability in prices. The same sort of dynamics happened in banking where the returns to individuals and organisations were short term in the form of bonuses, and the penalties of failures are visited on others (like the poor shareholder who is often an innocent in this). One of the most outrageous features of this whole game is the means by which the executives and high level dealers in banks and other institutions are able to manipulate the system to hide the truth from somebody just after a safe place for their pension investment.

An engineer designing a system will put in damping factors to control excessive amplitude variations. That means putting in modicums of negative feedback or time delay factors. The finance markets love of quick returns and instant gains drove this instability. It's a failure of market regulation that it allowed such practices and effectively penalised any longer term approach. It might be that futures markets could dampen these swings, but only if they are engineered correctly. The futures markets themselves have acted to increase these swings (see oil recently) as they still encourage short term speculation.

[James Anderson]

Good Article

When I read the strapline I was prepared for the usual end of civilisation, behead the bankers tosh. But it turned out to be a good review of a well reasoned and original book.

Housing markets desparately need a mechanism that prevents bubbles or at least bursts them early.

Also why is everbody so glad when house prices go up? They would get pretty pissed of if the price of bread or beer went up 100% every year. Housing is a basic commodity everybody needs, long term, cheaper housing would make everybody better off; Gods knows I would rather spend my wages down the pub than giving them to the bank manager.

[Anonymous Coward]

Not really a solution

I have no problem with the idea of a liquid derivatives market for property and housing, but the notion that it would prevent bubbles, speculative or otherwise, is incorrect.

Take the oil price. There is a lot of nonsense that the current price surge has been caused by speculation. That is unlikely, but what is true is that the presence of a huge and highly liquid derivatives market has not stopped price volatility or (arguably) a bubble.

People are just as likely to use such a market to bid the price up in a bubble than to deflate it.

[amanfromMars]

Grand Larceny .... Dire Straits Money for Nothing

"In which case, the solution is to design the market needed to solve our problem."

QuITe so, Tim, with New Market Leaders taking Over Overall Control ..... or are you hanging on the the Notion that Present/Past Incumbents have any Credibility which could possibly be Useful in the New Markets Leadership .

Surely the very fact that such is the Solution extraordinarily renders them as the Problem to be discarded and replaced with the Solution.

After all, they've had a good Run at Gambling for Free with Invented Money, time for them to move over and off the Pot to let more Accomplished Players Spend their Winnings rather than Fleece the Punters.

Or do you see nothing basically changing, with everything in effect just being a whitewash job.? ...... with more of the same death spiral to come for their Rigged System?

[Anonymous Coward]

cat in the hat

Which bubble has been saved by options? All of them had futures contracts, and they all had bubbles. So I think the proposal is historically blind, and therefore stupid.

Mortgage backed derivatives are exactly a bet against risk, and they made things worse not better, for the obvious reason that the stated risk was fraudulently misrepresented, and there was a conspiracy of greed and political expediency to maintain the illusion.

Exactly who didn't know this was a bubble? Are they suprememly stupid, incompetent, or just motherfuckers? Mervyn should be sacked for allowing a Ponzi scheme to mature, as should Brown. Well he probably will be at the next election. What an idiot.

[dervheid]

"Zero Sum Game"

Oh yeh. And it almost always plays out thus:

Winners = Them

Losers = Us

[Anonymous Coward]

sparts

For the record, the full name of the Sparts (of Eye Dave fame) is the Spartacists, not the Spartists. Almost as loony as the Adam Smith Institute.

[Mike Street]

Interesting Idea...

but, for me, it addresses the wrong problem.

Small business owners know that if their company makes profits, so do they. They also know that if it makes losses, so do they, perhaps to the point of losing their own houses, cars, furniture, whatever. This makes small businesses efficient, at least when allied to ordinary competence. Otherwise, they don't last long.

In large businesses, including banks and stock brokers, that linkage is broken. Brokers and managers make bonuses when business is good, even if it is none of their own doing, but do not themselves lose out when it is bad - just their clients and stock holders do. Worst case, they leave with a golden handshake, as at Northern Rock. This is what makes them ready to believe a risk assessment on sub-prime mortgage packages which any sane person could see was unrealistically optimistic. They have every incentive to take unreasonable risks. They don't pay the price. When a banker or fund manager or stock broker has to pay a % of losses (as a negative bonus) as well as taking a % of profits, I'll consider investing. Until the risk/reward is symmetric, or nearly so, these bubbles will keep happening, and another layer of speculation won't help.

