July 11, 2006

How the prophets of boom may pocket profits of doom

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In the early 1960s, the British establishment was rocked by a sex scandal involving the patrician, married, Minister for Defence John Profumo, and a young call girl, Mandy Rice Davis.

When the story broke, a sceptical member of the Tory press accused Rice Davis of being a money-raking fantasist and backed up his attack on her by saying that John Profumo denied even knowing her, let alone sleeping with her. The call-girl quipped, “he would say that, wouldn’t he?”

With one caustic, but self-evident remark, she condemned Profumo and made the journalist look like a bit of a naive eejit.

When I hear one of the biggest money lenders in the country telling us that we are the second wealthiest country in the world, the call girl’s wisdom comes to mind.

They would say that, wouldn’t they? Let’s look at motives for a second. If you are in the business of lending money, you might tell people that they are unfeasibly rich beyond their wildest dreams, mightn’t you? Could this be part of a sales pitch to make people feel better about borrowing yet more money to buy yet more assets and give the bank yet more fees?

Could this be another example of the shameless cheerleading process which goes on in Ireland every day to keep the inflated property market buoyant?

Let us consider that accusation for a moment.

You don’t have to be a killjoy to suspect that across the board, from banks to estate agents, money brokers, advertising sales people and the biggest gainers of all – the Government – there might be a motive problem here. When we examine the incessant barrage of self-congratulatory financial muck bandied about, could it possibly be aimed at lining the pockets of the thousands of vested interests who make money from the property market?

No one doubts the economic success of the past decade. Those of us forced to emigrate in the 1980s and early 1990s in particular have reason to celebrate; we returned to a much better country. However, a bit of perspective might help. We have seen this type of stuff before, in countries that have been much more successful for much longer than ourselves. For example, in the late 1980s, Japan – an economic powerhouse – experienced the most inflated property bubble of the 20th century. As a result of the lending boom, four Japanese banks dominated the top five banks in the world. (Today, no Japanese bank is in the top five and one of these original 1980s financial colossuses is bankrupt.) However, the most startling statistics of all were those about property values and implied wealth.

A good example was the fact that in 1988 the land on which the Imperial Palace in central Tokyo sits was valued at more than the entire real estate of the State of California or Canada – the world’s second largest country. By that benchmark, Japan was indeed the wealthiest country in the world. Needless to say, it was all nonsense – not because the Japanese were not wealthy, they were; but the property bubble (which burst in 1990 with dire consequences) had overstated that wealth enormously. The Japanese had income which had been built up over generations from making stuff, but they were not as wealthy as they thought they were.

Horse sense attests to Japanese income. Look around your kitchen, living room or front drive today and you will see where Japan’s undeniable income comes from. Even during the post-property crash domestic slump, Japan remained the world’s largest exporter and the globe’s most innovative economy. It still had the fastest growing consumer goods businesses with the best brand names like Sony, Toshiba, Honda, Canon and NEC. Japan’s car industry remained world beaters. The country continued to export more capital to the rest of the world than any other country and, as a result, its accumulated income was substantial.

In short, Japan had a lot more things going for it than simply property and even still, property played havoc with Japanese balance sheets by making them feel richer than they were. Also – surprise, surprise – Japanese banks – that were making most out of lending to fuel the property speculation – continued to publish reports on the marvels of Japanese wealth right up until the eve of the crash.

Now let’s look at this week’s Bank of Ireland Private Banking Report which says that we are the second richest people in the world after you know who. Wealth is a bizarre but fairly straightforward concept. Typically rich people, like countries have had substantial income for many years which has been invested over generations wisely so that their wealth overtakes their income.

But there has to be evidence of income to substantiate opulence unless of course, it is inherited. All of us are suspicious of the Flash Harry who rocks up throwing cash around with no evidence of where it came from. Did he win the Lotto, rob the loot or maybe borrow it from someone in an effort to either impress or hoodwink us? Should we not be sceptical about countries that do likewise?

If there is no evidence of income, wealth and the substance of public displays of money or claims about it, have to be questioned. With this in mind, one of the strangest aspects of the Bank of Ireland’s wealth assertions is the fact they claim that “Irish net wealth has increased by 350pc in the past ten years” and then says that our income has only gone up by 100pc in the same period. Both these figures are true, but did the fact that our wealth increased three and a half times quicker than income not make the Bank think for a minute?

How could wealth increase three and a half times quicker than income in ten years, if not through incredibly astute investments? Ok, so from having never speculated before, is it conceivable that the entire nation – from my mother to the local postman – could have turned into financial gurus overnight? Do you believe that all of us have suddenly learned the financial acumen of Warren Buffet? Anyone who has ever worked in a market knows that not everyone can be a winner all the time. For every buyer there has to be a seller and for every buyer who thinks he has got a bargain, there has to be a seller who believes that he has just sold something which is about to lose value.

That is how the system works, how it regulates itself and how it benchmarks value – unless, of course, we are in a frenzy. In a frenzy, everyone wants to be a buyer.

Everyone rushes to get in and prices go through the roof.

For a limited period, as the prices overshoot, the value of your wealth, as measured against the overvalued asset, can indeed exceed income – but this can’t go on forever.

However, the frenzy confuses people and many think that this is a permanent state of affairs so they forecast wildly panglossian futures. This is why for example, during the tech bubble of the late 1990s, when the Dow Jones was rising past 10,000, the book called Dow 36,000 was on the US best sellers’ list for weeks.

The Dow subsequently fell back below 7000 and is only now recovering to its previous levels. Incidentally, Japanese property has not recovered to its 1988 value, almost 20 years later.

Typically at the head of this cheerleading are the people who are feeding off the effervescence and making cash – such as banks, estate agents, property advertisers and money lenders of all hues.

They, in unison, project a bright future based on wildly optimistic values and nonsensical estimations of wealth. Nobody exercises their critical faculties.

Everyone speaks the same positive language. Things have never been better, we have never been richer.

The miracle continues.

They would say that, wouldn’t they?


  1. ronnie

    People forget that mortgages are rising at 25% per annum
    while house prices are rising by 13% ,ignoring income for
    a second if you project forward with 25% mortgage
    increases annually and say 10% house price growth mortgage
    values will exceed house values within a decade and thats
    with house price growth of 10% per annum! the high level
    of house prices means everyone buying has to huge levels
    of debt and these debt levels run miles ahead of growth in
    that “asset”s value.factor in these figures to the bank of
    ireland report and in a decade you’ll see a very different
    picture! another big concern is that the income used to
    pay for theses massive loans is growing by not much more
    than consumer inflation and arguably by less than the real
    increase in cost of living for many families with gas
    prices set to rise 30% in the autumn.the aggregate gnp/gdp
    growth rates look impressive till to drill down to the per
    capita figures for income growth etc.

  2. Open Window

    If you’ve ever been to Japan you will realise they are truly
    wealthy in ways we could only dream of.

    I am afraid the Bank Of Ireland is suffering from a bad case
    of VANITY and is pedalling a great untruth.

    EXPERTS often refer the the UK crash but very rarely do they
    refer to the the JAPANESE bubble.

    What is most interesting about the Japanese case is they DO
    have a serious shortage of land and esstentially on this
    point you could say there is a real physical enviromental
    constraint that prompt the bubble in the first instance. 120
    million Japanese living on an island of which only 6%
    habitable land.

    In COmparison to the Irish situation, an island with 4.5
    million people with almost the lowest population density in
    the EU with only 4% of the land urbanised.

    If Ireland had the infrastructural investment & efficency,a
    full spectum transport systen, R&D + manufacturing exported
    to the world at large only that Japan ENJOYS then would
    Ireland be the wealthiest nation on the planet by the
    standards set by the Japanese.

    Than game is up! Get ready to devalue your house to save the
    economy, the Governement did it to the punt once.

    Do we have the individual courage to take it on the chin and
    do what is needed for Irelands future economic survivaly?

    Http://ww.thepropertypin.com

  3. SpinstaSista

    Well said Billy Waters. A high proportion of home “owners”
    in this country are in reality tenants of the banks. The
    banks are the 21st century version of 19th century
    rackrent landlords.

  4. Gary Loughran

    Im afraid David’s research on the Profumo scandal leaves a
    little to be desired. Mandy Rice Davies (spelt Davis in
    piece!!!!) never attributed her quip to John Profumo. This
    classic was instead aimed at Lord Astor who vehemently
    denied accusations of having an affair with Ms Davies.
    Indeed, history has little evidence of any contact between
    the two with Christine Keeler being the focal point of the
    Profumo scandal given her association with the minister &
    Eugene Ivanov, a Soviet attache.
    Mandy Rice Davies association with the whole scandal
    centres around her contact with Dr Stephen Ward and the
    accustaion that he was living off the immoral earnings of
    Davies & Keeler.
    A small point but important none the less.

  5. Stephen Barrett

    Me? A tennant of the bank? Sure, but I get to put nails in
    whatever wall I want, and after 25 yrs, it’s mine. Hire
    purchase seems to me to be a more accurate model. And yes
    it’s pricy, but at least its purchase. Some day I won’t be
    able to afford to pay my current mortgage as rent.

