January 2, 2008
Ah the revisionists. You can’t help loving a revisionist. He always emerges after the event to suggest that the history you have just witnessed didn’t happen at all.
In recent days, our newspapers have been full of articles telling us what transpired in the Irish property boom in 2007 (as if we didn’t know). Commentators who this time last year were confidently predicting that house prices would continue rising (albeit at a slower rate — the fictitious “soft landing”) now have changed their tune and are suggesting that “we all knew it had to stop some time”.
Well wait a second; if you all knew it had to stop and reverse some time, why didn’t you say so beforehand or even at the time, or even when the market was turning down in mid-2006? What, cat got your tongue? Why didn’t you share this great insight with the rest of us, given that you are in the “insight” sharing business?
The reason is simple. Most of these so-called commentators and economists are paid agents of the hype-machine which has dominated analysis in Ireland for the past five years. Some work for banks, others for brokers or estate agents; many are representing various lobby groups and some work for the State, which gets 28pc of the price of every new house in tax. Some might work for media outlets which make so much of their revenue from property advertising that a simple calculation tells them where their bread is buttered.
Irrespective of where they work and who they represent, one thing binds them all together and it is this: they have been putting property before people for the last few years and in doing so, have condemned many thousands of Irish house buyers to 30-year mortgages for assets that are worth considerably less than what they paid for them.
As if that is not enough, the “property before people” merchants are at it again this week, telling us that there might be a slight recovery in the Irish housing market at the end of 2008! What gall. Having misdiagnosed the boom when it was in full strength, what qualifies them to make pronouncements when the patient is much more fragile?
Would you listen to a doctor who failed to diagnose the first signs of cancer? Worse still, what would you think of that same doctor who instead of diagnosing cancer and taking immediate remedial action, prescribed a course of muscle-enhancing steroids to disguise your weakness? As the cancer spread, the steroids made you look vigorous and strong, yet every day your health was actually deteriorating.
An interesting way to look at the commentary in Ireland over the past few years is to think of the economist as a doctor and the economy as the human body. The economy, like the human body, is susceptible to bouts of weakness and strength. It is also vulnerable to contagion. The banking system, for example, acts like the heart and credit operates like the bloodstream. If the heart is healthy, it pumps money into the economy which flows, like blood, into every nook and cranny. On the other hand, like a virulent cancer which spreads into various organs, the economy too — through the mechanism of confidence, overvaluation, outside shocks, accidents, bad behaviour/management and greed — is also prone to infection. Problems that begin in one part of the system can ultimately contaminate the whole organism. And yet, like the human body, the economy is a surprisingly robust entity, capable of recovery, rejuvenation and renewal.
A crucial player in this complex relationship is the economist — the doctor of the economic organism — who, using all the tools at his or her disposal, constantly assesses what might be going on under the skin. It is essential that the economist runs regular check-ups on the patient to ensure early diagnosis of problems.
In medicine we take it for granted that “early diagnosis” is one of the keys to successful medicine. Many of us will have friends and family for whom early diagnosis has been crucial in saving their lives. We also know people who have died of fairly treatable cancers because they were misdiagnosed or where not diagnosed early enough. Equally, we all know people who simply won’t take medical advice, will ignore the signs and pretend that everything is ok, afraid to confront the reality.
A good doctor is the one who tells his patients the bad news first, gets the sentimentality over with and focuses on the problem. She is the one who notices a problem and checks with ‘Gray’s Anatomy’ to see if this has been seen before. If she is unsure, she’ll consult with colleagues. Most importantly, due to a combination of instinct, experience and knowledge she will know what to look for. No one has ever criticised a doctor for diagnosing a problem too early.
Once diagnosed, it’s up to the patient to respond, maybe by taking medicine, changing lifestyle or diet.
Similarly with the economy, once a bubble is diagnosed it’s up to each individual to respond. No one ever suggested that you could not trade during a bubble nor use your own judgement to assess when it might burst. But the key thing to realise is that you are in a speculative mania rather than a healthy, permanent era of ever-rising prices.
Now back to medicine, consider the highly unlikely scenario of a doctor who is in the pay of a large pharmaceutical company. He is rewarded for pushing the company’s products onto patients. Imagine for a moment that this doctor is paid to advise patients to take steroids to build up their muscles so that they appear like ‘he-man’ in the centre-fold of ‘Bench-Press Monthly’ or some other body beautiful magazine.
This doctor is unlikely to tell the patient that taking these steroids is bad for him. He is unlikely to look for research which reveals that there might be unpleasant side-effects. In the extreme he might actually mislead his patients. The role of the Medical Council should be to police this type of carry on and strike off doctors who behave this way. This should protect society from compromised doctors.
Now think of the economist or commentator who is in the pay of a bank, broker, estate agent, developer or some other organisation which makes money when people buy overvalued houses. These people are in the same position as the doctor working for the pharmaceutical company; they are incapable of giving impartial, sound advice because it is not in their financial interest to do so.
This is the reason they all failed to forecast the dramatic reversal in the property market last year. This is the reason they did not speak out. This is also the reason that they ridiculed sceptics who years ago offered a crucial early diagnosis.
It is not because they are bad at their job — on the contrary they are actually extremely good at it. They are compromised cheerleaders masquerading as objective commentators and their job is to dress up a money making racket with the trimming of economic science.
The best way to protect yourself from them this year is a large dose of salt. Forget the hype. Prices are plummeting, so let the market do its thing.
You’d be mad to buy a house in 2008 — particularly with so many charlatans desperate to get paid at your expense.