a convenient truth

Something my father once told me came back to me this morning as I read the newspaper reports of the commons hearing yesterday where various top bankers were gently grilled by MPs.

My dad used to work in the fruit and vegetable trade and at one point he was managing a depot for a wholesaler in Alice Springs, right in the middle of the Central Australian desert.

Alice Springs only exists because it sits on top of some large natural fresh water springs, so although it’s in the middle of the desert it’s possible to irrigate farmland and grow fruit and vegetables. This was before the widespread use of refrigerated road transport and Alice Springs is thousands of miles from anywhere, so although a certain amount of fruit and veg could come in by rail, it was largely a closed market.

My dad said that every year the same thing would happen.  The previous year a certain product, maybe cabbages, had been in short supply, so they’d been very expensive.  This year all the local farmers would grow loads of cabbages, hoping to make lots of money.  Instead of course there would be a huge glut and cabbages would be worthless.  Instead something else, perhaps watermelons, would be in short supply.  So then everyone would grow watermelons the next year and once more they would be worthless, and everyone would be sick of them and would wonder why on earth everyone could have been so dumb as to have grown watermelons.

Even in a small quite predictable economy where you would hope the free market would lead everyone to diversify and find an appropriate niche, instead everyone did the same thing, to the detriment of the entire economy.

It struck me that this is, in the small, what really seems to have gone so horribly wrong with our economy.  The problem was not individual people buying houses, or individual people taking out lots of loans - the problem was everyone doing it together.

The tendency of the herd instinct to engender a sense of safety was very much in evidence yesterday, where the heads of various bankers gave evidence in front of a commons committee.  One after the other they basically said that “yes we have made some bad decisions but everyone else did it too so I’m not responsible”.  The idea that somehow because the whole bloody lot of them ran off a cliff all at once like a load of lemmings means that none of them are individually responsible shows just how crap they were psychologically when they were supposed to be making rational decisions.

It is perhaps acceptable for the man on the Clapham omnibus to use this excuse, but these guys are supposedly at the top of their game.  The fact that everyone else was doing it should not have made them feel safe if should have scared the hell out of them.

It’s a bit like that asinine argument against doing anything “but what if everyone did that?”, as if somehow one’s actions were being closely observed by all six billion inhabitants of earth merely so they can copy you.  The correct answer is obviously to not bloody do it, since if everyone is doing it, it’s bound to go horribly, horribly wrong.

The market for houses worldwide went completely mad after the internet bubble burst. On the whole people are pretty unsophisticated with their investment and speculation, it seems, and everyone rushes to join whatever the latest make-money-quick scheme is. And of course it works, for ages and ages. And then the music stops, and not everybody gets a seat.

It looks like the music has just stopped in the property business. It’s not just in the UK that the property market has been ludicrously inflated - right across the world people have been frantically borrowing to pump money into the property market. One of the problems is that people regard this sort of thing as an investment, and what can be wrong with investment, right?

It is, of course, not investment. Investment is where you buy something that vests over time, yielding a profit. Shares are an investment - you get a dividend every year. Buy-to-let is an investment, because you get rental income. Buying a McMansion and expecting it to double in price in a few years so you can sell it to an even bigger mug is not investment. It is speculation.

I suspect it really was the Internet bubble that caused all this grief, weirdly. After the market started recovering was obviously a great time to get in - prices were low, and were clearly going up. However, a lot of people had been burnt - and most of the people involved in this sort of money making scheme shouldn’t be anywhere near it. They said at the end of the last-but-one bubble that “when the bellhops start buying shares: get out”. When loads of people start borrowing to speculate on a rising market is when you know it’s going to go very wrong.

This has been happening right across the world, but nowhere more so than in the US. Their entire economic recovery has been based on a construction boom, followed by massive consumer borrowing to finance house purchase - and then more borrowing secured on these houses for them to buy the furniture to furnish their new places. The music has just stopped, and there are not enough chairs.

One of the places you can see this is in [Google's adsense rates](http://www.clickmojo.com/node/134). This is the cost of buying those words for your adverts on Google’s ad network. The first bunch is all about mesothelioma, the current cause celebre amongst ambulance chasers. But starting from $16 down you can see where the real money in financial products is now: debt refinancing.

The US is a major driver in the world economy, although thankfully not as significantly as it was due to the rise of China and India. If the US economy goes into meltdown, as it might do, that could really make life hard over here in Europe. There might be a silver lining though (for us at least). If the US economy goes wrong, less US Dollars will be used as reserve currency, which should help balance out the world money markets some. It might also finally kick start the Euro, which would be good for everyone on this side of the pond.