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 10 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


19:05 PM, 19th April 2012, About 10 years ago

Couldn't agree more with everything you say; the banksters are principally to blame for all the problems the western world is in.
They profit out of credit and when it goes all wrong the mug govts have to step in and bail them out.
This leaves poor old mug taxpayer to pick up the pieces and struggle on whilst the criminal banksters carry on as though nothing has happened.
We cannot have a situation in capitalist economies where banks are too big to fail.
That is not capitalism that is socialism.
That is effectively what has happened the taxpayer has socialised a private company's debts as the company was bust.
With no moral hazard for a company you cannot have true capitalism.
Therefore the only way to prvent society from being put in this position is to ensure that all our banks can go bankrupt without endangering the UK economy.
That work has not really even been started.
The elephants in the room are CDO's and derivatives.
Wait til that lot blows up then you'll have a full blown world depression.

19:14 PM, 19th April 2012, About 10 years ago

Why is the big question indeed.
People don't really need most of what they have, but they do want it.
Why do they want it?.................that is the question!?
I think then you are in the realms of philosophy etc and as such that is well above my pay grade!!!!?

18:37 PM, 19th April 2012, About 10 years ago

Hi, Paul - Thanks for your comments and time to write them. You have a lot of energy stored in regard to this subject and it must be good to let it out. I also think you do have a philosophical take on the subject, especially being involved at ground level in the financial system itself. How do you think that has left you as a person going forward. Has it made you stronger or cynical or completely distrusting of the system or all of the above?

2:08 AM, 20th April 2012, About 10 years ago

I would say very much agreeing with your perspective.
Am very cynical about banks who are still not subject to moral hazard like every other company is in the UK.
People are chasing dreams they cannot afford;  the sweetie jar has now been removed so people are going to have to expect a lower standard of living in accordance with their wages rather than how much they can borrow to achieve those aims.
I never believed in the fantasy world of credit.
I have been saying for about the past 13 years that people have been effectively been giving themselves pay rises of about £3000 per year.
This has not been achieved via increased productivity.
Well now the sweetie jar has been well and truly removed; back to the future to reality!
The concept of saving and doing without to achieve what you want will have to be restored to the consumer psyche.
As most 'adults' and I use the term advisedly have had their hands in the sweetie jar for a long time; they will behave like petulant children until the dawning reality gradually sinks in.
The days of free and easy credit and job security are gone.
Get used to it.
Start working hard and saving hard for things that you need and not what you want.
Politically this does not augur well for govt who need consumers to borrow otherwise the economy will decline by about 6%
This is the case as wages are not enough to sustain a growing economy.
Voters are extremely reluctant to understand economics..
They just see their standard of living declining and blame the govt, who invarably get booted out  the next election.
Govts are left in an impossible position
Damned if they allow credit and out of power if they don't.
Who'd be a politician!!!?

2:20 AM, 20th April 2012, About 10 years ago

As for energy to let it all out; I'm not the slightest bit concerned whether I express a point of view or not.
I just look after no 1 now  and sod everyone else.
I have in the very recent past been severely compromised by some a-------s.
So I intend to make as much as I can and am not the slightest bit interested if it impacts on anyone else.
When my circumstances have been recovered, which they never will be; then I might consider being charitable again.
Until that happy day!! I shall be considering only my circumstances.
Tenants to me are just a necessary evil that I have to deal with to try and make profit.
I am NOT interested in the slightest in their circumstances..
But I have to be to the extent I retain them as tenants.
That is as far as it goes for me.
I do the right thing as far as tenants are concerned but I only do so as it economically benefits me.
I am not a housing charity and do not intend to be unless I amass fortunes like Peabody and Samuel Lewis!

9:38 AM, 20th April 2012, About 10 years ago

Hi, Paul

You obviously picked up the sharp end of the stick in the last few years; sorry to hear that. However I would hope your self-fulfilment stance will change and once again soften in time. Such attitude as you know when widespread is not part of the solution, its part of the problem. We can't change the system, but we can change ourselves.

I personally get great satisfaction mentoring other property investors for Free and receiving great thanks when I put them into bargain deals. I actually find the more I give the more I receive; the giving process starts the receiving process. The laws of life also state that success is something you attract not pursue. If you pursue success, it generally evades you. I also come across people that accumulated great wealth, but gave very little in return; these are the ones that lost it quickly.

I listen to Jim Rohn often, he is Americas foremost success philosopher and I have meet him once. Jim Rohn said "Life is like the Seasons, you can't change the Seasons, but you can change yourself". Give him a listen, his goal setting material is good as is Brian Tracy's.

As they say "Life is like a box of liquorice all sorts"; that's what makes life interesting and not boring.

I wish you success for your future. Regards Mav

16:13 PM, 20th April 2012, About 10 years ago

Ben Graham was Warren Buffett's mentor and the founder of value investing.
Buffett named his son after Graham and calls Graham, his second greatest influence after his own father.
Anahin ( analyzes all 4000 stocks listed on the NYSE, and more, using all of Ben Graham's principles.

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