This is not a new idea of course - it was mentioned by the father of capitalism, Adam Smith, in The Wealth of Nations.

[Anonymous Coward]

Unconvinced

When the threat of climate change has been eliminated, then we can use cap and trade as an example of how markets solve problems. At the moment it just looks like a way for a) politicians to defer the introduction of unpopular measures while pretending that they are tackling the problem and b) bankers to make even more money from this deferment.

[Mark]

@AC: US or UK?

Demand does not exceed supply. 15-20% of UK housing stock is empty. Price rises were inflated by banks lending money to people that would never be able to finance the debt. If they hadn't done that then the prices would have had to come down to levels were the debt was supportable by the buyers.

It wasn't the homeowners speculating it was the mortgage lenders. They bet that what ever happened they would be able to retrieve their bet by repossession and resale. They got it very very wrong.

It would be very interesting to see what would have happened if the facility to bet against them had been there. My instinct is that there would have been an extreme and short lived bubble - similar to what happened in the oil market earlier this year - followed by a quick return to sanity.

[Matt]

No that impressed.

The bottom line is that the banks, particularly in the US, lent money to people they knew couldn''t repay.

The second part of the problem is that the banks sold this dodgy debt around.

What's proposed in the article seems to be more "dressing up a corpse" than dealing with the root cause.

We shall see....

[The Badger]

Re: cat in the hat

"Exactly who didn't know this was a bubble?"

This is an interesting question given all the backslapping about inflation being at a manageable level while house prices soared. According to "Consumer Prices Index and Retail Prices Index: The 2008 Basket of Goods and Services" from the Office for National Statistics, "mortgage interest payments... are excluded from the CPI", although they feature in the RPI, but given the usual amount of political spin involved in any policy matter this surely makes it very easy to apparently meet those inflation targets and keep interest rates conveniently low.

[Mark]

....US or UK? Correction

Quick correction - its approximately 5% of housing stock is vacant. . ..

---------------

There really should be a legislative mechanism for forcing this housing stock into the market. Make it revert to the state if left unoccupied for more than 24 months out of 36 or something. Then assign it to social housing use. Something like that would reduce the impact of speculative property investors as they risk losing all their cash if they can't resell or let the property.

[Steven Jones]

@Matt

Totally agree, except of course it is the bankers (who are people) that did this, not the banks. As others have noted, it's the bankers who engineered this through get-rich-quick schemes where they could load all the downside onto the shareholders and customers. Of course there is no way that you can expect everybody to behave honourably (especially when the very system means that the gamblers will drive out the others). What's needed is a system engineered so that it is not in anybody's interest to so manipulate the system, and to do it in such a way that it doesn't kill innovation.

As it is, everybody competent knew this would happen some time. The aim was not to be there when the financial roof fell in.

[Anonymous Coward]

Attacking the symptoms, not the root cause

The argument is compelling, but misses the real root cause of the current financial turmoil. The Credit Crunch is, at its heart, a bubble in the (low) cost of credit; an under-pricing of the risk of lending money. This in turn cause excessive lending (and sub-prime lending) at prices not commensurate to the risk, which fuelled an asset bubble.

The market in 'asset backed securities' that allow banks to re-distribute lending-risk is the market that needs addressing first. I am personally very doubtful that the presence of short selling in any market would 'head off' a bubble, there are plenty of counter examples.

[Anonymous Coward]

Heads they win - tails we lose

A recent (but accurate) summing up on Radio 4's Today programme:

"The banks have an innate tendency to privatise profit & distribute loss".

Accurate and depressing at the same time.

Who's got an endowment which is on target? No me neither.

Who's got a pension which is going to achieve what they promised? No me neither.

On the other hand - the traders & managers all had lovely bonuses this year...bless them.

[Charlie Clark]

"Wealth generation" - fnarr, fnarr -

is the primary source of inflation.

