So you think you know what really caused the Credit Crunch?

So you think you know what really caused the Credit Crunch?


9:15 AM, 18th April 2012, About 12 years ago 17

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Well think again, but before I tell you what really caused the credit crunch, I must first explain why I wrote this article.

Recently after reading several books on property investment, each offering up their own reasons for what caused the credit crunch/ property crash it was clear that the real reason was being missed. Contributing factors just like a runny nose and a sore throat are just symptoms of a cold; they are not the actual cause.

Previous to this I also read a book about the sub-prime crisis called the ‘Big Short’ by Michael Lewis. Yes the lending machine, particularly in the US, got totally out of control. Money was lent en masse to people and companies that just couldn’t afford to pay it back. Then, all those loans were rolled up into bad investment bonds that institutional investors traded like football stickers. In truth Wall Street became a financial circus with investment banks continually chasing quicker and bigger profits; a ticking time bomb!

These and other similar actions like big corporations growing and growing by acquisition, adding massive debt to their balance sheets with little concern for shareholder value is again another symptom of the credit crunch, but not the root cause.

Remember our actions are determined by our thoughts and our thoughts are determined by our philosophy. By that virtue if society is encompassed by a crisis like the credit crunch/ subprime crisis then its society’s philosophy not the actions of society that’s at fault.

Furthermore, following the credit crunch it appears that we could still be living in denial. Denial is not a river in Egypt; denial is a process by which painful thoughts are not permitted into the consciousness. Little has really changed and it’s just a matter of time before the lending rules are relaxed and the financial floodgates of greed open once again.

So for now let’s put aside all the contributing factors of the credit crunch such as building supply exceeding buyer demand, rental supply exceeding tenant demand, collapse of the mass mortgage market, an increase in repossession properties, new restrictive lending, larger deposits needed and a complete loss of buyer confidence.

The Age of Instant

Society today has become obsessed with the quick fix. Everybody wants instant success and instant reward. We crave for the quick fix and everything instant from ‘Instant Meals’ to ‘Instant Weight Loss’ to ‘Instant Cosmetic Improvement’ and of course the big one ‘Instant Wealth Creation’. And let’s not forget the quick fix to end all quick fixes ‘The Atomic Bomb’ designed to end all conflicts without self-casualty or involvement.
Let’s face it when a book entitled ‘Total fitness in 12 minutes a Week’ becomes a National bestseller we seriously have to ask ourselves what’s going on with society. Why are people buying en masse into so many pie in the sky quick fix instant reward scenarios? Why is it that we have become so impatient? Why is it that we now want all the gain without the pain?

So what really caused the credit crunch?

It was society’s obsession with quick fix instant reward that caused the credit crunch; it’s our philosophy not our actions that’s at fault. The ‘We want it now’ philosophy is the root cause of the problem and one that became ever more prevalent from the 1980’s onwards.

Let’s face it, we wanted it and the lenders and mortgage brokers en masse were giving it to us regardless of credit record or provable income. In truth the system cared not as long as commissions and fees were flowing. Everyone was caught up in the Instant Reward with no thought for the long term future. In short the financial world was on a journey of self-fulfilment, hooray for me to hell with everyone else. So we were all to blame, but some sectors of business and society were more to blame than others.

Looking back the philosophy and encouragement was more debt means more progress. The bigger the debt the bigger the potential return and many people bought into this notion with abandonment. However, one
person’s progress can be another person’s devastation. Many people as a result fell afoul of this instant wealth philosophy and ended up in the bankruptcy courts.

So was this mistaken philosophy a worldwide problem? Yes and no, it’s more a western world contagion, but the rest of the world is dragged in too.

However in countries like South Africa where lending followed a more conservative path the property crash was non-existent by US and European standards.

So can we change society’s obsession of the quick fix instant reward philosophy?

The answer is no, but we can change our own individual philosophy.

Will it ever happen again? You bet it will, it’s not a case of if, it’s just a case of when. But look on the bright side- such events are a gold mine of opportunity for the savvy and well prepared investor; it’s an opportune time to build your property portfolio.

