Wednesday, April 01, 2009

The Crisis of Credit Visualized [VIDEO EXPLANATION]

This is an excellent video, and well worth watching. The cardinal truth though is espoused in the last 5-10 seconds. That is that investors made the risks on the assumption that rising property prices was given, guaranteed, and thus associated risks could always be recouped, no matter how risky the sub prime mortgage undertaking.

In theory there is nothing wrong with this psychology, except that is exceedingly naive. The idea that property prices would appreciate forever is grandiose. It's based on a childish hope that you can get 'something-for-nothing', and somehow escape the laws of gravity, entropy etc.

The reality of course is that property prices like human beings rely on something very basic to continue operating - they need energy. Without fresh air, people start succumbing to cancer and other respiratory diseases. The property markets - and suburbia in particular - relied on cheap and abundant energy to expand (and to maintain their inflating price tags). With energy becoming neither cheap nor abundant, property prices could simply not be justified. For example, if you can no longer afford to drive long distances from home to work, to Wal-Mart, to drop the kids off at school, and other costs are rising simultaneously (food for example) then the value of your home is going to drop. Houses simply become less affordable when everything else is becoming expensive.

And this is what happened as more and more money was based on property-based credit. In fact, much of the economy of America is based on Americans selling houses to one another (and all the associated accoutrement's). Take this away, and you really push that nation into economic collapse, which is what we're seeing.

US home price drops set records in Jan.

No comments: