It amazes me that anyone is amazed at the current state of the economic world. It doesn’t take an expert to realise that it can never work the way it was and is. I’m no economist. I’m just your average person with an average intelligence, who’s aware of the world I live in. For what it’s worth — here’s what I think: The problem started by increasing the amount of mortgage that was available to us. Forty years ago it was not easy to buy a house. You needed a good deposit, and you could only borrow low multiples of your salary. I’m not sure what, but I think about two-and-a-half times. By the mid-eighties you could borrow four times your salary and a multiple of your partner’s salary. You didn’t even need much of a deposit. Buying a house became within reach of millions more people, demand rocketed, and a massive sellers’ market was created. any capitalist economy exists on growth, and growth demands profit. Profit is the value that’s added to something to makes it worth more than its cost. An economy based upon this is a beast that needs constant feeding. But which of us stops to think that the fundamental nature of this is flawed. Infinite profit — infinitely adding value — is an impossible fundament on which to build a society. The concept of profit is as abstract and insubstantial as a plume of smoke.
The demand for property led to prices rising at a totally ludicrous rate. I was a staff writer for a computer magazine in 1983, and bought a one-bedroomed flat in Brixton for £17,000. I sold two years later for £34,000, and I know it sold three years after that for £62,000. You may think that was brilliant. But peel away the veneer of bank-notes, and the problems are clear. Firstly, who’s making the money? OK, I walked away with £17,000 profit. But the estate agents charge a percentage, so suddenly they’re making twice as much money. Then I moved back up to Manchester and searched for a house. What was £12,000 two years previously, was now the best part of £20,000 and rising by the day, almost as fast as prices are falling today. Gazumping was rife, not just from other buyers, but by the owners. More people than ever before were borrowing money, and borrowing more money than ever before. The banks and building societies were booming, lending money generates profits. People were buying and selling houses and making more money in a year than their salaries. They released equity, borrowed against the growth in the price of their home to buy cars, homes abroad, even buy-to-let properties in the UK. Credit card companies were happy, banks were happy, building societies were happy, retailers where happy, the consumer was happy, shareholders were happy (the selling of public utilities back to its owners is another story). And so it grew. Lots of people were ‘wealthier’ than they had ever been. There was the slight blip of a recession of course, and those who had overstretched their borrowing out of blind optimism slipped into ‘negative equity’, and had their houses repossessed. But this didn’t stop the march, or even stall it much. By the mid-nineties house prices were still rising steadily and money invested in property was considered to be ‘as safe as houses’.
But the greed trap started to filter upwards, through the housebuyer to banks, building societies, the shareholders, and so on. All of them lending and borrowing, investing and creaming in the profits, overstretching themselves in every way on the basis that property prices would continue to rise. And it is property prices that are the key. Because what happened since the eighties was that property prices became the backbone of the economy. ‘Service industries’ took over from manufacturing industries as the UK’s national business. Apart from everything else they were virtually union free, so part of the theory was that the country couldn’t be held to ransom (but again — that’s another story). But these service industries were, and still are, almost entirely based upon house prices, and that they should forever rise.
What has happened now, starting in the US. Is that the banks have found themselves in ‘negative equity’, in a similar way to a home owner who had overstretched his or herself. They lent money to people who they knew couldn’t repay their mortgages, but that didn’t matter, because in year or so, when the house was repossessed, the lender would make their profit on the resale as the value of the property rose as expected. By offering cheap mortgages, they were feeding the demand, and demand was supposed to keep property values on the up. But what happens when they stop rising? You can see the pattern here of course. What happens to each of us is no different than what happens to the banks, governments, and countries. Of course at this level the process is hidden in jargon, pseudo-justifications, layers of bureaucracy, ego and pride. But it’s all smoke and mirrors hiding exactly the same mechanics as each of us experiences on a day-to-day basis.
The problem is that we all presume people running things know what they’re doing. Which is not always the case. Someone in a position of power has to be driven by power — another abstract concept that has no place in the running of a business, never mind a country. (How many politicians become politicians for the sake of being one rather than for being seen to be one?) There’s in interested paradox worth mention here. The reason communism doesn’t work is because of greed: there’s always someone who wants more, better or bigger than someone else. Capitalism suffers from the same fundamental flaw — greed is the fuel that drives the engine of profit. The only way that capitalism can work is for profits to be limited. That’s what governments are discovering now. Banks are driven by their shareholders. And shareholders only invest in places that bring the biggest returns. The result is an economy that is underpinned by fear. Keep your mirrors polished and your smoke thick and you’ll attract investors. That’s what lots of public affairs companies get paid to do. It’s also why we live in a ridiculous economy where a company’s value can be much higher than the sum of all its assets. With ‘perceived value’, we scale even higher into obscurity and surrealism (or should that be sinking lower?) What happens when the fuel begins to run out and smoke gets thinner? Value that was never there disappears. There are even those, the so-called ’short traders’ who made billions on predicting and encouraging this very scenario. And now we’re being faced with an inevitability. It was so obviously going to happen. The reason no action was taken to avert it, was because everyone was in it to make as much money as they could for as long as they could. And they probably have. But guess who’s going to have to pay for it.
October 12, 2008...2:52 pm
This unsustainable world
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