As others have pointed out the market failed as most of the do from time to time. The regulation in the US failed technically because of the inaccurate assessment of risk by the ratings agencies although it could be argued that the regulators failed in letting the agencies rate products where the risk was probably incalculable. As for the rest: as nearly everybody involved gets paid enormous bonuses as long as the bubble expands and only risk losing their job briefly when it crashes. But I read The Economist for this kind of stuff unless it's funny or got tits in it. According to The Econmost next bubble could well be renewable energy with investment currently far outstripping supply.

[Dodgy Geezer]

Reasonable argument...

"Take climate change as an example. Stern (of the Review) has called it the greatest market failure ever:"

but a pity you spoiled it by citing Stern. He is a good example of a politically-driven shill whose economics are proveably wrong. I thought the Review was a laugh-a-minute for real economists...

Why can't we have a Dodgy Geezer icon for "a bit iffy"?

[bogwoppit]

@Mark - supply & demand

I'm not sure that I agree with your assertion the supply does not exceed demand. Clearly, many more people wish to buy a house than can currently afford to. More houses == lower prices. As previously mentioned, the bursting of the bubble in the UK was not really caused by swathes of defaults and reposessions, but by reduced credit availability and therefore increased price of credit. Prices have dropped not because people don't want to buy, but because creditors don't have the cash to lend to riskier buyers.

In truth, the number of people who can no longer afford their mortgage is relatively small, and will be unless/until we start to see a lot of unemployment. I suspect the damage caused by the downturn in the market will be done in in the retail sector, when people don't have the extra disposable cash they might otherwise have done.

And just as a small reply to the "beer" comment, allow me to make the analogy more accurate: if you spent a year drinking beer, which you are quite prepared to pay for, how do you feel when you find that at the end of the year you can sell the beer you just drank for double what you paid for it?

[Rupert Stubbs]

How to dampen short-term profiteering

In the UK, the tax system encourages to think of their houses as a good "investment", since your main residence can be sold with no capital gains tax.

Far better to have tapered capital gains tax on all property sales, which would help dampen upward swings by giving less profit to short-term speculation. Rather than being a tax on sales, it becomes a tax on profit.

The other villain in the UK is Stamp Duty, which adds an artificial incentive for people to pump up asking prices to "get their money back", and distorts the free trade in property. Use the capital gains tax to massively reduce it.

[Anonymous Coward]

Supply & Demand

I suggest we allow the Chinese, who are getting pretty great at rapidly building out nice quality residential skyscrapers at low cost, to come over to UK and build a bunch of them in all the major city centers.

I've been sitting around waiting for 6 years to buy a house because of the stupid UK house prices - and a lovely house-price correcting recession is finally in sight. But then I see all these news stories about the government trying as hard as they can to keep the house prices up to stop the young folk being able to buy into the property market at sane prices.

It would be nice for the younger generation to have an extra 100K or two in their pockets to spend over their lifetime. Some of us might even use the extra money on something useful...

[Tom Turner]

silver bullet

That's it! you've found the silver bullet for preventing market bubbles. All we need is futures trading to allow folks to short the market and we're done. if only we'd had such a system in place in the stock market back in that pesky dotcom bubble, such havoc might have been avoided. Oh wait! We did.

[Matware]

The down side doesn't have to be financial

You don't have to make bankers pay back money if they lie (restoring balance to the force), you just have to call it fraud, put them in jail, and let them be sodomised buy Bubba and his hand puppet.

The up side is bonuses, the down side is that that bonus comes with a paper trail, and the person who lied about the quality of the debt, an any body who the lies, or misrepresents the risk, or uses small print when explaining risk, or attempts to absolve themselves of blame by shrouding themselves with paper work gets to go to jail.

As for the oil price bubble bursting, jeeze are you guys retarded? It's currently sitting at $114/B (which was freak out territory 12 months ago) and the US is about to lose 10% of its refinery capacity.

[Anonymous Coward]

Even I know

Of course you can hedge against prices falling

http://www.igindex.co.uk/spread-betting/house-prices.html?ct=ln

to name one.

[Angus Wood]

Fannie and Freddie

A good article, and (capitalist bastard that I am) I'm in agreement with the bulk of it. One thig I'd like to add though is that the USA sub-prime situation was, in some ways, caused by the existience of the quasi-governmental mortgage lenders (Freddie Mac and Fannie Mae).

Because of their implied government-backed status then their cost of borrowing on the markets was much lower than the private sector banks (government backed == safer, lower risk) meaning they could offer better deals to housebuyers who naturally put loads of business their way. Many years of low interest rates and nationwide house price rises meant loads of profits. The private banks cash flowed to the edges of the mortgage markets assisting the spread of sub-prime lending.

Now, that's all fine if the US government meant to do that and had things engineered such that they made oodles of cash from this but that's not the case. The US Treasury doesn't make cash from F+F when things are good but when things are bad (now) is having to provide vast sums of cash to prop them up. Not good for the USA taxpayer.

I addition to creating a method of shorting housing stock, killing the F+F giants will remove an enormous distorting force.

This week's Economist has a more eloquent explanation than the above if anyone wants more information.

[Greg]

Little off topic, but...

...am I the only one who re-read the title of this article and was disappointed to find that it wasn't about Bubblegum Crisis?

[Dodgy Geezer]

Beer processing...

"..if you spent a year drinking beer, which you are quite prepared to pay for, how do you feel when you find that at the end of the year you can sell the beer you just drank for double what you paid for it?.."

Well, once I have drunk the beer, I put a lot of specialist chemical processing to work on the liquid. So I am not surprised to find I have bought a raw material, added value, and can now sell it for more.

Is this what is called taking the piss?

[Steve Todd]

But risk WAS offset by the banks

Anyone heard of Monoline insurance? The big problem was that as the financial instruments being used got more and more remote from actual assets it became hard to compute the real risks and the insurers didn't know their actual exposure.

The house buying public were most of the cause here. They could see low interest rates and fast rising prices. They wanted in on this any way they could, and without them chasing house prices upwards this wouldn't have happened. The banks were awash with cheap money, which they needed to lend out to make a profit, so they weren't looking too hard when people asked for a mortgage. The media was in there whipping things up with articles and TV shows on how to make money in the property market. Then, like the emperors new cloths, everyone suddenly found themselves over exposed in public.

How to stop it happening again is a bit more problematic. Some kind of legal obligation on the lender to ensure that the loan is affordable for the term perhaps?

[Phil]

Market failure

It was a the market in Collaterilised Debt Obligations that triggered this whole mess in the first place, in turn fuelled by artificially cheap money. It's always puzzled me that even the 'red in tooth and claw' capitalists from Adam Smith don't suggest a 'free market' in Bank base rates. Why let the Fed mess it up by setting interest rates? Why not let the market decide? Err..because they don't work...

As for housing no-one has mentioned the obvious point that a market in land does fail since you can't realistically make more of it - hence supply is capped. This becomes painfully obvious to people in the UK forced to buy new builds on flood-plains. That being the case adding more speculation is hardly going to help.

A comparison with the German housing market is instructive - what's really needed is a change to people's expectations around home ownership. Sorting out the dismal lot of private tenants in the UK would go a long way to address this.

[Brutus]

@Greg

No, because you're the only person I know who's so into Babes in High-Heeled Powered Armour ;-)

[Colin Millar]

New theory? - try July 1944

The root problem is nothing to do with lack of markets, cheapness of credit or a supply/demand imbalance. It is the imbalance caused by one part of the market sucking up cash well beyond the total underlying value of the assets involved.

JMK warned against exactly this type of problem at Bretton Woods and in particular the need to have a correcting mechanism to redistribute surpluses when they threatened to imbalance the whole system.

Of course the Yanks couldn't see this. They thought (and still do) that they could carry on accumulating surplus with no negative effects. So we have the 'natural economic cycle', the rich getting constantly richer and the developing world left ever further behind.

As for the book and the housing market:

The model proposed would merely allow speculation on whether the credit market for domestic property would speed up or slow down - nothing to do with the underlying value of the assets themselves which is going to be fairly stable (and way below the 'market' value). It would do nothing to address the ever increasing pile of cash and credit that is being tied up (unproductively) in domestic bricks and mortar rather than getting out into the real world and driving some sustainable growth.

