I have to say, reading the press recently is beginning to get right up my nose.The sanctimonious ramblings of so-called financial journalists intent on hoodwinking the public into believing that all this mess is caused by greedy speculators trading the markets and making money at the expense of the little people.... What a crock of s***.
In the Telegraph today they were saying that the markets would be 'perfectly affective' if there were 'far fewer' traders. These 'talented people' could then get a real job in the 'professions'.
What, like a journalist? Who, from the stuff I have read recently, are at best, deluded, at worst corrupt. After all, selling newspapers is their game right? Months ago profiling hedge fund rocks stars was selling newspapers, now nailing them to the wall is flavour of the month.
First of all I will agree that the over use of leverage has contributed to the wild swings we have seen in the markets and private equity and hedge fund speculation has created short-termism in the minds of many a CEO leading to overly risky company strategy in some cases.
BUT (and it is meant to be in capitals) speculation is not to blame for the route causes of this mess. We all know that the route cause is the US housing market, and, to a certain extent, the UK housing market.
Both of these sectors have been, and no doubt will continue to be, a massive ponzi scheme in which everything is OK as long as new money is coming in. Just like a game of musical chairs, when the music stops and the new cash disappears the whole thing collapses and some people do not have a seat.
So who is to blame? For me it is the banks, mortgage brokers, the media, the regulators and the one that will make this post unpopular, Joe Public.
When I say Joe Public I mean a certain section of the public, those who thought that the housing market would go on forever and so it was worth lying about your income to get in on the game. It is not only the market speculators or traders who had over used leverage but the house buying public.
I will give you an example. I lived in a flat that was in a converted hotel. In 1999 this flat was offered to me for £180,000. Two bedrooms, paper thin walls and an odd shape. That same flat was on the market 8 years later at £600,000. Six hundred grand for a two bedroom flat? If inflation had taken it to that price, fair enough.. but it didn't.
What caused it? Cheap money from the banks, eager/greedy mortgage advisors/estate agents and some dim buyer thinking the housing market was going to go up for ever and was prepared to pay something for a flat that was no where near worth it.
Where was the trader in that equation?
When it looked liked this Ponzi sham may be over the banks came up with ever more schemes to keep it going. How about 125% mortgages from Northern Rock? What about self-certification 'liar loans' in the US.
The trader’s job, be it in a hedge fund, investment bank, or sitting at home trading online is to spot anomalies in the market and bet on making money when the price corrects, is that evil? If you saw a listed company with no income trading at a £200 million pound market capitalisation and you are able to trade it would you buy or would you short?
The housing market and its component parts was just one huge price anomaly waiting to be corrected by, yes, traders. Who else would have done it? Blaming them now is like blaming a vulture for killing an already dead animal. (Probably not the best analogy, but you get my point).
Traders are no more responsible for the housing crash and the tsunami sent through the markets as a consequence, than the guy who bought his house with a 30% deposit and mortgage payments well within his affordable income.
Journalists will no doubt say that Joe was hoodwinked into this scheme buy greedy mortgage advisors and banks giving 'teaser rates'. I would agree with that, but I find it a little incongruous that the media is getting all high and mighty after pumping out page after page of stories on how great the housing market is, and how safe an investment property is. The TV media was awash with shows such as the BBC's 'Million Pound Property Experiment' where two interior designers borrowed £100k from the BBC and would renovate and sell properties until they had a million pound house.
There were a million other shows which all gave the impression that property was a never ending game. Even the National Housing Federation is predicting, still, that house prices will rise 25% from 2008 - 2013. They may be right, but that growth is at the long end of the scale and if the cheap money system is crushed under the weight of this crisis, I would predict that 25% is 'optimistic'.
On the other end of the scale Jeremy Grantham of GMO, the $126-bn US investment fund, notes that UK house prices "could easily decline 50% from the peak, and at that lower level they would still be higher than they were in 1997 as a multiple of income!"
The blame game is, indeed, well underway. What will follow will be a slew of regulations/legislation aimed at curbing the 'excesses' of the 'greedy bankers' and 'evil' traders. This will be shouted from the roof tops by lame-ass politicians trying to cling on to power or gain power. It will be repeated gleefully by the press in a mass love-in of schaudenfraude and lapped up by a gullible Joe Public.
What they will not be shouting about is that some of these regulations (the ones that will actually work) will be aimed at Joe Public's addiction with the property market. Cheap money and easy loans are going to go away for a long, long time.
Far from it being the traders who suffer from this new regulatory world order, it will be Mrs Miggins who had dreams of buying-to-let a hundred houses on cheap leverage.
