Big Bangs & Why You Still Shouldn't Buy a House

Following on from why not to buy a house, I can highly recommend Steve Keen's blog at: http://www.debtdeflation.com/blogs/ (Have a look at his graphs showing the debt levels in Australia ovcer the past 100+ years, and you'll see what it is that's been funding those huge hikes in house prices. The houses certainly didn't suddenly become worth 3 to 4 times as much - people weren't wall papering with gold leaf).

Keen has been one of the few sane voices talking about the insanity of our 'economy' over the past 10 years or so. To this day he's despised or ridiculed by most traditional economists, because they don't have the slightest clue where he's coming from. If you have even a passing interest in economics though, and all of us do in a way because it's become a standard item in most news bulletins, and you read Keen's work and others of the same mind, you'll wonder what planet the other economists came from.

There are almost too many stupid things in conventional economics to even start to list, it's just so embarrassing. The reason it's held firm with these beyond-dumb ideas is because it's an orthodoxy, and orthodoxies always maintain themselves very vigorously. The quickest way to realise that these ideas are stupid is to know anything at all about other fields, like science or art. Most conventional economics for example is based around the idea that the economy is a self-correcting equilibrium, that always returns to a nice steady growth path over time unless evil governments or other 'macro' actors stand in its way. So at the moment on the news you'll hear the supporters of the conventional theory bleating about a return to growth, the end of the downturn etc., and also speak to most people with houses or an interest in houses and they'll believe the same thing i.e. that house prices will just keep rising gradually over time, with temporary interruptions (booms and busts) now and then. The myth of the 'cycle'.

Now any other field that deals with equilibria, and there are many, would find this so laughable you wouldn't last a day working in them. And these other fields invented equilibrium theory, so they know a helluva lot more about it than economists do, whose training in maths for example is usually so poor that they wouldn't even pass second-year exams in these other fields. When you look at the economic idea of equilibrium, it's literally the equivalent of a perpetual motion machine - an economy that sails magically along, self-regulating and always growing. People who actually know about equilibria on the other hand know that they're: provisional, i.e. they rarely last; need constant work to maintain themselves; and most importantly they usually collapse and you get no regular pattern back at all, no matter what you try. And if you do get it back, you usually have to do a huge amount of very complex and painful work to achieve it i.e. it doesn't just magically come back on its own.

Part of the problem is that we ignore history, the mythological housing and economic cycles have only happened since the 1960s, which is a tiny slice of time in historical terms. So everything the conventional folk like to say about economies and houses is actually only an historical anomaly, it's NOT how economies actually work. This is probably partly a generational thing, the generation from the 1960s onwards decided that their theory and experience was somehow completely divorced from the past, which could therefore be safely ignored. Maybe we were all so relieved after the last war that we couldn't wait to confine anything before that in time to the bin. (I've always wished somebody would do a thesis on the effect of the world wars on Western society, I suspect an enormous amount of what's gone in the past 50-odd years has its roots in the world wars.)

My own hypothesis is that we're so dependent now on housing in particular as a generator of wealth (look at how dependent State Governments here are on stamp duty, for example), that you're never going to convince the vast majority of economists and home owners and investors that they've been living a fantasy. In situations like that historically the only thing that brings about change is catastrophe, where people suddenly can't ignore something any longer because it's right in their face, threatening their survival or interests. Climate change might end up being a similar thing. It's a pity it has to come to that, but I wonder if at root this is just how history works, that people cling to their current ideas and behaviours until they're forced to change. Japan was where we are now in the early 1990s, and house prices there fell more than 70% between then and now, and their economy has never really recovered. They fell off their equilibrium point and tried desperately for 20 years to get back to it, all to no avail.

Keen is of course always described as a 'doomsayer', as if people just saying things for how they are is somehow negative or grumpy trait. He's actually a very funny, light-hearted guy, it's pathetic that you increasingly can't even be analytical without an assumption that you're a miserable bastard. As if reality should be just how we want it to be, rather than how it actually is. That Pollyanna mindset is what brings on the big bangs, the shocks when we suddenly realise how stupid we've been, at which point we generally turn on the people who warned us in the first place, as if it was all their doing.

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