You've got to love the sheer audacity of the financial sector in the housing market - getting consumers to drive up prices for them so that they can cream even more off the top. No wonder developers won't build anything - what's the point when for a fraction of the cost you can simply resell something that was built a hundred years ago. The cost of new build is practically all loss.

What is needed in the UK is a healthy rental sector encouraged by some sane legislation that encourages someone other than the naked greed idiot brigade (AKA close your eyes and plunge in blindly buy-to-letters) to become landlords. The immense feeling of schadenfreude as this mob lose their shirts doesn't make up for the misery that our housing model causes.

Of course we did have the beginnings of a rental sector but we flogged it under right-to-sell your children into homelessness. Isn't it curious how the licenced thievery that was endowment mortgages coincided with that particular scam - let 'em sell their futures to us and pay us three times for the privelege - 1) for the interest on the loan, 2) for the crappy insurance premiums and 3) for the shortfall when the crappy insurance policy (surprise, surprise) fails to deliver the riches of Croesus as promised - at least the salesman and insurance company got their bit (that was what the premiums were).

Personally, I thought the cheekiest bit was when it was becoming clear that endowment mortgages were actually a stinking pile of rotting fish. Were the financial services sector at all dismayed - not at all - like the widest wide boy flogging pirate DVDs at the car-boot they slapped a new label on, put the price up and sold them as 'pensions'.

It would be funny if so many people weren't going to be condemned to old-age poverty because of it.

[Chris]

Derivatives market

There already is a property derivatives market - however it is thinly traded because although there are plenty of willing sellers - Property companies/banks/insurance companies looking to hedge their exposure/people willing to speculate on house price falls - there aren't really any buyers.

If you want to be long oil, you have to buy derivatives - most people don't have a large oil storage facility to store the physical stuff in - but in the property market this isn't true. Speculators are willing and able to buy the physical asset and rent it out, and the costs of doing so are lower than the derivatives market; the barriers to entry (minimum contract size) are much lower (it's about £5m in the PD market). So there isn't (and is unlikely to be) a large body of buyers. That means the PD market is likely destined to stay small.

[Anonymous Coward]

Creating more "markets"

Seems very complex solution for what is a simple problem - measuring the risks that borrowers will be able to repay the money they borrowed and lend accordingly. Done properly it would put an upper limit on the money lent to buy houses - so prick the bubble before it got too high.

If the market is unable to do that - simply put a law that they can only claim 3.5x the amount the borrower paid tax in the 12 months before the loan was taken out when there is a default - thus spell out the risks to the lenders if they fail to do their job (oh and make selling defaulted property at too low a price illegal).

[amanfromMars]

MaJIC Tricks ..... Real Solutions

A Bank full of Money is a Failed Institution in that it has found Nothing of Value for Money Supply/Inventor Spend 42 Create. And written off/written down Funds are Credits Freely Available and Floating around with a Home/Spender.

I should Like to Avail myself of a Fair Packet of that Action........ for I have a Cunning Plan ..:-) which Guarantees no Loss of Investment.

[Anonymous Coward]

It is really quite simple

No one owns the land, no one made the land.

So instead we divy up the country into equal comparable portions:

There are 60 million in the UK.

245,000 sq kilometers

245,000 / 60,000,000 = 0.004083

There are 1 million square meters in a square kilometer so,

so 4083 square meters per person.

So if you need to visual that space it is 100 meters long by 40 meters deep.

If you have less than that you are being stolen from, if you have more you are being greedy :) Of course we would have to adjust for arable land and water supply perhaps (though there are wells).

Now, most won't need 4083 square meters, so they can rent out a portion of their land to business, or road works, charge a toll perhaps. That solves unemployment and allows those who wish to work in business the space to do it.

No one can buy or sell land, but they can exchange it or for another plot, and make rental agreement of 2 years maximum. This will create a constant rebuild for business, which will spur the economy. All business is run electronically, and all methods of production are done underground using cybernetics. Everyone grows their own crops using grow chambers and their plot of land. All wahrehousing is done in the vertical. There is no military or police just a standing army of land owners.