  6. Kayode Olatunji

    Your articule is very interesting. Very good to read. All
    the stakeholders in the boom will never say anything again
    the boom as you opinned. Instead, they will always give
    facts but in a distorted form. Imagine the way they
    present “Dublin wide average” price where a unit in D4 may
    be equal to a street of 50 units in D24. How on earth will
    someone in D24 not feel cheated when he is being offered
    an amount below “Dublin average” price? How will this not
    affect prices of properties in the outskirt of Dublin?
    Guess the industry will be affected if prices are given by
    prefectures ir D1 average, D2 average etc so people can
    see what property real worth in their area. Nice article.
    Hope people can start making sence of the mess and stnd up
    to the facts.

  7. Sverre Helgesen

    Hi David. You’re smart. You hooked me by quoting my ex-girlfriend, Mandy Rice Davies. It should actually be Davies Rice, but her new stepfather (a paedophile who sexually abused Mandy for years, with her mother’s approval) prefered his name first. Mandy always thought of herself as Mandy Davies. She hated the name Rice but realised that people in showbiz liked the double name. She knew Sammy Davies Jr very well, she and ‘Eastender’ Wendy Richards backed him on an hour-long BBC special he did in ’60, the same week both girls arrived in London and signed-on for an agent! Mandy never worked again, she was frozen-out by the Artists Union and the other girls ‘in line’ who’s job they said she took (she only took what she was offered!?) Her money rapidly running out she did as many other girls had to do, strip for a living. She was London’s top stripper in the end. She was a fab singer/dancer/actress, into sports and horseriding. I helped her find her father’s grave on the North Weald, not far from where he crashed his Meteor after shooting down a Doodlebug. His plane was obviously hit by some debris and he was knocked dizzy. Mandy was a very nice girl who didn’t deserve the rep she was given.

    By the way, Rachman wasn’t the little fat, bald guy often quoted, that was Rachman’s DOUBLE, an ex-paratrooper living on borrowed time (wounded in the war) that peter hired to impersonate him. The real Peter Rachman, Ilan Ram’el, was tall-dark-and-handsome, a rich art-student from Lvov who was planning on buying a tile factory…when the war started. Peter loved designing and making tiles. He served under Menachem Begin during the war, with Vladec Shebal, the actor in From Russia With Love, and the 3 only survived the massacre of the Polish Army at Katyn in ’43 as they were out slitting German thoats and stealing their food supplies. Peter then decided Begin had to be gotten out of Europe and to Israel and led them West… to Britain, where he had family friends. But they got ambushed on the way, Peter offering himself to allow Begin to escape, and thus spent nearly 2 years in a concentration camp, surviving this by “doing things that shamed me.” Unfortunately some of the inmates survived too and there was a death sentence on Peter’s head. He got to England before the Poles found him. “I saw the inmates were walking dead, they had given up. Well, I wasn’t going to do that. Somebody had to survive to tell of the atrocities that went on in Poland, and the camp. So…”

    The entire Profumo affair (ironically pro fumo means ‘without fire!) was the biggest coverup in history. Like Rachman, Ward was prepared to do what it took to do the job. He hated the Royals as much as the Reds and was negotiating with Ivanov to get evidence on the Royals that would crush them forever. Evidence the Reds had found after the revolution. Ivanov had helped move it from St. Petersbourg and archive it in Moscow. He was also looking for a copy in England, files Rudolf Hess had brought with him on that flight of mystery he did. Roger Hollis had spotted the files in the archives at the end of the war and had tried to find them again. They had been removed. As had other sensitive files. No record of their existance survived either. Secrets so volatile they can never be revealed. Who’s saving who’s arse here?

    Are you now beginning to realise there was a lot never mentioned during the scandalous Profumo Affair? Why aren’t you asking why the entire Ward affair is on the top secret list until 2046? Ward was a mere pimp, a dime-a-dozen sleazebag not worthy a mention on the back pages let alone an expensive trial in Crown Court. Who’s saving who’s arse here?

    These same ‘fine’ people used to rule us with the sword, then they realised this was self-defeating as they needed slaves to do all the hard work for them and devised religion to control us. This eventually began to loose it’s effect so they came up with the ultimate solution…rule us via our wallets. They created the Industrial Revolution to force us to manufacture the goods we were then forced to spend our wages on. They moaned at how much we were costing, but omitted to say that they immediately took the money back again – and with interest! And we are so stupid we lap it up, “We’ve never had it so good,” forgetting the fact that we have to come up with the repayments every month or wind up starving in the streets. All we’re doing is making a few select families, dynasties, Masonic ones, richer by the minute.

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