Can we end boom and bust?

penguine

I recently suggested on another thread that we really need to end boom and bust this time this time around, because it's damaging to those individuals caught up in a property crash as well as to society as a whole. It seems to me that every decade a large number of those who bought at or near the height of the boom get shafted when prices fall and/or interest rates rise -- and since these are usually people in their 20s or 30s who have just stepped onto the property ladder and often have a young family, this has knock-on effects for their own children.

Another poster told me that you can't eliminate boom and bust, it's just "Mother Nature".

But I don't think it's "Mother Nature", it's human behaviour and as such we can take steps to eliminate it -- through regulation, first of all, but also by working to change attitudes towards renting and better education about managing one's own personal finances.

What do others think? Can boom and bust be eliminated? And if so, how?

Dan:_4

The 'Mother Nature' comment was me, and I stick by it.

You cannot suddenly force regulation on a free market.

penguine

Dan: wrote: »

The 'Mother Nature' comment was me, and I stick by it.

You cannot suddenly force regulation on a free market.

Yes, I know it was you.

I don't know why we can't re-impose regulation that previously seemed to work well -- the Glass-Steagall Act, for instance.

The argument for preserving Glass-Steagall (as written in 1987):

1. Conflicts of interest characterize the granting of credit -- lending -- and the use of credit -- investing -- by the same entity, which led to abuses that originally produced the Act.

2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.

3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

lostinrates

Beyond markets I believe its human nature.

Another example of how this effects markets, is fashion. ra-ra skirt anyone?

bluey890

Bad crop equals bust. Discovery of new oil reserves equals boom.
Can't regulate that...

Really2

I think no.

Demand, & supply etc all have variance on price then when that happens greed and fear kick in.

I can't see it any other way, it is capitalism it's make or break world but for the majority of sensible people boom and bust does not really make much difference.

Well I suppose the only exception to that is pensions but surely we know the risk on them anyway.

mother nature explanation on this is "survival" so i would say boom and bust is part of "modern mother nature"

penguine

bluey890 wrote: »

Bad crop equals bust. Discovery of new oil reserves equals boom.
Can't regulate that...

Perhaps I need to clarify. I meant to ask, can we end boom and bust in property markets? Given that people need a home to live in, and someone needs to own that property (either the occupiers, a landlord, or the state/local council), can and should we attempt to end boom and bust in property markets?

tomterm8

The only way to eliminate booms and bust in the housing market is to eliminate the housing market.

It is possible to restrict how violent a boom and bust is by regulating the amount of leverage... more leverage inevitably increases the volatility of the business cycle. The cost is that by reducing leverage, you also reduce the trend line of growth over the long term.

Cannon_Fodder

Too many greedy people in the world, that see an opportunity and try to make their million...

It would require a wholesale rethink of our markets/society.

Something a lot of people are unprepared to consider, when its only 2 years in 12-15 that a painful period occurs.

Like snow-plows. Not worth buying for the 1 in 10-20 year blizzard...

I would hope that sensible lending criteria are adopted and enforced, to hopefully slow the evolution of boom and bust, for longer than the time it takes to pay the bail-outs back...

On the Mortgages forum there are still people being offered 38 years mortgages...banks have learnt nothing, even though its still fresh in memory. Another 2-3 years and they will be back to 2006 lending practices if there is no legislation.

edit; seeing the property specific clarification, I would say that rent controls (to help both parties) and the regulation of BTL would be needed to take future heat out of the market.

Cat695

In a simple answer....No

For some strange reason we are happy to pay well over the odds for some right dumps.....I don't think there is any other product/item/thing on this earth that us normal (not stinking rich) working person/family, would pay well over the odds for......and I'd be glad to be shown wrong.

JayScottGreenspan

You can't end boom and bust completely. As long as you trade with nations making huge policy errors, you'll always be exposed. However, if the UK government had made the right choices this whole thing could have been a lot smoother for us.

Suppose Gordon Brown had eschewed short-termism and stuck to his mantra that letting house prices get out of control would put the economy at risk? What might have happened?
1) An investigation into the property bubble, from which might have followed:
2) Proper regulation of UK mortgages, LTV, self-cert, etc..
3) A bit of insight into the US mortgage market - regulation to protect our banks from a collapse there - limits on UK bank exposure?
4) Testing robustness of UK banks business models
5) Counter-cyclical capital requirements
6) Inclusion of house prices in BoE's remit
7) Counter-cyclical public sector surplus/deficits
etc etc...

There are lot of things they could have done better, to ease the magnitude of the cycle and make sure we end the rollercoaster a little better off than otherwise.

I'm not saying they should be expected to have done all of the above, but some of the above might have been nice.

Hindsight is 50:50, but people were calling for these measures during the heady days of the insanity of the boom. They were ignored, as was politically expedient. The government focussed purely on short-term political gains, regardless of long-term growth.