Yes, that is how all of this works, but of course we have some greedy power mongers who basically have just stolen from us, give us back our land.

And yes it will cause massive upheaval, but that will also spur the economy, as lots of things get torn down like the national trust places, and new things built.

Oh and you can only have 1/2 a child per person for a while, to increase the overall wealth, then it is 1 child per person max, no buying children slots :)

[Mark]

re: New theory? - try July 1944

These landlords with plenty of housing were called "Councils".

Councils are being allowed to buy the properties however, so it may be in a very small way correcting itself.

[amanfromMars]

Oops..... an Honest Mistake.:-)

"Credits Freely Available and Floating around with a Home/Spender." ... By amanfromMars

Posted Monday 1st September 2008 14:54 GMT

That of course should read Credits Freely Available and Floating around without a Home/Spender.

[Anonymous Coward]

Lots of lovely theory, why not start fixing NOW?!

Another article suggesting we tinker with the fringes of the system. This doesn't address the basic problem which is that the system is fundamentally broken because the major players are basically corrupt, gambling in an unregulated manner with other people's money, keeping the winnings for themselves not their customers, and not taking any of the losses themselves but simply passing their losses onto their investors/customers. The corrupt broken system is not going to be fixed because the people in charge are beneficiaries of that corruption. A different answer is needed.

Close your existing current account, move it, and your mortgage, your home and car insurance, and anything else you can think of, to financial services providers where the idea of gambling with other people's money is heresy (literally).

Don't know what I'm on about? Fair enough. Shariah finance (aka Islamic banking) is what you need to look at, and the more folk that take it up, the less there is for bonuses for the ungodly money-worshippers in the City, and their followers around the world.

Whatever your religion, if you have children, you owe it to them to vote with your wallet once you have done the research and convinced yourselves that this is the future, and then the CIty will see that things can and WILL be done differently in future, and your children, and their children too, will thank you for it.

[Anonymous Coward]

How do the bears

It's the vaguest proposal with no understanding of how things work. Discussing it just seems impossible. I keep starting then stopping again trying to find anything that could be a starting point.

One area, a trader defaults on his geared bet and commision. Which currency would you trade in for homes, what about the Basel II capital reserves and risk %, how do these differ. Would a spiral of the trading partner such as a bank owning assets which it secures loans on, falling in value , be caught by being unable to cover other commitments, I presume we don't just bet futures on the value of housing.

The insurer would be covering an entire country, how could they possibly secure even a fraction of the total. The system as described with no ratings, regualtion, capital or indeed money means I would make a bet, win or lose, bet more and so on. When I had 100 Billion after losing 100 Trillion and making 100 Trillion 100 Billion after 4 years, who was supplying the capital to cover this risk and....

[Watashi]

Nice idea - wrong type of market

The problem with this futures system is that the seller has to say when they are going to buy/sell the goods in question well in advance of the date of sale. This may work fine for organisations who have an annual cycle and so can take out futures every year... but with housing the cycle is closer to a decade, and so the futures terms would be far too restrictive. Young, professional singles and couples, and divorced middle-aged people (who have largely created the boom in housing) would never sign up to futures because their lives are too unpedictable. What happens if the young couple gets pregnant, but can't sell their town flat for another three years? Or the divorcee wants to move in with her new spouse but can't because their stated sales dates on their respective current houses are two years apart?

Other home owners can sit on their houses for years at a time, and so would know they could ride out a storm when it comes. Why agree to sell your house in ten years when you know you won't need to move for twenty? Or commit to twenty when you know you may fancy a change in ten? The only people who actually lose out in a house prices slump are those who lose their jobs and have to sell up because they can't cover the mortgage. It's very unlikely that these people would have set their futures bet date years in advance to co-incide with being made unemployed.

Lets get this straight. The lack of movement in the house market is a temporary symptiom of a wider problem caused by lack of liquidity, high fuel costs and the natural economic cycle. There is no house price bubble in the UK, just a high level of disposable income coinciding with a big increase in the need for a commodity that is in short supply. The slow-down of housing market that the government is trying to turn around is a consequence, not a cause of, the economic problems we face. A futures market wouldn't fix these problems even if it could reduce the impact on home owners of a house price crash.