Right now in terms of property investing what can we do? The solution is to go back to property investment basics. Buy when everyone else is selling and sell when everyone else is buying. Understanding property cycles will help to spot these the trends and aside from that you need to look for real property value.

There’s also no need for convoluted and complex property investment strategies. Today there are more than enough property bargains to be found and mortgages can still be obtained and equity gains can still be released by re-mortgage or further advance. Property investing should never be about getting something for nothing, but it should be about getting out more than you put in.

The best and simplest form of property investing is ‘Value Investing’. If you look after the downside, the upside will take care of itself; you make your money when you purchase not when you sell. “Property investing is a process not an event.”

So let’s get back to investment basics and stop these notions of quick fix instant wealth. A winning property investing strategy is all about performing a winning process over and over again for a considerable period of time. If you do this, then and only then will you create real and lasting wealth from property.

“Life is designed to give us what we deserve not what we want.” – Jim Rohn

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Paul Routledge

19:56 PM, 18th April 2012, About 12 years ago

I know I was there after Thatchers barrow boys did the same game. I was offered a job in New York at Euro brokers before the twin towers fell and turned it down by my then future boss Adrian Scott Jones who said I was mad I could earn millions. 
but I may have been right

When you take controls off of  financial regulations in favour of tax receipts you will start a unsavoury brew and then when you then add unlimited restrictions on public borrowing you put it over a fire and start letting it heat only time then until it boils and spills over and burns us all.  

21:16 PM, 18th April 2012, About 12 years ago

Hi, Paul - Thanks for comments. Did you read any of the books by Michael Lewis like the 'Big Short' or 'Liar's Poker'? If so what was your thoughts after reading?

3:45 AM, 19th April 2012, About 12 years ago

Capitalism ihas proven todate to be the most successful methodology to create wealth
However unbridled capitalism is one of the most unfair systems ever invented.
Only controlled capitalism is ultimately a fair way of creating real wealth.
The banks had the bridles taken of them and ultimately it has been proven that they have not had to consider moral hazard.
This as the banks have been judged as to be so fundamentally required for a modern society that they CANNOT be allowed to fail.
This require the govt  to bail out banks to support the financial system.
This is not capitalism.
Capatilism requires that you could lose everything, if you make wrong business judgements.
This is not the case with banking which is essentially the oil to make an economy's wheels go round.
Without it we would be back to bartering!!
As it is now no banks are allowed to fail by a govt and this means the banksters can still trade with impunity as they know if they make a wrong bet the govt will yet again bail them out.
Credit which generally the banks provide is needed for major purchases such as property as people don't earn enough to buy outright.
Lending is needed.
A property value is not based on supply or demand; it is based on the availability of mortgage monies and deposits availability.
If loan finances dry up because banks have fouled up and are now required  by govt to build up capital bases, they will not lend or will severely restrict the lending they will do.
This will have a depressive effect on the property market.
For a single person now wishing to buy a property now on say an average wage of £30000 would be unable to purchase a property for £240000 until their wages have doubled.
They would also need a deposit of about £60000.
Nobody is in this situation and therefore cannot buy.
Mortgages should be based on affordability only.
The trouble is with the free and easy mortgages which could be obtained by lying this put an upward pressure on prices forcing people to try and borrow even more to be able to try and buy.
The banks had loads of money caused by the Chinese savings and they wanted to lend as much as they could to maximise their profits.
Fractional banking also has a lot to answer for.
Peoiple will do whatever it takes to get a property and they are not prepared to wait years for the opportunity.
People are not prepared to save and wait years before they achieve their aspiration.
They want it, and they want it now.
Life is not a rehearsal.
You cannot change human nature but you can control it.
So how about saving with say a Building Society for say 5 years and then being granted a mortgage as you have been a loyal customer.
It was like this 35 years ago.
This kept prices low as there was not so much mortgage availablility.
However greedy banks want to lend as much as they can as there is no loss to them as banks offset losses against corporation tax and in extrmis if it gets really bad the govt steps in.
RBS was hours away from destroying the UK banking system until the govt stepped in with tax-payers money tio save the day.
They cannot be trusted with the economy again.
There are also the massive problems of derivatives and CDO's which are reckoned to be more than the whole of the banking system is worth!!
Wages are not enough to afford a lifestyle, people will NOT wait for a lifestyle, they will borrow to achieve it whether it is a good investment of not.
Credit availability increases demand and therefore increases prices and so on and so on.
Credit allows you to punch above your weight as earnings are never enough for the little man to get ahead.
Having said all that why  bother with buying a home and then the govt takes it off you to pay for care home fees.
Better to be on the social and get everything paid for and soend everything you have as the social will cover all your costs.
Value investing is stating the bleedin obvious.
Everybody looks for value products.
It is just sometimes there is no value as everyone is trying to buy the same product.and they need it for somewhere to live.
It is not discretionary spending.
Law of the jungle takes over and it is he who can amass more credit who will outbid someone who can't access it.
People will then do whatever it takes to get ahead of the other person.
It is the human condition and value investing has got nothing to do with it when you want your own shelter in a nice place which will go up in value.
Ultimately it is about greed,
Greed to live in a nice place with nice schools and facilities and away from certain ethnic and class types.
Greed to have nice shops, good communications,
These greeds will continue to drive property prices up along with people who can obtain the credit or earn more.
Essentially people try to buy exclusivity to prevent certain people living where they do.
This is achieved prices of property.
Why do you think the shires are called the 'stock broker' belt.
You don't find many stockbrokers choosing to live in Peckham or Wembly, I wonder why!?

