Kaupthing Singer & Friedlander... About To Go Pop?

[Chinahand]

Sebrof, I don't disagree with you over mortgage levels to salaries, or housing booms - but those things have happened before and the financial world hasn't ended. Savings and loans, Japan, South East Asia were in many ways down to such things.

 

What has made this crisis so much worse is the hugely more complex derivatives that have been created on the backs of these things - all of which were underpinned by faulty models. The guys with the PhDs enabled this collateralization etc to occur - and that is what has turned this from being a major housing crisis - we've had em before - into a once in a hundred years systematic collapse.

[Sebrof]

I have to admit I find the Slim & Sebrof show tiresome to the point of it ruining many a good thread - sure Slim winds himself up into ever more frustrated rage, but Sebrof's nit picking, context ignoring, bloat quoted supercilliousness really takes the biscuit if you ask me.

I'm not sure supercilious is correct here. I think sanctimonious is more apt. Just an opinion...

 

No, I think supercillious is what Chinahand meant. Just an opinion....

 

And now, if you guys will stop all the name-calling, perhaps we can get on with the discussion.

 

S

[Declan]

No, I think supercillious is what Chinahand meant. Just an opinion....

 

And now, if you guys will stop all the name-calling, perhaps we can get on with the discussion.

 

If that was meant ironically - that's a contender for post of the year.

[Sebrof]

Sebrof, I don't disagree with you over mortgage levels to salaries, or housing booms - but those things have happened before and the financial world hasn't ended. Savings and loans, Japan, South East Asia were in many ways down to such things.

 

What has made this crisis so much worse is the hugely more complex derivatives that have been created on the backs of these things - all of which were underpinned by faulty models. The guys with the PhDs enabled this collateralization etc to occur - and that is what has turned this from being a major housing crisis - we've had em before - into a once in a hundred years systematic collapse.

 

Well, no and yes. If you look at the statistics, you will see that UK house prices have drifted much further from the long-term trend than at any time since records began. So the house price situation alone is a lot worse than in the past, and would by itself have caused a much bigger problem than the 1989 recession.

 

I agree that this situation is hugely exacerbated by the derivatives problem, but again I disagree that models are to blame. Bankers I know are appalled and embarassed by what has gone on. It's just bad banking. A good banker doesn't buy a package of loans without knowing what's in the package, and working out what will happen if interest rates rise or house prices decline.

 

I am not saying that models weren't used, just that bankers should not have relied on them.

 

But I do agree that it's (hopefully) a once in a hundred years event. It's going to take half that time to get back to normal.

 

S

[Sebrof]

No, I think supercillious is what Chinahand meant. Just an opinion....

 

And now, if you guys will stop all the name-calling, perhaps we can get on with the discussion.

 

If that was meant ironically - that's a contender for post of the year.

 

Thank you, Declan.

 

S

[Slim]

You don't need a model to tell you that a man with a mortgage worth six times his salary will be in trouble if interest rates rise. You don't need a model to realise that house prices couldn't go on rising for ever. You don't need a model to tell you that if people are allowed to self-certify their income, many will lie.

 

You're over simplifying, again. Mortgage vs average salary is a pretty worthless guide. Mortgage vs house buyer salary is far more useful, and house buyers have a higher average salary, first time buyers have an average salary of 35k vs the 25k national average, and movers have an average salary of 45k. The multiples never got as high as you're suggesting.

 

The Turner review pointed out that mortgage approvals over 90%, something that you bang on about constantly, were also not a significan't problem, their proportion of the lending total was under 15%, a figure that's been constant for many years. This is why Turner didn't include mortgage regulation in his action points, something you claimed was definitely on the way.

 

In my opinion, the reason the likes of Sir Fred or the regulators didn't see the crash coming is because the products were too complex, like Chinahand says. The complex derivative structures were just too baffling for them to understand, they share some the blame for allowing this of course, but I don't think it was something they did intentionally.

 

 

As I have said repeatedly (and have been villified for it by the likes of Slim, hence our spat), the whole house price bubble was obvious from 2002, and despite the warnings, Brown did nothing. If house prices had been controlled, sterling would not have lost 25% against the euro.

 

Not at all, I've said many times on this forum that house prices should have been included in inflationary controls, and that speculation in property should be controlled better using mechanisms like decreasing CG tax like they do in France.

[pongo]

In my opinion, the reason the likes of Sir Fred or the regulators didn't see the crash coming is because the products were too complex, like Chinahand says. The complex derivative structures were just too baffling for them to understand, they share some the blame for allowing this of course, but I don't think it was something they did intentionally.

 

Interestingly these products were developed out of research into ways of reducing risk. It was the very complexity which was supposed to spread and reduce the risk.

 

The problem was not so much that the bank bosses did not understand them (they were being fed bad information) - the problem was that the ratings agencies did not understand or properly report them. The bank bosses are being scapegoated for something which was not essentially their error. It was the industry, the practices, as a whole which were at fault. The ratings agencies especially.

