Cowen told by DoF to dismiss property warning

Scofflaw

THE DEPARTMENT of Finance advised then tánaiste Brian Cowen in 2007 there was “nothing new” in warnings of an imminent property collapse.

The memo from a senior official in the department rejected the assertion from UCD economist Morgan Kelly of a possible 60 per cent fall in values over nine years. It also advised Mr Cowen, who was minister for finance at the time, that he should warn against overreacting to falling house prices.

The document, drawn up by economist John McCarthy in July 2007 and sent to the former taoiseach pointed out that the housing values remained above 2006 levels.

The memo was written in response to an article written by the UCD professor for the ESRI quarterly economic commentary for summer 2007, which made similar arguments to an article he wrote for The Irish Times earlier that year.

The two-page document is the only record held by the department that deals with a spate of warnings about a property bubble made by a small number of economists during 2006 and 2007, including Prof Kelly and Dr Alan Ahearne of NUI, Galway.

In the response to Prof Kelly’s article, the document states: “It should be noted that this paper is nothing new – a version of the paper [ The Irish Times article] received considerable media attention in recent months.”

It then summarises the argument made by the UCD economist.

“The analysis considers house price developments in OECD countries and finds a strong relationship between the size of the initial increase in prices and the subsequent fall. If the same relationship was to hold for Ireland, then real house prices would decline by 40 to 60 per cent over a period of eight to nine years. It is also argued that policy will not be able to address any decline in house prices; in particular, it is argued that stamp duty cuts will not change buyers’ . . . incentive to wait and see if prices fall further.”

Source: http://www.irishtimes.com/newspaper/ireland/2011/0622/1224299384702.html

It's not an iceberg...

cordially,
Scofflaw

Dannyboy83

I had always assumed Cowen was lying through his teeth when he claimed he was advised there was no Iceberg on the horizon.

I'm think even that would have been preferable to the above.
Intergalactic Facepalm.

Victor

Of course, the departments was also issuing its own warning, which were also routinely ignored, on the excuse that they weren't excalating.

Nijmegen

I've spoken to some people in different concerned departments who were witness to the internal thinking at the time.

Essentially, I believe it can be characterised as group think on the one hand, and ostracisation of those who did not conform.

This leads me to believe that the management culture surrounding those who should be providing the ministers advice is very poor.

The public and civil service has a duty to the citizen to remain an impartial and balanced facilitator of government decision making by providing the best advice at all times.

They, clearly, failed.

This guy, and the people who facilitated a world in which his advice could be given in that way with no balance (be they politicians, senior managers), bear responsibility for every person who has ended their life on the end of a rope in the garage because of the severity of our collapse.

I wonder if he's still on the public payroll in any way?

hinault

THE DEPARTMENT of Finance advised then tánaiste Brian Cowen in 2007 there was “nothing new” in warnings of an imminent property collapse.

The memo from a senior official in the department rejected the assertion from UCD economist Morgan Kelly of a possible 60 per cent fall in values over nine years. It also advised Mr Cowen, who was minister for finance at the time, that he should warn against overreacting to falling house prices.

The document, drawn up by economist John McCarthy in July 2007 and sent to the former taoiseach pointed out that the housing values remained above 2006 levels.

The memo was written in response to an article written by the UCD professor for the ESRI quarterly economic commentary for summer 2007, which made similar arguments to an article he wrote for The Irish Times earlier that year.

The two-page document is the only record held by the department that deals with a spate of warnings about a property bubble made by a small number of economists during 2006 and 2007, including Prof Kelly and Dr Alan Ahearne of NUI, Galway.

In the response to Prof Kelly’s article, the document states: “It should be noted that this paper is nothing new – a version of the paper [ The Irish Times article] received considerable media attention in recent months.”

It then summarises the argument made by the UCD economist.

“The analysis considers house price developments in OECD countries and finds a strong relationship between the size of the initial increase in prices and the subsequent fall. If the same relationship was to hold for Ireland, then real house prices would decline by 40 to 60 per cent over a period of eight to nine years. It is also argued that policy will not be able to address any decline in house prices; in particular, it is argued that stamp duty cuts will not change buyers’ . . . incentive to wait and see if prices fall further.”

The “speaking points” prepared for Mr Cowen in response to Prof Kelly’s article assert that people “must be careful that we do not overreact to the current easing from the very high levels of activity” in housing market.

“House prices have fallen back slightly in recent months,” states the next speaking point, before adding that “prices still remain about their levels this time last year”.

In the final speaking point, Prof Kelly’s analysis of a property bubble is rejected, pointing to other factors as the reasons behind the high property values.

It recommended that Mr Cowen say: “I share the view of most commentators that house prices increases in recent years have been underpinned by many factors including a strong economy, increases in employment and earnings, reductions in taxation and lower interest rates resulting from participation in monetary union.”

The then taoiseach Bertie Ahern was more explicit in his criticism of Prof Kelly’s articles during 2007: “Sitting on the sidelines, cribbing and moaning is a lost opportunity, I don’t know how people who engage in that don’t commit suicide.”

He apologised later that day for making the reference to suicide.

The FF-Green coalition introduced stamp duty reliefs for first-time buyers in 2007, but it failed to halt the slide in prices.

According to fresh analysis conducted by department economist Ronan Hickey – and published yesterday – house prices had fallen by 40 per cent from their 2006 peak by the fourth quarter of 2010.
http://www.irishtimes.com/newspaper/ireland/2011/0622/1224299384702.html



I've posted the full text of the article.

It is interesting that there is only one document in the DoF dealing with warnings about the forecasted property crash.

Count Dooku

DoF was not alone
Central Bank hid property crash forecast

THE Central Bank buried sensational data forecasting a crash in the property market months before the housing market began to crumble in early 2007.