9:10 AM, 19th April 2012, About 12 years ago

Sorry "Propery Maverick" I have read your article several times and yes I do beleive I know the causes of the crash - you explain them most succintly in the opening paragraphs of lending and investment vehicles. To offer up the human condition of greed and gratification as some unique event  that manifested in only 2008 is to ignore the history of mankind which I beleive most peope have a notion of. You can be the good grasshopper storing up your food for the Winter while other just fool around but in reality when hundreds of lazy maurauding grasshoppers turn up at your door you wil be swept aside and your savings ruined. Ring any bells?

9:29 AM, 19th April 2012, About 12 years ago

Hi, Paul, that was a long one. I just asked if you had read any of the Michael Lewis books. Live and people is not all about greed, that would be a rather synical view if it was. People and investors I mentor are striving to achieve more by being more, some just need extra guidance to stay on the path than others. People are too often distracted from path by the get rich schemes or short cut processes that normally end in tears. The book called 'Mastery' by George Leonard explains that the process of mastery is a long one and the process itself is more important than the destination. Finally, value investing is not stating the B... obvious, far from it, if it was all property investors would be multi-millionaires. Wealth and Success should always be about the person you have to become to achieve the success that you desire; money is purely a by-product of doing something well and objects like fast cars and a bigger personal houses are only as good as the reasons why you require them; THE WHY?

12:17 PM, 19th April 2012, About 12 years ago

Just another whimsical wannabe philosopher in my opinion. He should stick to talking about property investment (he made a couple of obvious, but good points).
I say this because of course action is driven through our personal philosophies. And talk to me about a time when the good nature of humanity hasn’t been jeopardised by a desire for the quick fix. Any fight, theft, drug taking or any form of social criminality is the result of human nature taking advantage of their urge for short term gain at the cost of a personal long term longevity. But there are laws, and well publicised laws which are understood, imposed to prevent this.
This acceptance, however, shouldn’t be used (as this guy does) to provide an excuse to alleviate blame from the financial institutions, authorities, rating agencies and individual traders who assumed a position of either consequential ignorance or of sheer corruption.
If the same short-termist behaviour was transferred from the corporate environment to society, the world would say ‘no’. And these guys would all be locked up for committing crimes that are obvious to society – regardless of whether they knew it was wrong. The fact is the ignorance of the hundreds of thousands of Wall Street and Canary Wharf based investment bankers (who are now redundant or pursuing careers as amateur journalists) has been relatively brushed under the carpet with the indusry’s brand image taking the only real tangible hit.
A few CEOs (gang leaders) and obvious fraudsters have been held accountable but all the lower league bankers (gang members) are still running around unaccountable, untainted, unpunished on the basis a system was allowed to grow indeed it’s growth was projected on inherent global ignorance and corruption from the top.
It reminds me of a corporate version of the killing fields or youth gangs in Brazil (City of God) where kids are fed drugs and made to fight a war, the cause of which they don’t understand. The main differences being that in this case is theses aren’t kids, they are Harvard and Ivy league graduates being fed massive salaries and bonuses..
Little rant here.
These guys have stifled our generation though, so deserve it.    

