(originally written Mar 4, 2012. Part of Great Upload of 2013.)
Readers (regular and irregular both) may know that about six years ago, I was quoted in MacLean’s saying Canadian housing was in a bubble. So after six long years of looking very wrong, I was delighted to see the right-wing rag run a cover story proclaiming that Canadian housing is in a bubble! So I’ll dedicate this email to all the stopped clocks out there — twice a day, your time will come! :)
Like anyone else challenged by a cognitive dissonance between ego and evidence, I naturally prefer the delusion that I wasn’t wrong, just early. ;) Having figured prices would fall by 2008 at the latest, I like to think I was only off by an Olympiad, or eight “Friedman units“. On the more forgiving fossil-record timescale, I nailed it!
MacLean’s cites low interest rates and lax lending standards as a (sub?)prime reason for the real estate boom-turned-bubble. This can kind of be expected, because most people aren’t great with money. It’s a financial variant of Sturgeon’s Law, which says that “ninety percent of everything is crap”. Take housing market predictions, for example… ;)
Given the opportunity to make very bad decisions by enabling financial institutions, most people will do so. Indeed, the mutual fund industry owes its existence to people’s predilection for sub-par performance! Of course, most guys who throw their own darts probably do even worse, so the best way to look at mutual funds is probably to see them as a less-damaging “cowpox” to the “smallpox” of DIY investing. :)
As you’d expect from a left-leaning atheist on an issue like this, I’m with… Jesus, and blame the bankers. ;) If people are trying to borrow beyond their means, competent financial institutions are supposed to not make loans. Of course, fewer loans means lower profits and much lower stock-option-based executive compensation. (As they say, no good deed goes unpunished.) By loosening lending standards, bank executives can enjoy kingly compensation; and by the time the crisis hits, they’ve moved on to other pillage-able pastures. Which explains why cartoons like this make the rounds:
Banks lending / too much damn money / to people, is a haiku microcosm of how Greece came to be in its quandary: it borrowed more than any sane lender could’ve reasonably expected it to repay. Which is why European governments are trying to work out “bailouts” by which they launder money through Greece to recapitalize their countries’ banks. The “choose your own adventure” blog entry here does a pretty good job of showing the stalemate.
Compounding the problem, austerity packages are being pitched, which will only make the crisis worse; in cutting public services, austerity measures reduce a country’s GDP (because public-sector activities count towards GDP) meaning debt has to be repaid from an even smaller national account.
The endgame seems to be that Greece defaults and reverts to its own currency, while everyone else does the duck-and-cover. After mistiming the Canadian housing market — and fuel cell vehicle commercialization for that matter — I’ll decline to guess when that happens. ;) A cheaper currency would cement Greece as a cheap vacationing spot (tourism is one of their biggest industries) and allow them to attract some manufacturing jobs with which to rebuild their economy.
There’re many precedents for thinking that default and devaluation would work. Iceland defaulted a few years back; its GDP is now higher than pre-crisis levels, and its government debt is now back at “investment grade”! Argentina also did pretty well after its default in the early 2000’s… and a forgiving of debts (effectively a society-wide default) preceded the rise of democracy in classical Athens.
The march of progress. And plumbing!
Pessimists might note that we’re not always that good at learning the lessons of history — even as Iceland resurges, Latvia is in a “Shock Doctrine” death spiral. But here on Team Glass-half-full, I like to think that we do in fact make slow progress. :) Consider universal indoor plumbing, which none of us would want to live without. First invented around 2000BC by some proto-Tommy Douglas of the Harappan Civilization in the Indus Valley, this was such a breakthrough that within thirty-eight centuries London, England — capital of the globe-straddling British Empire — had decided to build its own! Progress — there’s no stopping it! ;)