09 October 2010

Casting the first stone...

I may be bearish on real-estate (and have been since the early 2000s when I sold my home), but I don’t blame anyone for the housing bubble, or its collapse. It’s not the fault of evil bankers, fraudulent real-estate agents or incompetent regulators. Neither was the bubble the fault of homeowners cashing out equity or hoping to build a nest egg.

Instead, I believe that the credit bubble (of which housing was just one part) is simply the result of broad societal shifts in optimism and pessimism. One can no more complain about these generational patterns of sentiment than they can the ebb and flow of ocean tides.

The thing about manias is that nearly everyone is caught up in them, whether they wish to be or not. The president of an investment bank MUST play along with the same risky investments as other investment banks or they will find themselves fired by investors who are displeased that their bank is making lower profits than its peers. Ratings analysts have to play along, using optimistic assumptions, or they will find that competing agencies (who are willing to use rosy estimates) get all the business. Politicians who appoint rigorous regulators will find themselves voted out of office by the masses who are upset that the regulatory agencies are giving the companies they own shares in a hard time.

Property appraisers who use conservative valuations will find that no one brings them any appraisal business. During a mania even consumers are forced with having to either buy at irrational prices or sit out of the market for what could be decades. That’s not to mention the peer-pressure that results from seeing friends, family and associated get rich by participating in the feeding frenzy. It’s a strange soul who can stay emotionally everyone they know is telling them they are fools for not taking advantage of the great wealth generation machine sweeping the land. Even retirees relying on poorly funded pension plans had a role by putting pressure on fund managers to take risks that jeopardized what meager funding there was.

No, I don’t blame the lowly mortgage holders who took out zero interest loans with balloon payments. The simple fact is that everyone in society played their part in the great credit bubble of the last 20 years and thus no one in particular deserves the blame. To put this in perspective, what we have witnessed with the great credit bust of the early 21st century is nothing more than the playing out of a generational cycle of social attitudes which oscillates between fear and prudence to unbridled optimism and a willingness to shoulder risk (also referred to as a Kondratieff wave).

Now that the credit bubble has been pierced we are beginning the painful process of restarting the great cycle all over again.

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