It is interesting to note that in Scotland house prices are still increasing.

[chris]

Next week on The Onion...

Great column. Sprayed tea all over the laptop.

[Robert Hill]

@Mike Street

Mike hit the nail on the head - the corporate form of governance isolates top managers from any downside to risky behaviour (as long as it is not provably illegal!) while compensating them highly for risky behaviour that pays off.

Frankly, ANY other discussion is a fail if it does not address this - any discussion of market dynamics, demand curves for resources, self-correction, etc...they are all just re-arranging the deck chairs. As long as you have top corporate managers who's only reaction to risk is to assume MORE of it if it looks profitable in the short-term, and believe they personally can make a bundle during that short-term, then no systemic fixes will work. There is always SOME way to game the system (mis-calculate that risk, hide it in sub-corporations or outside players, put it off-balance sheet, create "off-sets" that aren't really offsetting, etc.) that smart people will find - and you are dealing with people smarter than those regulating them in many cases.

The root of the problem is the broken corporate governance model, especially in the huge number of cases where the board is actually under control of the CEO or outside investors who only care about short-term profits. Until this structural deficiency is addressed, the rest is just mental masturbation...

[Boris the Cockroach]

Sub-prime loans

What was mised was the way banks were able to make these loans

Normally a bank is allowed to lend £10 (dollars) for every £1 it holds on deposit(rough guess but its there in the regs somewhere)

What the banks wanted to do was lend more people money, thus making more money from the interest, but once that £1 had been lent out 10 times that was it.

So they packaged the debts together, and sold them on

In effect for every £1 on deposit, they lent it out 20 30 even 40 times creating a vast mountain of debt, sold on the markets to anyone who would buy it.

The managers took home big bonuses for being clever and the regulators could only see the banks lending out their deposit money 10 times as per the rules

Quite frankly the managers responsible for the mess should be up on charges of fraud and not standing in line at the government's door begging for money

[Kanhef]

more causes

Perhaps the most direct, tangible cause is that realtors and mortgage brokers are paid on commission. Their cut is a percentage of the sale price, so they have an incentive to make as many sales as possible and at as high a price as possible, regardless of the borrower's ability to repay the mortgage. Many falsified documents and used other means of fraud to make clients look more credit-worthy. However, this alone would not be enough to cause a crisis; banks would have noticed that many loans made by certain brokers were defaulting, and investigated why this was happening.

The next problem is the complexities of financial dealings. A package of, say, 1000 mortgages could be sold as an investment that would be sold as an investment that would return $250 million over the next 20 years. But the details of the loan, such as interest rate and income of the borrower, are lost in the paperwork. It comes as a complete surprise when people start defaulting en masse and the value plummets to $100 million.

There are tens (hundreds? more?) of trillions of dollars on paper floating around the financial industry. Only a fraction of this corresponds to a real entity or can be readily converted to actual money. Recall the dot-com millionaires, who were wealthy on paper, but were left with nothing when the stocks crashed. For a more recent example, see the collapse of auction-rate securities earlier this year. When the market for them died, hundreds of millions of dollars were trapped in these securities which could not be sold or accessed by investors.

What is needed is not another market for intangible assets, but more transparency. Even experts at major financial institutions admit that no one really understand how the industry works. Until we do, this sort of thing will continue to happen, as it simply cannot be predicted.

[amanfromMars]

DeadHead Rule ..... AI Natural Default

"Mike hit the nail on the head - the corporate form of governance isolates top managers from any downside to risky behaviour (as long as it is not provably illegal!) while compensating them highly for risky behaviour that pays off." ... By Robert Hill Posted Monday 1st September 2008 23:20 GMT

Robert, It is all illegal because the gambling is all done with money created by peoples toil and production since time began and which is salted away/denied them by the Usurers who would even then charge them more to Use what is already theirs, but which has been stolen/spirited away by Suits who think they are Invincible/Invisible/Smarter than the Average Bear. They are no more than Crooks of the Most Vile and Putrid Kind for their Love of Money is the Root of All Evil, it is truly Said.