The new governments in the UK and the US will blame this all on the previous bunch, send a few bankers to jail for good measure and then say "Sorry Mrs Miggins, that was a corrupt system and the game is over".
First of all I will agree that the over use of leverage has contributed to the wild swings we have seen in the markets and private equity and hedge fund speculation has created short-termism in the minds of many a CEO leading to overly risky company strategy in some cases.
BUT (and it is meant to be in capitals) speculation is not to blame for the route causes of this mess. We all know that the route cause is the US housing market, and, to a certain extent, the UK housing market.
Both of these sectors have been, and no doubt will continue to be, a massive ponzi scheme in which everything is OK as long as new money is coming in. Just like a game of musical chairs, when the music stops and the new cash disappears the whole thing collapses and some people do not have a seat.
So who is to blame? For me it is the banks, mortgage brokers, the media, the regulators and the one that will make this post unpopular, Joe Public.
When I say Joe Public I mean a certain section of the public, those who thought that the housing market would go on forever and so it was worth lying about your income to get in on the game. It is not only the market speculators or traders who had over used leverage but the house buying public.
I will give you an example. I lived in a flat that was in a converted hotel. In 1999 this flat was offered to me for £180,000. Two bedrooms, paper thin walls and an odd shape. That same flat was on the market 8 years later at £600,000. Six hundred grand for a two bedroom flat? If inflation had taken it to that price, fair enough.. but it didn't.
What caused it? Cheap money from the banks, eager/greedy mortgage advisors/estate agents and some dim buyer thinking the housing market was going to go up for ever and was prepared to pay something for a flat that was no where near worth it.
Where was the trader in that equation?
When it looked liked this Ponzi sham may be over the banks came up with ever more schemes to keep it going. How about 125% mortgages from Northern Rock? What about self-certification 'liar loans' in the US.
The trader’s job, be it in a hedge fund, investment bank, or sitting at home trading online is to spot anomalies in the market and bet on making money when the price corrects, is that evil? If you saw a listed company with no income trading at a £200 million pound market capitalisation and you are able to trade it would you buy or would you short?
The housing market and its component parts was just one huge price anomaly waiting to be corrected by, yes, traders. Who else would have done it? Blaming them now is like blaming a vulture for killing an already dead animal. (Probably not the best analogy, but you get my point).
Traders are no more responsible for the housing crash and the tsunami sent through the markets as a consequence, than the guy who bought his house with a 30% deposit and mortgage payments well within his affordable income.
Journalists will no doubt say that Joe was hoodwinked into this scheme buy greedy mortgage advisors and banks giving 'teaser rates'. I would agree with that, but I find it a little incongruous that the media is getting all high and mighty after pumping out page after page of stories on how great the housing market is, and how safe an investment property is. The TV media was awash with shows such as the BBC's 'Million Pound Property Experiment' where two interior designers borrowed £100k from the BBC and would renovate and sell properties until they had a million pound house.
There were a million other shows which all gave the impression that property was a never ending game. Even the National Housing Federation is predicting, still, that house prices will rise 25% from 2008 - 2013. They may be right, but that growth is at the long end of the scale and if the cheap money system is crushed under the weight of this crisis, I would predict that 25% is 'optimistic'.
On the other end of the scale Jeremy Grantham of GMO, the $126-bn US investment fund, notes that UK house prices "could easily decline 50% from the peak, and at that lower level they would still be higher than they were in 1997 as a multiple of income!"
The blame game is, indeed, well underway. What will follow will be a slew of regulations/legislation aimed at curbing the 'excesses' of the 'greedy bankers' and 'evil' traders. This will be shouted from the roof tops by lame-ass politicians trying to cling on to power or gain power. It will be repeated gleefully by the press in a mass love-in of schaudenfraude and lapped up by a gullible Joe Public.
What they will not be shouting about is that some of these regulations (the ones that will actually work) will be aimed at Joe Public's addiction with the property market. Cheap money and easy loans are going to go away for a long, long time.
Far from it being the traders who suffer from this new regulatory world order, it will be Mrs Miggins who had dreams of buying-to-let a hundred houses on cheap leverage.
The new governments in the UK and the US will blame this all on the previous bunch, send a few bankers to jail for good measure and then say "Sorry Mrs Miggins, that was a corrupt system and the game is over".
A few years down the line when the banks recover, traders are happily making the free market work and money abounds again, the government will need a shot in the arm to get re-elected. Being the dim wits they are they will point to the housing market, do something silly and the whole game will start all over again.
I just hope that this time, the public will show a little restraint... somehow, however, I very much doubt it.
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