There’s a good, short piece by Maurice Saatchi in today’s Times on how the property bubble crept up on us without being noticed. It criticizes the focus – at least in the UK – on the consumer price index, which measures the rate of inflation on the weekly shopping basket, but doesn’t take account of the price inflation of assets, such as housing. Not good if the population is following the mantra:
I borrow money.
I buy an asset.
The price goes up.
I exit the asset.
I repay the loan.
I keep the profit.
Of course, we can’t all get rich by buying and selling houses to each other using other people’s money. Inflation on house prices ran at six times the target set for the CPI inflation rate in the last five years. Debt inflation was running at over four times the target rate. It should have been obvious that we were heading for trouble, but it wasn’t on most people’s radar.
Not everyone was blind, by the way:
- Max Otte predicted the current crisis in 2006 (Der Crash kommt)
- Nassim Nicholas Teleb warned in his book “The Black Swan” published in 2007, the year the current crisis started to unfold, but a year before Lehmann Brothers collapsed, of the likelihood of a massive financial collapse, due to the way banks and governments ignored certain types of risk
- And there have been other warning fingers, such as Mike Adams, warning back in January 2006 that the US property market was ripe for a collapse.
Most people, however, weren’t listening.
