Housing Bubbles: Learning To Grow Up

November 20, 2008

Within this rather lengthy and extremely informative article The End of Wall Street's Boom - National Business News - Portfolio.com, by Michael Lewis, author of Liars Poker (which dealt with the excesses of the 1980’s), the author revisits Wall Street to assess “what went wrong”.

Within this lengthy Portfolio.com article, Mr. Lewis describes in very human terms, the behavior of the players – and in how so few of them (in particular the senior managements of the firms involved) had any idea of the consequences of the reckless financing, in fueling the housing bubbles.

It needs to be borne in mind however – that the role of the finance sector generally, was simply to provide the “fuel” – and within dysfunctional urban markets where housing exceeded three times household incomes, the financing had to adapt, if finance firms participating, wished to maintain market share.

Within a recent Forbes article Alan Greenspan, ''Savant Idiot'' - Forbes.com, Michael Thomas, a former investment banker and author of seven books on business and finance, provides his assessment of the former Federal Reserve Bank Chairman, Dr Alan Greenspan.

In reading the above articles, it is important to recognize that the finance sector globally did not have a monopoly on stupidity and infantile behavior. All “housing bubble players” from the political and regulatory leaderships right the way through to the mom and pop speculators borrowing willingly to excess, to make “easy money”, had their parts to play too.

The media – and in particular the print media – has played a key role in providing generally poor quality information to the public (to turbo charge advertising revenues), regarding the nature and consequences of housing bubbles. Even today – it still persists in seeking widespread commentary from people, with a generally poor understanding of markets and property markets in particular. People too often from the academic or professional spheres only “schooled” in markets – but with no successful track record of market experience. As the saying goes “prove yourself first – then open your trap”.

There is a need for the print media to review the performance to date of many of these commentators – and enlighten readers of the results.

Within the Portfolio.com article “The End of Wall Street’s Boom”, Mr. Lewis points out how a small number of people realized that urban markets, where the housing exceeded the norm of three times household earnings, were heading for major problems. This had been well understood since the 1970’s – and there is an abundance of material available on the Demographia and Performance Urban Planning websites to illustrate this. The process that is currently being playing out, is covered in simple terms, within an article I wrote back in December 2007 Scoop: Housing Affordability – The Shift To Reality.

The root cause of these current problems are serious governance and regulatory failures at the national and local levels – which created the artificial scarcities, to allow these bubbles to get underway. The Melbourne, Australia daily The Age has set a good example with a recent article Land supply at heart of home-front problems | theage.com.au. It is these structural and performance issues that must be dealt with – to allow the “bubble values” to be worked out of the system, so that a foundation can be put in place for a recovery.

ENDS