Every mania is based on an illusion

Economic growth, Financial Events

I first wrote about the subprime crisis two months ago, as it began to be noticed in the press. Housing represents an important source of chemicals demand, and so it seemed to have potentially major implications for the chemical industry. Since then, it has become clear that the crisis could have far-reaching implications, if not properly handled. I therefore thought it might be useful to summarise the insights I have gained via a letter to the Financial Times, which they have kindly published this morning. I thought you might like to see it.

From Mr Paul Hodges.

Sir, There is another reason Washington should follow your excellent advice and “resist” the urge to intervene in the subprime crisis (“Subprime loans – subprime solutions”, editorial September 1). This is that the scale of the problem is probably too large for any congressional action to be effective.

All investment manias have their illusion. They then gain in strength as the “fact” underpinning the illusion becomes more widely accepted. Thus large numbers of dotcom investors came to believe that “page-clicks” would lead to profits. So US house-buyers, and lenders, all began to believe that house prices would always rise.

When brokers pushed unaffordable loans to low-earning borrowers, they were sure that increasing property values made subprime loans bankable. The ratings agencies were happy to consider AAA ratings, because their models showed that US house prices hadn’t declined nationally since the Great Depression. And central banks were keeping global interest rates low, thus encouraging investors to chase the higher yields on offer.

The problem is that the whole story turns out to have been an illusion. The S&P/Case-Shiller US home price index is firmly in negative territory, while the number of unsold houses is climbing. A “buyer of last resort”, such as the Federal government, would probably now need to emerge if the situation is to be stabilised.

Even Congress would surely balk at the amount of money that this scale of intervention would require. Unfortunately, therefore, the myth behind the US housing mania is likely to become increasingly transparent, as the fallout from it widens.

Published: September 4 2007 03:00 | Last updated: September 4 2007 03:00

PREVIOUS POST

OPEC and the IEA

31/08/2007

I first wrote about the subprime crisis two months ago, as it began to be notice...

Learn more
NEXT POST

Two swallows

06/09/2007

I first wrote about the subprime crisis two months ago, as it began to be notice...

Learn more
More posts
The End of “Business as Usual”
21/04/2019

In my interview for Real Vision earlier this month, (where the world’s most successful invest...

Read
Most businesses were nowhere near Ready for Brexit last Friday – we mustn’t make the same mistake again
14/04/2019

Thank goodness for backbench MPs and the European Union. Without their efforts, the UK would by now ...

Read
Don’t get carried away by Beijing’s stimulus
07/04/2019

Residential construction work in Qingdao, China. Government stimulus is unlikely to deliver the econ...

Read
Businesses thrilled by Brexit uncertainty: “It’s exhilarating” says small business owner
01/04/2019

With the European Commission saying that a No Deal is now “likely“, small businesses acr...

Read
Ageing Perennials set to negate central bank stimulus as recession approaches
10/03/2019

The world’s best leading indicator for the global economy is still firmly signalling recession...

Read
BASF prepares its UK supply chain for Brexit
24/02/2019

BASF has been working with Ready for Brexit (the online platform I co-founded last year) as part of ...

Read
Companies and investors have just 30 working days left to prepare for a No Deal Brexit
17/02/2019

Companies across the UK and EU27 are suddenly realising there are now just 30 working days until the...

Read
The BoE’s pre-emptive strike is not without risk
12/02/2019

The Financial Times has kindly printed my letter below, arguing that it seems the default answer to ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more