 

peculation in property should be controlled better using mechanisms like decreasing CG tax like they do in France.

 

I suggested that to a candidate MHK who came visiting when I lived in Ramsey a few years ago and she asked if I had any concerns. She glared at me and changed the subject.

[Slim]

The problem was not so much that the bank bosses did not understand them (they were being fed bad information) - the problem was that the ratings agencies did not understand or properly report them. The bank bosses are being scapegoated for something which was not essentially their error. It was the industry, the practices, as a whole which were at fault. The ratings agencies especially.

 

True, but isn't it that before these complex instruments appeared, bank boards could understand without depending on agencies?

 

I suggested that to a candidate MHK who came visiting when I lived in Ramsey a few years ago and she asked if I had any concerns. She glared at me and changed the subject.

 

It's a hard thing to implement, as it'll have an instant knock on prices which would be deeply unpopular.

[pongo]

The problem was not so much that the bank bosses did not understand them (they were being fed bad information) - the problem was that the ratings agencies did not understand or properly report them. The bank bosses are being scapegoated for something which was not essentially their error. It was the industry, the practices, as a whole which were at fault. The ratings agencies especially.

 

True, but isn't it that before these complex instruments appeared, bank boards could understand without depending on agencies?

 

I'm not so sure. Economics is always complex and often theoretical. The business of complex derivatives ... how that evolved was from an analysis of how the markets were already operating. It basically codified patterns which already existed and which will continue to exist.

 

Methods change but the people within any hierarchy will always have to assume that they are able to depend on expert opinion from other professionals. Especially when all of the other professionals are essentially saying the same thing. Now Sebrof would point out that there were people shouting that it was all built on sand. And there were. So possibly what the system needs is some way of listening to the radicals. Since it seems to often turn out that they have a point. The people who stand up and say that everyone is wrong.

[pongo]

I suggested that to a candidate MHK who came visiting when I lived in Ramsey a few years ago and she asked if I had any concerns. She glared at me and changed the subject.

 

It's a hard thing to implement, as it'll have an instant knock on prices which would be deeply unpopular.

 

And yet on another thread there is a discussion about the first-time-buyer scheme which is about spending money to make it possible for some people to buy houses which they would otherwise find difficult to afford. This is another example where low / zero taxation has a potentially negative impact. Taxation is the only method available to control prices locally.

[Slim]

I'm not so sure. Economics is always complex and often theoretical. The business of complex derivatives ... how that evolved was from an analysis of how the markets were already operating. It basically codified patterns which already existed and which will continue to exist.

 

Methods change but the people within any hierarchy will always have to assume that they are able to depend on expert opinion from other professionals. Especially when all of the other professionals are essentially saying the same thing. Now Sebrof would point out that there were people shouting that it was all built on sand. And there were. So possibly what the system needs is some way of listening to the radicals. Since it seems to often turn out that they have a point. The people who stand up and say that everyone is wrong.

 

Yep, true, and brings me more to the point I was trying to make in the other thread, that the market grows to it's boundires, asset bubbles aren't strictly the fault of the bankers, but the market conditions that allow them to form. The banks can't be blamed for trying to rake it in, particularly if the advise they're recieving on risk is flawed. The fault lies with the government for providing the environment for creating the asset bubbles, and not implementing the controls that allow them to grow unchecked. Property not part of inflationary calculations, derivatives not regulated, credit defaults not treated like insurance so unregulated, cheap central bank debt, etc. But then this, as brown keeps telling us, is a global problem, and governemnts are in competition with each other. What government is going to constrain growth while other governmnents let it go unchecked?

 

 

And yet on another thread there is a discussion about the first-time-buyer scheme which is about spending money to make it possible for some people to buy houses which they would otherwise find difficult to afford. This is another example where low / zero taxation has a potentially negative impact. Taxation is the only method available to control prices locally.

 

And interest rates surely?

[pongo]

And yet on another thread there is a discussion about the first-time-buyer scheme which is about spending money to make it possible for some people to buy houses which they would otherwise find difficult to afford. This is another example where low / zero taxation has a potentially negative impact. Taxation is the only method available to control prices locally.

 

And interest rates surely?

 

IOM does not control interest rates and my conversation was with an MHK candidate. IOM sets taxation locally. Tweaking taxation is the only method which IOM govt has to control the local economy.

[Slim]

IOM does not control interest rates and my conversation was with an MHK candidate. IOM sets taxation locally. Tweaking taxation is the only method which IOM govt has to control the local economy.

 

Oh true if we're talking about the local market. I think there's more to it than taxation though still, particularly in such a small market. If the government were to release a ton of land via planning for development, prices would drop for example. Guernsey has some odd rules about local vs open market housing, which certainly influences their prices.

[pongo]

Although that might depend on what land was released and who already owns it or was likely to build on it.

[Slim]

Although that might depend on what land was released and who already owns it or was likely to build on it.

 

Yep, but we can see the planners are constantly under pressure to release more land from the number of rejected applications from certain large developers.