January 27, 2008
Fundamentalists still preach the false gospel of propertyPosted in Celtic Tiger · 31 comments ·
Spin masters continue to tell us that our economic fundamentals are sound, but they keep changing the fundamentals.
In the past week, various ‘experts’ have been wheeled into radio studios around the country to explain two things: first, why the Irish and global stock markets are so volatile and secondly, why Irish house prices are falling dramatically.
The most ridiculous aspect of this theatre is that most of these guys either work for banks and stockbrokers or estate agents. They are the fundamentalists. If you close your eyes, you could imagine them emerging with long beards, Kalashnikovs and a copy of the financial equivalent of the Koran under their arms, believing in the fundamentals. Last year we were told there would be no problem because Ireland was different. Our fundamentals were sound.
However, each month, the particular fundamental that was guaranteeing our glittering success seemed to change. Some days, we were different to the rest of the world because we had a young (or was it a growing?) population; sometimes it was because we had lots of immigrants or maybe it was because our housing stock was old, or we had restrictive planning – or was it because we had lax planning? Other days, we were catching up, we were high-tech, we had permanently low interest rates. I could go on, but you get the message.
Like Islamic fundamentalists, Irish property fundamentalists were driven by exceptionalism. Islamic fundamentalists preach that Islam is different, and Irish fundamentalists preached that Ireland was different. We now know that what they had to say about Ireland was codswallop.
These guys were the propaganda department of an orchestrated financial coup d’etat that took place in Ireland over the past few years. An unholy alliance of banks and property developers was allowed to create a property bubble that greatly enriched a tiny few at the expense of thousands of ordinary people.
How can you possibly take these propagandists seriously? Initially, they told us that prices could only go up, and those not ‘‘on the ladder’’ would rot in eternal monetary damnation. Then we got the mysterious soft landing. At the height of the binge, this became an almost quasi-religious term a bit like transubstantiation – you know, something that doesn’t stand up to scrutiny unless you are prepared (and many good people are) to suspend some of your more critical faculties.
Few people questioned the logic of the soft landing, and those who did, in time honoured religious fashion, were branded as heretics by the fundamentalists. Let’s re-examine the soft landing idea. Think about the imagery of a soft landing.
We have a picture of a superhero with a Rolex in the cockpit pulling levers, fighting with the elements, decelerating and getting the angles right. He is the safe pair of hands when everyone around him is losing his head.
The key to landing is to remove the uplift from the air using the tilt of the wings, so the plane almost drives smoothly into the runway. The tilt is controlled by the pilot using his cockpit instruments. Remember, he is disoriented, so he has to trust the tools at his disposal to give him altitude readings and speed of approach.
The margin for error is minimal: if the pilot releases the uplift too late, the plane will smash nose-first into the runway; too early and the aircraft will drop like a stone onto the ground, bounce and try to take off again.
The pilot adjusts the rudder, wings and balances the machine. He straightens the plane, eyes up the runway, drops the wheels and engineers the aircraft towards a soft landing. Everyone claps.
Now try to picture this with no pilot, no flight instruments, no air-traffic control tower, no tail fin, no fuel and, most importantly, no power over the wings. Yes, I’d be saying the rosary too.
The Irish property market is an out-of-control aircraft, full of petrified screaming passengers, with neither a pilot nor working controls. We abandoned our economic levers when we joined EMU in 1999.Like a doomed plane, the market can only go up and, when it stops going up, as it is doing now, it falls to earth. The severity of the fall is based on the pull of financial gravity.
Because of EMU, we now face the added problem of a housing market slump when interest rates are not responding.
No other country has ever faced this dilemma. Typically, at the first sign of trouble, a country cuts its interest rates to as close to zero as possible in order to avoid a credit meltdown. The US did this in 2002 after the dotcom crash, avoiding a recession. And that is what the US is doing today. However, the stock markets seem to have decided that the US will not avoid a recession this time.
Now the fundamentalists have changed their tack. Out goes the soft landing and in comes the short sharp correction – which is commonly preceded by the reassuring adjective ‘healthy’. The correction slipped into the lexicon just after the soft landing was discarded, some time in November.
When you look out for it, you will hear it in almost every utterance from the fundamentalists. Ironically, the fundamentalists have abandoned the fundamentals for now and we are being introduced to our new friend, the healthy correction. Today, we are being spun the line that the fall in house prices is good for us.
The fundamentalists don’t believe this and have been doing all in their power to prevent it, but they have reverted to this mantra as away of buying time. It is also crucial to accept the new fundamentalist line that the ‘healthy correction’ will be short-lived and that house prices will recover in early 2009 when – guess what – the fundamentals (which presumably have taken off on a bit of a break to Krakow) will reassert themselves!
This is all pronounced with such certitude, despite the fact that all the historical evidence from around the world says the opposite – housing slumps typically last for years, up to five years, and even ten in some cases. There is no real reason to believe that Ireland will be much different from other countries. So prices are likely to keep falling for some time. But the positive side of all this is that it gives us a chance to think up a Plan B.
I’m writing this column from Davos, where many of the world’s leaders in politics, finance and technology are meeting. Nobody here is talking about property. The talk here is about what’s next. The major point of discussion is how can countries best harness their people’s brain power. These industry leaders are not in denial, they are not pretending that the world stands still. They are looking at global trends and figuring out ways to react to, or even shape, these events.
This is what we should be doing, rather than repeating mantras, like fundamentalists, to the false god of property.