This excerpt from Stewart Lansley (author of The Cost of Inequality: Three Decades of the Super-Rich and the Economy) succinctly sums up some of the problems caused by the deregulation of Capitalism:
The main outcome of the post-1980 experiment – one based on a return to blind-eye regulation of the City, fewer controls over business and a weakening of collective bargaining – has been an economy that is both more unequal and more fragile and prone to crisis.
So why is this? The reason lies in the relationship between wages, productivity (the increase in productive capacity) and growth. When wages fall increasingly behind growth and productivity – as they have in both the UK and the US in the last 30 years, and at an accelerating rate – the natural mechanisms that bring economic stability stop working. The decoupling of earnings from growth creates three powerful forces that bring first imbalance and then economic failure.
First they suck purchasing power out of the economy. For the last thirty years, an increasing number of rich nations have been running their economies on low levels of wage-generated consumer demand, necessitating an increasing reliance on debt to prevent implosion. In both the UK and the US, the rising levels of politically sanctioned debt enriched financiers and kept economies going for a while. But they were never sustainable.
Secondly, concentrating income at the top, amongst a group more likely to engage in reckless speculation than spend their wealth in ways that benefit the productive economy, eventually leads to asset price bubbles in property, commodities and business values. Thirdly, great levels of inequality bring unequal power. Over recent times, the rise of dominant wealth-diverting finance capitalism has created a powerful new and unaccountable economic elite. Hence the inaction on tax havens, blind-eye regulation on the City and Wall Street and the way the super-rich are treated as a special case for tax. These are all factors that contributed to both the build-up to the Crash of 2008 and to the persistence of the crisis.
Rising executive pay and soaring personal fortunes are important issues of social justice. Levels of personal wealth at the top have risen to levels that are indefensible in terms of economic contribution. But they also have important implications for the way economies function. Until we find ways of breaking up these great concentrations of wealth and power, fragility will remain, and the global economy will struggle to recover.
Tuesday 1 November 2011
Monday 3 January 2011
Do House Prices Absorb Excess Wealth?
Astonishingly, coalition minister for Housing Grant Shapps is speaking sensibly about the UK Housing Market on BBC R4 Today this morning (3rd Jan 2011 - see http://news.bbc.co.uk/today/hi/today/newsid_9334000/9334045.stm). I agree with him that a stable market is a good thing, that property bubbles are very bad, and that the current market is considerably overpriced. He's also right that a fast correction will be a devastating thing. Look at Ireland for example. However, I do not believe he is correct on 2 important points:
1. His prediction that the market will slow down and stabilise gradually. Putting policies in place to make this happen (build more homes etc) is GOOD, but his colleague's austerity cuts, VAT rise and general crusade to get rid of a huge number of government related jobs will almost certainly mean this thing goes down like a Tiger-shaped hot-air balloon that's run out of gas.
2. That house-prices should end up cheap - like white-goods and TVs. This is hokum, and not because houses can't be shipped from China (although they can), but because house price inflation partly happens to absorb excess wealth. As we get richer (due to most things becoming more affordable) our societies reach consumerism saturation point - that point you might have reached when asked what you want for Christmas and it's a job to know. We've bought the dishwasher, PS3, huge TV, MacBook, Sky+Broadband, Fender guitar. What else IS there to get? There's only so many holidays you can take - and your car can only be incrementally better than a Focus. But I believe as humans we NEED to make progress, to accumulate "achievements" (which is what all of those materialist goods supposedly mean to us) - we have to aspire. It sounds strange to think that we subconsciously want to have things that are out-of-reach, but here we are paying what is in reality a 1/4 or 1/3 of a million pounds for a few rooms with shit carpets. Land is the one thing that cannot be manufactured (easily) and is therefore the one thing that will become in short supply (and thus more valuable) when everyone has everything else.
(Just as 'real' animals are more valuable in Blade Runner ;)
I am no economist. Nor do have any proof other than the correlation between house-prices and previous times of wealth. But I bet you this - as the economy turns dark that trend will be reversed, and assuming we come out the other-end into a new time of prosperity (2020?) we will see that which has a limited scarcity soaking up excess cash once more.
