Broken Capitalism

 George Osbourne has hit a lot of flack for his schemes that inadvertently artificially intervene in UK house prices. His flagship mortgage support scheme (and Funding for Lending before it) combine with near-zero interest rates ostensibly to address moans that “the banks just aren’t lending” (the reason commonly cited by those with vested interests as to why houses aren’t selling). George is doing what banks won’t - getting the UK government into the sub-prime business - lending to people who cannot naturally afford the means to take out simply enormous debts.

In a way it is sensible - a house price crash could topple the whole private debt pyramid the we currently teeter upon, wreaking the sort of the havoc unleashed in Spain, Ireland etc.

Osbourne of course makes no claims his actions are artificially propping up the market - instead that it will encourage houses to be built (since the funding is only currently available for new homes).

Where-in lies the twist.

Skewing the market so that a higher percentage are now seeking new housing will pull away the first link in the chain from many of the already restricted “second hand” house sales. This may be enough in an already fragile market to cause distressed sellers to lower prices, kicking off an adjustment toward more sustainable historic income multiples.

New Scientist have an interesting article about a new bricklaying robot developed in Switzerland (it’s not a paywall - you just need to register for free to read it): http://www.newscientist.com/article/mg21829135.600-robot-builders-deliver-architects-dreams.html?

This is the sort of thing that could radically change the housing market. Labour is the low hanging fruit in construction costs. It’s not even close to optimised - that’s an off the shelf Staubli arm - but shows the potential.

Next obvious optimisation is a “deliver the brick to the gripper feed” so it doesn’t have to turn back.

No mortar required; the bricks are epoxied together.

Building are the last common thing that’s not mass produced, which is why the economics of building the are still rather 19th century. the primary cost is this man people for this length of time.

Why has the principle of Supply and Demand broken down so fundamentally with regards to the UK housing market? Demand is huge - and yet property developers have stopped building houses because no-one is buying them.

People simply cannot afford the homes - so none are being bought or built. Why do developers not offer them at lower prices? 

Interest rates have held at record lows for years, so if house prices are not in a bubble, the market should be soaring. But it isn’t moving at all - in either direction - insinuating some other effect is taking place.

Is it because developers have spent so much on land they cannot sell cheaper? Or are existing homeowners keeping prices high through a reluctance to allow their huge recent windfalls to be devalued - choosing not to sell at all rather than at a lower price?

Developers and homeowners alike may be wishing for a return to the high-risk easy-money lending that fueled the original boom, yet banks are unlikely to return to the very practice that nearly destroyed them. The gravy train is over, yet the bubble is still stuck - is this through stubbornness alone?

Must we wait 10 years for inflation to stealthily re-align prices? That will create a missing generation of those by then too old to get a mortgage paid off before retirement.

Or will the bubble be pricked by rising interest rates causing crushing negative equity to wipe out today’s generation of 1st and 2nd time buyers?

It’s a high-risk gain of Russian Roulette where only the baby-boomers can be guaranteed a chamber with no bullet.

Look at a mass murderer, or indeed a fighter in any conflict throughout the world. They are able to inflict extreme harm; torture; death upon one another. And yet, if one of their colleagues is lying wounded they will move heaven and earth to help their fallen comrade. To make this separation (and it seems most all people are capable of it in extremis) there needs to be a mental distinction between people “with us” and those “against us”, where “us” is the social group (or collection of) we have chosen. Only in branding those we harm as “bad people” can we block our empathy with their plight or situation - which is an essential precursor to maiming or killing. (Note: Sociopaths / Psychopaths simply have this suppression permanently active)

Video games, books, movies show that we love to work toward seeing things in this black & white way (or if the plot allows more complex shades, these have generally collapsed into monochrome by the conclusion). In an FPS we require a simple binary fact: “do I shoot this thing” or “do I not shoot this thing”.

It is anecdotally trivial to back up the claim that we all think like this. The majority of under 30s males play video games - and these gamers are mostly what we would describe a “good” people. Notice how the “bad” guys are usually the same types - e.g. Aliens / Zombies / Nazis - that us “good” guys can easily identify as definitively “bad”, therefore having no moral issues with switching off our empathy and blowing them away (with scant regard to the pain that Alien / Nazi personally feels).

Differentiating between your clan and other clans is an essential evolutionary distinction for the survival of your group and thus yourself. “Liking” or “Not liking” is a branding of others to fulfil this primal desire (no surprise this is the principle currency of social networks). Tribal allegiances have developed over history into shields and flags - the WW2 British “Target” vs the German Swastika being an obvious example. You choose a side - and you stick with it. ( NB the Union Jack is still a major brand in the UK with people flying the flags outside their houses and painted on the roof of their cars). This innate desire was cleverly leveraged by marketeers in the 20th Century to inspire brand allegiance through promotion of the idea that you could be part of their “gang”; their “group” - and showing that as an aspirational tribe you would be better off (i.e. safer) as part of.

