There was a programme on TV the other night taking Lloyds TSB apart for lending too much to those who can't afford it. Although I don't propose to fight Lloyds TSB's case for them, it seems to me that borrowers need to look after themselves a bit more and not go crying if they have overstretched themselves. This couple had about 100K on loan!! What did they think they were doing borrowing that much if it was too expensive? Don't they have any idea what they can afford? I have absolutely no sympathy for them.
The banks can now resell the debt as CDO's and so they're not on the hook anyway if the debt goes bad (unless they sold it insured of course). Thus the banks have scant interest in ensuring that they'll get the money back (though they'll make the appropriate noises in public if prodded).
Robert Shiller noted (in "Irrational Exhuberance") that the consumer has a similar perverse incentive. If houses go up 10% a year 90% of the time and down 10% to 90% a year 10% of the time and the consumer starts with bugger all, it's in their interest to borrow as much as they can service to leverage their bet on housing. 90% of the time with a 10% deposit (and who pays that these days?) they can make a 100% return 90% of the time. The other 10% of the time they lose their whole wad and go bankrupt, leaving them with nothing, which is where they started out anyway.
So it's break even versus 100% gains ongoing. It's pretty much stupid not to bet unless you're fairly sure you're not headed into that 10%.
The only people who have the incentive to make the game rational are the ultimate buyers of CDO's, and as we're beginning to discover, most of them don't understand what it is they've bought, or are holding it for hedge and pension fund investors anyway and figure their cheque arrives at the end of the month whatever happens.
I hear what you say, but most borrowers are not that sophisticated. I just get fed up with them complaining about the evil banks when it's themselves who need to be careful. Everyone blames everyone else these days whereas they need to take care.
If however, they've been to a bank for advice and the bank advises that they can afford it, then that's a bit different. Even so, someone on a 10,000 p.a. wage who's proposing to take out a loan costing him 1,100 a month might question whether he really can afford it even if the bank says he can.
Wasn't the point with Lloyds that the couple had an annual income of £5k and a loan of £100k; this isn't a bad debt in the sense of a risk that didn't pay off, there was no chance of the debt being repaid, and the bank's systems *should* have prevented the loan being made.
Yes, I agree. But I say again, what the hell did the couple think they were doing? If you see an open manhole do you just walk into it? And then sue, or get onto Watchdog?
We've actually got two points running here. One is regarding borrower's stupidity and the other is regarding banks lending with devil-may-care on the basis that they don't mind if the debt is not repaid. My points relate to the first issue.
Sure, but once the whole concept of the one-way bet gets some (heh) currency, those later to the party are merely emulating those who have made earlier profits, or are going along with received knowledge such as "house prices always go up around here". In a 70 year cycle, they're not going to have any evidence that makes them skeptical.
As Mark twain once put it: it takes a strong man to be able to withstand seeing his neighbour get rich. Sophistication isn't needed when most people are all too willing to copy others, even in running at the same cliff.
When someone gets rich in a boom, they're going to congratulate themselves on their financial acumen. If they go bankrupt in the subsequent bust, they're going to blame absolutely anyone that they can.
In modern times I guess we can sadly add: "...and scream for compensation".
Why is it different? If a man wants to sell you a car and he says "Ooh, it's a great little runner and does 200 miles to the gallon", is it wise to just take his word for it? Or is it wiser to check his story?
Similarly if a loans officer tells you that house prices always go up and that loads of people on a 10K salary have 100K loans, do you take his word for it, or do some reading?
This is the largest amount of money almost all of these people will ever spend in their lives. Does it make sense to do less research than they'd do if they were buying a car?
A loans officer has something to sell you and he gets *paid* to persuade you to accept whatever deal he's offering. He's selling secondhand money the way people sell secondhand cars. If you know less about money markets than you do about cars, and you're about to spend enough to buy
20 cars, that suggests that you ought to at least get to the point where you know more about money than cars.
Taking a snake oil salesman's word for it is tantamount to putting the rest of your financial life on a silver platter with "Steal Me!" engraved on it.
The government isn't going to look after your life savings - it's only interested in taxing them. The bank is after your life savings, period. The guy selling the house is more worried about his life savings than yours. The surveyor is more worried about getting sued if the house falls down than he is your life savings. The estate agent's life savings depend on you spending your life savings. The only person who's going to be able to guard your life savings is you.
Now, taking out a mortgage is signing over your life savings before you've even saved them. Does it make sense to understand not a bit of what's going on? Might that not put a person at a teensy weensy disadvantage?
It's a dog eat dog world, and some people seem to be dressing up as bones.
I'm trying to make a case for the borrower - in this case, not easy. If he asks for advice the advisor *should* put the client's interests first. If he doesn't, then I feel for the borrower. Having said that, the borrower should be less stupid that to accept blatant bad advice.
Some advisors are good and some bad. Most are going to be more indifferent to your life savings than they are to their own. They'll also have been around for less than the 70 year cycle unless they're already long retired and as yet I've personally found only one broker who has even deigned to read up on what most see as "ancient history".
Thus, as far as the borrower goes, it's pretty much down to them to do that reading just so they can arm themselves with the right questions even when they're talking to an advisor who's supposed to be on their side.
I knew there was something missing here. It's the "argument" thingie isn't it?
Nope. That, and the 1989 housing crash, would be the disinflationary (primary) K-wave crash. The secondary (deflationary) crash would be expected to follow after a Juglar cycle (9 years, but they're often extended in the blow-off phase).
There was a primary stockmarket crash on Wall Street in 1921.
The Tech Stocks crash in 2000, coupled with what happened in the primary crash, indicates that completion of this cycle will require a housing crash, probably followed by and exacerbated by a deflation.
Looking at previous cycles, the K-bottom should be somewhere between 2009 and 2018. After that we should see 25-35 years of good growth with minor recessions followed by an inflationary recession which will come as a shock to a generation that thought inflation was something from history. Some asset will be chosen as something that beats inflation (probably not housing because our generation will be suspicious of it) and that'll set the ground for the next bubble around the 2060's give or take a decade.
Maybe there'll be a bubble in AI stocks, exacerbated by AI's speculating in 'em...
Sorta. I think the major rash will be in housing, not stocks this time. The major asset is marked both by credit and by the proportion of the populace participating. In 1929 folks could speculate in Wall Street stocks by putting down 10% of cost. This time folks are doing that with houses (on a good day) and there are far more folks with credit out to buy houses than to buy stocks.
In fact the bubble I think this is closest to is our own South Seas Bubble in 1720. One third of the British population were speculating on credit (the South Seas Company arranged it that way). Most of the House of Commons, half the House of Lords, and much of the Royal Family had been bribed with South Seas stocks to either promote it or pass the required legislation.
Clearly we have higher participation than that and our debt to GDP ratio is almost certainly much worse than in 1720. What is interesting about that particular bubble though is that debt was being resold as an asset (to save the Treasury, which was basically bankrupt after financing foreign wars) on a large scale. This is the first time I know of that again happening on a large scale (in the asset-backed markets in mortgages, car-loans etc) since that bubble.
All interesting stuff. I remember reading a book about that one, a very english deceipt I think it was called. had a quick look at those k-wave websites you mentioned. as a complete layman on this stuff, i do wonder how much you can predict about macro economics on such long time scales. maybe you're right, and the ebbs and flows are of the order of the length of a human life....about long enough for those that remember last time to nolonger be involved in speculating this time...if you see what i mean
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