16:08 PM, 19th April 2012, About 12 years ago

Dear, MR Beige a parable to the 7 plagues that were visted on Eygpt is not really relevant here. Yes the Bible is probably the greatest book of human personal development ever written; outlining the battle between good and evil and the "Don't build your home on the sand" is a good parable warning for the Dubai boom and bust. In truth the quick fix philosophy took deep routes and became main stream in the 70's when there was also a property boom and bust. This article is centred around we are what are thoughts are and our thoughts are dictated by our philosophy.

17:23 PM, 19th April 2012, About 12 years ago

Dear Grinny - You said "Just another whimsical wannabe philosopher in my opinion". Let's not get personal please, blogs are not about personal attacks on the writer; readers don't want to read this. They seek objective replies with 'Brevity' not personal attacks. Positive replies for the future not cynicism of the past is what we need as what has been done cannot be undone. I study personal development philosophies weekly not in terms of socrates, but in terms of personal growth by gaining new skills and helping others; talk is easy, results through action are the name of the game. The next blog will be about property booms and busts going back 60 years, what caused them economically and what might trigger a new one?

Mark Alexander - Founder of Property118

17:59 PM, 19th April 2012, About 12 years ago

Very well handled Kelvin, what an excellent response. I thought long and hard before publishing that comment and only decided to do so on the basis that it was an opinion and not defamatory. I totally support you response. Personal remarks like this only serve to lower the credibility of the person writing them but in this case the writer was hiding behind a pseudonym which made my decision even more difficult on whether to allow the comment to be published. I'm very pleased now that I did as it's made me think about the moderation policy going forwards. In future I will only publish opinion which is unlikely to constitute a personal attack. I have no problem with people questioning method or the message generally but when things get personal we run the risk of other people becoming shy to post for fear of personal attacks and stop being a professional website.

18:54 PM, 19th April 2012, About 12 years ago

You can easily replace the word greed with the word aspiration.
I aspire to live in the leafy stockbroker belt but can't afford it.
If I could borrow to be able to do so then I would.
I don't care about lenders I would just want the resouces so that I can achieve my aspiration.
Everyone is trying to do the same thing.
Clearly something has to give as there is a finite supply of what people aspire to, therefore the price will generally rise commensurate with peoples' ability to resource that.
This maybe via credit and large wages.
The banks only make money when they lend, they do not sell apples and pears.
When they have lots of money deposited with them it has to go somewhere for the greedy bank to make lots of profit.
Therefore they lend even more; as people need then to borrow even more as prices have risen to afford the purchase.
If banks had only lent on affordability on a repayment basis then we would not have the present housing crisis.
Keeping the lending restricted would have kept a check on house prices but the banks would not have been able to lend all the money they had as there would be no borrowers as they would not be able to borrow enough.
The banks are the main problem in advancing funds beyond affordability and on a IO basis.
Keeping supplies of credit down reduces property prices; it does not however increase a banks profits as they are left with lots of money they can't lend as nobody wants it as it is not enough to purchase property.
They have to change their lending criteria to be able to lend.
This then reaches ridiculous amounts and the whole rotten edifice comes crashing down.
And so the cycle will start again.
If lenders keep the recently introduced lending criterias they will not be able to lend like they used to until wages have doubled and if prices stay the same.
I reckon 20 years tio achieve that.
Consequently bank profits will be subdued form mortgage lending for many years and people had better get used to the idea of renting; if they can find somewher.

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