1. His prediction that the market will slow down and stabilise gradually. Putting policies in place to make this happen (build more homes etc) is GOOD, but his colleague's austerity cuts, VAT rise and general crusade to get rid of a huge number of government related jobs will almost certainly mean this thing goes down like a Tiger-shaped hot-air balloon that's run out of gas.
2. That house-prices should end up cheap - like white-goods and TVs. This is hokum, and not because houses can't be shipped from China (although they can), but because house price inflation partly happens to absorb excess wealth. As we get richer (due to most things becoming more affordable) our societies reach consumerism saturation point - that point you might have reached when asked what you want for Christmas and it's a job to know. We've bought the dishwasher, PS3, huge TV, MacBook, Sky+Broadband, Fender guitar. What else IS there to get? There's only so many holidays you can take - and your car can only be incrementally better than a Focus. But I believe as humans we NEED to make progress, to accumulate "achievements" (which is what all of those materialist goods supposedly mean to us) - we have to aspire. It sounds strange to think that we subconsciously want to have things that are out-of-reach, but here we are paying what is in reality a 1/4 or 1/3 of a million pounds for a few rooms with shit carpets. Land is the one thing that cannot be manufactured (easily) and is therefore the one thing that will become in short supply (and thus more valuable) when everyone has everything else.
(Just as 'real' animals are more valuable in Blade Runner ;)
I am no economist. Nor do have any proof other than the correlation between house-prices and previous times of wealth. But I bet you this - as the economy turns dark that trend will be reversed, and assuming we come out the other-end into a new time of prosperity (2020?) we will see that which has a limited scarcity soaking up excess cash once more.
Thursday 16 December 2010
Why Britain Still Has A Housing Bubble, And Why This Will Lead The Economy To Collapse
Nearly all financial crises are either closely related to, or because of, a property bubble. Britain still has a property bubble (average house prices are currently £246,387 with an average income of £22,800, making that nearly 11 x income!). Anecdotely, those selling say they can't shift their homes - but yet those home owners (almost all born between the 50s and 70s) are clinging to their values, desperately trying not to accept lower prices.
How Did Prices Get So High?
The average baby-boomer home owner did not earn the £61k-£80k/yr traditionally required to afford the home they now live in. In general they will have bought their home for well under £100k, on a 25yr mortgage that they could afford. However, they do feel they "deserve" or "have earned" the £250k they now sit on.
What happened is like a giant pyramid scheme - an unconscious collective scheme for everyone to get rich without actually generating any wealth (here-in lies the first clue as to why bubbles always go spectacularly bad). Everyone 'agreed' to sell their price for a higher amount. Bob puts his price up, which causes Jane - who is buying Bob's house - to put her price up. At some point over the past decade (due in part to property programs and those ads that claimed you could become a millionaire by doing nothing through buy-to-let) everyone agreed that actually - rising house prices rule! So let's ALL push our prices up together - then we'll be richer!
This also worked for the economy - everyone feels richer, they buy more - even equity releasing a 'little bit of money' to buy an M-Series. So the government loves it to. But there's a problem - if no-one can buy Jane's house, the whole thing stalls. The solution? Make bigger and bigger loans available to those people at the bottom of the housing ladder! Make buy-to-let loans available to pretty much anyone! And huge loans at that.
But that doesn't work either does it - because it's risky to lend 100,000s of pounds to these people? Ah, we have a solution! Banks figured out a way to not take the risk on themselves, but 'resell' those mortgages (and actually make MORE money out of them). The mortgages were resold in selection boxes so the people who "bought" these loans didn't see the obviously-ludicrous coffee creams amongst the jam rings and bourbons. These selection boxes of maybe a thousand or so mortgages were selling for so much money, that most banks got into the swing of buying other people's! (this stupidity seems mainly driven by traders who got a huge bonus for making these trades, but didn't suffer from the consequences, and the people whose money it actually was didn't know nor understand what the traders were doing). The perceived spreading of risk - and the belief that surely the whole thing couldn't collapse - is what led Gordon Brown to declare the end-of-boom-and-bust - possibly the most dangerous, bubble-inflating statement of all time.
