In the end it’s all about maths
December 2nd, 2008Buying a house used to be so simple. 2-3 times your income or 3-4 if you had joint ones. This was before the days of the grand pyramid scheme known as financial deregulation. The formula was fixed at a level that had been shown to be affordable.
So what happened to the simple model?
This quote may explain it.
It’s from a piece on the sub-prime web by Michael Lewis of Liars Poker fame,
“He called Standard & Poors and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. They were just assuming home prices would keep going up“, Eisman says
Nice one. This idea, that things keep going up, seems to have become instilled into our eco-social fabric. Buy houses, buy stocks….they always go up…..well at least in the long run.
The dreaded long run that usually ends in death, mercifully for some.
With a belief system like that it’s no wonder that the recent crash will go down in the annals of history alongside the South Sea bubble, Tulip Mania and the Great Depression.
But really it’s quite simple: learn to trust numbers. They never lie.
Tags: banking, bubbles, credit, economics, financial crisis, lending, manias, markets, money, numbers, property, stocks
December 6th, 2008 at 9:43 pm
[...] But the point I’m making is investment is pretty simple. Ignore the hype and focus on the numbers. [...]