"Lots of lovely theory, why not start fixing NOW?! " ... By Anonymous Coward Posted Monday 1st September 2008 19:05 GMT ..... is a Valid Starting Point for the Great Fix ........ and who knows, if there is any Intelligence in Wall Street Capitalism, their Bankers will SWIFTly convert to Shariah finance/Islamic Banks or watch their Funding Streams Divert and Disappear as Investors Realise the Deceptions played upon them for the Obscene Pleasure of Unnecessary Greed and Intellectual Arrogance. The Live Evil/Cancerous Growth in their Midsts.

"What is needed is not another market for intangible assets, but more transparency. Even experts at major financial institutions admit that no one really understand how the industry works. Until we do, this sort of thing will continue to happen, as it simply cannot be predicted." .... By Kanhef Posted Tuesday 2nd September 2008 01:15 GMT ..... Spoken like a vulnerable banker/investor, Kanhef. The Industry works like a Scam for it is predicated on Dreams which are tied to the supply of perceived wealth/printed paper/currency. Control the Flow rather than Supply the Flow of Global wealth has you sitting in Control of Dreams and Reality.

That is How IT Works in two Short Simple Sentences.

What would you like to do about IT? Ignore the Facts or Change the Rotten System for Something/Anything Altogether Beta, for of course, IT will be Registering and Monitoring its Live Rebuild with ITs CyberIntelAIgent Reaches into Virtually Instant Global Communications Networks InterNetworking Influence and Affluence to New and More Wwworthy Homes/Stores/Hubs/Safe Havens.

The Old Money System with Powers in Control is Dead .... Long Live the New Money System with IT Control of Powers instead.

[Anonymous Coward]

The market is mostly just fine, thanks

This article goes on and on about markets but it's really just about hedging, which is certainly not the same thing as a market.

However, while creating a hedging mechanism (not a market) is an interesting idea, it is not a good one. There already are many hedges for the housing market. You can short housing stocks, buy put options etc etc.

Furthermore, consumers are particularly bad at insuring themselves adequately or even understanding risk. That's really why the housing bubble occurred. People like to hear "this market's gonna keep on risin', baby." Generally, they're also not very good at understanding financial instruments like options.

What's more, futures and the like are themselves very liquid, very risky instruments whereas a house is not. A homeowner could find themselves forced to sell the entire house at a discount in order to cover hedging losses.

Yet most homeowners don't even have access to such financial instruments simply because they are too risky and, although intrinsically simple, difficult to understand. Do I buy a call or sell a put?

We don't need another 'market' - ok, just a hedging mechanism. We also don't need a lot more intervention ie regulation in the existing market. However, there is a need for better monitoring of abidance of the rules of the market because this market failed due to lack of 'policing' not because of a lack of rules.

There is one major distortion in the UK housing market. Buy-to-let causes a shortage of housing supply and is also well-rewarded by HMRC. Unfortunately, rectifying something as simple as this is insufficiently dramatic or far-fetched. No one's going to print a story about a change in taxation when they can scare readers with the worst slump in 60 years.

[amanfromMars]

Clearing the AIRwaves of Dross and Petrified Thoughts

"This article goes on and on about markets but it's really just about hedging, which is certainly not the same thing as a market." .... By Anonymous Coward Posted Tuesday 2nd September 2008 08:58 GMT

You can say that until you are blue in the face, AC, but the thread is about the dire straits need for wholly different markets, which dispenses with leads from the corrupted financial controls of the less than worthy. And if that should see their little ego empires collapse rather than flourish in their Unbridled Support of Virtualisation of the Great Game, then who would they have to Blame but themselves whenever they are Appraised of the Paradigm Shift in New World Order ProgramMIng. The Offer is there for them to Support IT with Global Wealth. After All, it is not as if it is their Money which is being Spent, is it, although too many are Stupid enough to tell themselves that Tall Tale and thus are Frightened to Spend IT Freely and Wisely for IT to come around to them again for their Philanthropy?

Take a Bow all those Pontificators a la Buffet/Gates/Soros to name but three, who promise a lot but do practically nothing.

[E]

Tech?

What has a USA neo-con economics opinion obscurantist got to do with IT?