A few years after these selection boxes were sold, people started to realise that they weren't getting their £500/mth interest payments from all of the mortgages they bought - in fact homeowners (in the US initially) started defaulting wildly, and the whole sorry mess started to untangle.
Of course, banks are no longer lending the bottom of the ladder these silly sums of money (even though those with property further up the ladder are often whinging that the 'housing market has stalled' because of 'the unwillingness of banks to make credit available' - or something along those lines). The bottom of the ladder has been kicked away - but prices remain.
So Can Prices Stay High?
What IS clear is that prices cannot go higher. A junior doctor earns ~£30k - going up to £53,781 to £81,158. These are people in the top-end of the wages world, and yet they could not get a mortgage for an average home without a substantial deposit.
This in itself has implications - first time buyers of the recent past were happy to get £1/4million loans so long as prices went up. It was all relative, so a friend of mine told me before jumping into a massive loan that would take 35 years to pay off. It did not strike him that this was less a housing ladder he was getting on, but a millstone he was strapping to his feet.
I had been thinking about those who I knew were buying - their parents were helping out with the deposit - generally from taking equity from their own homes. The only way I could see house prices staying up was if the baby-boomers provided the unobtainable sums to their children, or indeed bought up the majority of available property as buy-to-let.
There is a reason why this won't happen - or not indefinitely - and that is age. Banks may open up increased lending to wealthy 40/50 somethings now - but as they age, there simply won't be enough earning life left to forward them another say 50,000 on their mortgage. Without selling up, this will come to a natural end.
So When Will The Falls Come
Soon - if Ireland and the US are anything to go by. What forges a virtuous circle when the bubble is inflating becomes a vicious problem on the way down. When prices start falling, people don't want to buy until they level out. Buy-to-letters start losing more money each month than they are gaining from rent - and have the not inconsiderable hassles of being a landlord chucked in to boot. Those who tip into negative equity soon join in the glut of those trying to sell, and people stop saying how houses are easy money and point out that the Emporer never really did have any clothes on.
What Will Happen
Ireland are on the way down, and the impact on the economy continues to be devastating. From just this cursory assessment of prices, easy to see that our bubble is HUGE and - combined with spending cuts and rising unemployment - potentially ruinous.
How Did Prices Get So High?
The average baby-boomer home owner did not earn the £61k-£80k/yr traditionally required to afford the home they now live in. In general they will have bought their home for well under £100k, on a 25yr mortgage that they could afford. However, they do feel they "deserve" or "have earned" the £250k they now sit on.
What happened is like a giant pyramid scheme - an unconscious collective scheme for everyone to get rich without actually generating any wealth (here-in lies the first clue as to why bubbles always go spectacularly bad). Everyone 'agreed' to sell their price for a higher amount. Bob puts his price up, which causes Jane - who is buying Bob's house - to put her price up. At some point over the past decade (due in part to property programs and those ads that claimed you could become a millionaire by doing nothing through buy-to-let) everyone agreed that actually - rising house prices rule! So let's ALL push our prices up together - then we'll be richer!
This also worked for the economy - everyone feels richer, they buy more - even equity releasing a 'little bit of money' to buy an M-Series. So the government loves it to. But there's a problem - if no-one can buy Jane's house, the whole thing stalls. The solution? Make bigger and bigger loans available to those people at the bottom of the housing ladder! Make buy-to-let loans available to pretty much anyone! And huge loans at that.