Market Forces at work:

Higher Profits + Lower Costs - Red Tape (smaller gvmt) = Horse Burgers

Without the small amount of government involved in Ireland finding this, and a free press to report it, this would not have come to light.
Market forces _should_ now kick in at Tesco for example who _should_ implement their own checks to avoid the negative press in the future. But if further funding is cut from the Food Standards Agency (in a bid to reduce red tape / increase profits) then it’s easy to see how right wing ideologies of small government are in this case detrimental to citizens.

Blockbuster goes bust - that’s nearly 20%* of high street shops now going/gone. There must be many more shops only just holding in there too. * http://www.bbc.co.uk/news/business-13977255

Why hasn’t Amazon got into online groceries? The market is worth £5bn here in the UK (growing by £1bn/yr) and most supermarkets struggle to make it competitive since their picking & packing is done by hand in a relatively archaic and highly manual way leading to an additional £15-£20 cost to their businesses.

Now certainly I am pleased Amazon have not brought their automated processes to bear as I do not relish the same decimation of the big UK retailers as has happened to our high street, but I would be surprised if they did not seize the opportunity to put Wal Mart / Tesco in their sites.

Want to know whether or not someone is the best person to do something? Ask simply - what is their motivation? Why are they doing it? Usually, human beings find this potentially complex question surprisingly easy to gauge. It seems we can see through someone’s disingenuousness if we just ask the right question.

Of the care home CEO who claims “we just love customers” - it’s simple to ask “what is her motivation?” - if it is their own monetary reward, others will similarly not give a shit about anything other than their pay & bonus. If it is genuinely the old people in their care, others will see that and work for the cause.

Increasingly, institutions that succeed BIG are those ones whose leadership are motivated by the actual cause itself - with monetary compensation not irrelevant, but a side-cause. These companies inspire their staff with a strength that mere selfish, Adam-Smithian monetary reward cannot compete with.

In a related manner, I read today a Ted Hughes quote from a letter written to his son:

“The only calibration that counts is how much heart people invest, how much they ignore their fears of being hurt or caught out or humiliated.”

If you’re going to get stuff done - do it for the right reasons. If you’re going to get great stuff done (measured in intrinsic worth, rather than monetary return, note) you must be OK about failure and be prepared for humiliation. The more humility you can bring, the greater the achievement you are capable of.

I have considerable sympathy for those who called for the banks to go bust rather than be bailed out in 2008. The premise of capitalism only works if you allow disastrous ideas to fail - if the banks know they will ultimately be bailed out there is no real incentive to avoid crazy risk.

And yet this view is not the whole story either, because there are two discreet entities here; institutions and individuals. In situations where it is probable that the institution will fail, it is quite possible for the individuals at the helm to make colossal amounts of money as it does so. CEOs or investment managers seeing an opportunity to massively enrich themselves at the expense of their institutions may well take that course if the rewards are sufficient. With the deregulation of which so many free-market purists dream, those opportunities for individual gain will only increase. You may say that the individuals won’t do it because they may never be trusted to get another job - but forgoing the fact that most would due to the nepotism ingrained at the highest echelons, they would not need to get another job if their reward from the wreckage is great enough.

The shareholders in this utopian market would therefore introduce rules & red-tape to prevent such actions happening. Such rules would inevitably require cross-company and cross-border agreement to be effective - ergo, they would be almost indistinguishable from governmental intervention.

This push-and-pull between regulation and freedom means no completely “free-market” could come into being without quickly cancelling itself out. Those ideologues who persist in following the “it’s just not free enough” school of thought would do well to realise the reality of equilibrium.

During the boom years, the only way many people could afford the huge multiples of income was just to make the interest payments. Banks - who could resell the debt and skip the risk - didn’t really care whether they could repay it any point in their lives; and hey! house prices always rise.

Figures from the FSA show that more than 40% of mortgages are interest only, and Moody’s this week said this grows to more than 50% in the South East* - with 7 in 10 of those borrowers have nothing in place to repay - relying simply on house price rises.

While interest rates are low and property prices remain roughly static - many homeowners and landlords are hoping to ride-out the storm. Rather than accept that the housing market will remain stuck until there is a price correction, many come to the more palatable conclusion that prices are ok and the storm will pass if banks simply return to lending as they did during the boom > http://www.bbc.co.uk/news/business-18722069

Yes, if banks started lending wrecklessly, it would indeed restart the market and push prices up again. But banks aren’t stupid enough (yet) to repeat that mistake - the root cause of the whole financial crash. Even if they did, there is a natural roof to house prices - think about it. Can each of the 100,000 terrace houses in Ipswich be worth £1m when average salaries are set to remain < £35k ?

*Source: Financial Times http://www.ft.com/cms/s/0/f269df52-251d-11e2-86fb-00144feabdc0.html#axzz2BdMRLbT4