But that doesn't work either does it - because it's risky to lend 100,000s of pounds to these people? Ah, we have a solution! Banks figured out a way to not take the risk on themselves, but 'resell' those mortgages (and actually make MORE money out of them). The mortgages were resold in selection boxes so the people who "bought" these loans didn't see the obviously-ludicrous coffee creams amongst the jam rings and bourbons. These selection boxes of maybe a thousand or so mortgages were selling for so much money, that most banks got into the swing of buying other people's! (this stupidity seems mainly driven by traders who got a huge bonus for making these trades, but didn't suffer from the consequences, and the people whose money it actually was didn't know nor understand what the traders were doing). The perceived spreading of risk - and the belief that surely the whole thing couldn't collapse - is what led Gordon Brown to declare the end-of-boom-and-bust - possibly the most dangerous, bubble-inflating statement of all time.
A few years after these selection boxes were sold, people started to realise that they weren't getting their £500/mth interest payments from all of the mortgages they bought - in fact homeowners (in the US initially) started defaulting wildly, and the whole sorry mess started to untangle.
Of course, banks are no longer lending the bottom of the ladder these silly sums of money (even though those with property further up the ladder are often whinging that the 'housing market has stalled' because of 'the unwillingness of banks to make credit available' - or something along those lines). The bottom of the ladder has been kicked away - but prices remain.
So Can Prices Stay High?
What IS clear is that prices cannot go higher. A junior doctor earns ~£30k - going up to £53,781 to £81,158. These are people in the top-end of the wages world, and yet they could not get a mortgage for an average home without a substantial deposit.
This in itself has implications - first time buyers of the recent past were happy to get £1/4million loans so long as prices went up. It was all relative, so a friend of mine told me before jumping into a massive loan that would take 35 years to pay off. It did not strike him that this was less a housing ladder he was getting on, but a millstone he was strapping to his feet.
I had been thinking about those who I knew were buying - their parents were helping out with the deposit - generally from taking equity from their own homes. The only way I could see house prices staying up was if the baby-boomers provided the unobtainable sums to their children, or indeed bought up the majority of available property as buy-to-let.
There is a reason why this won't happen - or not indefinitely - and that is age. Banks may open up increased lending to wealthy 40/50 somethings now - but as they age, there simply won't be enough earning life left to forward them another say 50,000 on their mortgage. Without selling up, this will come to a natural end.
So When Will The Falls Come
Soon - if Ireland and the US are anything to go by. What forges a virtuous circle when the bubble is inflating becomes a vicious problem on the way down. When prices start falling, people don't want to buy until they level out. Buy-to-letters start losing more money each month than they are gaining from rent - and have the not inconsiderable hassles of being a landlord chucked in to boot. Those who tip into negative equity soon join in the glut of those trying to sell, and people stop saying how houses are easy money and point out that the Emporer never really did have any clothes on.
What Will Happen
Ireland are on the way down, and the impact on the economy continues to be devastating. From just this cursory assessment of prices, easy to see that our bubble is HUGE and - combined with spending cuts and rising unemployment - potentially ruinous.
Friday 30 July 2010
Nuclear vs Solar
Lots of arguing today (again!) over at Slashdot on whether Solar or Nuclear is best (i.e. most cost effective) following an article repeated in the New York Times claiming Solar power is now cheaper than Nuclear power - and a quick rebuttal from atomic insights claiming the reverse.
It's all a bit tit-for-tat : no, they shouldn't have factored in the Solar subsidies when comparing the two - yes, they should have included the cost of reprocessing nuclear waste + insuring the things (which governments currently cover the cost of). What matters though, is not who wins this argument-based-battle, but who will win the overall power-war. That Solar can even be compared to nuclear cost-wise is something that would never have been attempted a decade ago, and shows the trend of Solar technology. Following this forward, it's clear that Solar will soon genuinely be more cost effective than Nuclear - even if some argue it might not be now.
It's all a bit tit-for-tat : no, they shouldn't have factored in the Solar subsidies when comparing the two - yes, they should have included the cost of reprocessing nuclear waste + insuring the things (which governments currently cover the cost of). What matters though, is not who wins this argument-based-battle, but who will win the overall power-war. That Solar can even be compared to nuclear cost-wise is something that would never have been attempted a decade ago, and shows the trend of Solar technology. Following this forward, it's clear that Solar will soon genuinely be more cost effective than Nuclear - even if some argue it might not be now.
Thursday 10 June 2010
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