Last week's report into the banking crisis by Central Bank boss Professor Patrick Honohan revealed that minutes from the bank's financial stability group had shown that predictions of a crash in the market were deliberately left out of a crucial report in 2006.

"It was decided in 2006 to exclude from the main text of the report data and references to a likely 15 per cent house price overvaluation that was contained in a themed research paper," according to Prof Honohan's report.

jmayo

Dannyboy83 wrote: »

I had always assumed Cowen was lying through his teeth when he claimed he was advised there was no Iceberg on the horizon.

I'm think even that would have been preferable to the above.
Intergalactic Facepalm.

So is that an excuse for cowen ?

I thought cowen was his own man who did things his way ?

How many people out there were saying it was a bubble and we were heading for trouble ?
Anyone with a bit of common sense and who were not vested interests were saying we had a bubble that would bust at some stage.

FFS some of us who are not bloody economists had been harping on about a massive construction bubble and loss of competitivesness.

All this proves is that not alone was the head of the Dept of Finance and head of the country an idiot, but so were some of his advisors in DOF.

No wonder we had a bank meltdown and no wonder we had the worse possible solution to it. :mad:

Atilathehun

jmayo wrote: »

So is that an excuse for cowen ?

I thought cowen was his own man who did things his way ?

How many people out there were saying it was a bubble and we were heading for trouble ?
Anyone with a bit of common sense and who were not vested interests were saying we had a bubble that would bust at some stage.

FFS some of us who are not bloody economists had been harping on about a massive construction bubble and loss of competitivesness.

All this proves is that not alone was the head of the Dept of Finance and head of the country an idiot, but so were some of his advisors in DOF.

No wonder we had a bank meltdown and no wonder we had the worse possible solution to it. :mad:

Didn't Garret FitzGerald, say that when he came into government, the thing which most struck him, was the poor standard and quality of advice and insight available to him from department managers and to level staff.

WTF, was done about that weakness in the intervening 20 years

Surely benchmarking, handled properly would have led to a big rise in standards of expertise and managment skills at the top of the civil service.

Total systems failure going back two decades and over numerous different governmants and administrations.

later12

In the parallell universe where the credit crunch did not happen and there has been nothing much out of the ordinary to report upon in terms of global markets and investment banking, can anybody tell me what happened to irish house prices, or disprove the possibility of a soft landing?

eigrod

Two different economists, Morgan Kelly & John McCarthy, offering different opinions....unfortunately Cowen picked the wrong one.

It's like getting two different tips from two different 'horse experts' for the same race and picking the wrong one (only the consequences are vastly different of course).

It's still happening of course, economists giving opinions that are at total opposites of the specturm.

Rubik.

Cowen's mantra like excuse all along was - he acted on the best available advise from unnamed advisers. How did this memo come to light, was it a FOI request or was it leaked? If leaked, in whose interest was it leaked?

Isn't there some law that means a Government Minister cannot be compelled to reveal whose advice he/she acted on - the Ministerial something or other? Cowen may well also have recieved other advice contrary to John MacCarthy's but chose to ignore it.

later12

eigrod wrote: »

It's still happening of course, economists giving opinions that are at total opposites of the specturm.

One thing that always intrgues me is the idea that an established economist should know what is going to happen to the economy. Nobody ever blames meteorologists for failing to predict bizarre weather patterns far in advance, because most people appreciate the dynamics of small occurrences significantly affecting the outcomes of seemingly unrelated events... in other words, the principle behind chaos theory which has as much significance in financial markets as it has in meteorology.

People will often point to economic predictions and say look, economist x told you this was going to happen...but for every economist x there is a w, y and z saying something different. Policymakers should be open to assenting and dissenting voices on economic matters, but policymakers cannot simply lay the blame at the feet of economics professionals when it all goes wrong.

It is the job of an economist who advises the Government, or advises the voter, to put forward theories and probabilities based on the evidence available to him, but governments and indeed voters should be aware that this advice itself is not sancrosanct.

dynamick

What use is a warning about a house price bubble in 2006 or 2007? The bubble had peaked at that stage. There was no easy way out by 2007.

Of more interest might be why between 1995-2007
- McWilliams was ignored
- so many incentives to buy housing were provided: affordable housing, mortgage interest relief, sec. 23
- why there was and still is no central bank limit on mortgage income multiples or 100% mortgages and no restriction on interest-only mortgages

Scofflaw

later10 wrote: »

In the parallell universe where the credit crunch did not happen and there has been nothing much out of the ordinary to report upon in terms of global markets and investment banking, can anybody tell me what happened to irish house prices, or disprove the possibility of a soft landing?

I don't think one can disprove the possibility of a soft landing - but one can point to the fact that soft landings from asset/property bubbles aren't observed, and, as far as I can see, never have been.

Once rising prices for an asset are fundamentally based on rising prices for the asset, it's almost impossible to envisage how you could have a soft landing. Not only that, but, unless there's an infinite supply of money, prices have to stop going up at some point, and the moment they do, they start to go down - no external shock is actually necessary.

What the government could claim is that they didn't think the bubble was a bubble - and that, instead, they believed that rising property prices were based on an (increasing) imbalance of demand and supply, where that demand was driven by a need for houses unrelated to their value as an asset.

There aren't many people who would consider such a claim credible, but the evidence suggests that it's what the government believed. That may seem bizarre, but economic orthodoxy in the form of the "efficient market hypothesis" says that asset bubbles can't exist, and that therefore price rises, even spectacular ones, are based on real change in the underlying fundamentals - and that is the current market-liberal doxology. The government's belief that "the fundamentals are sound" is therefore only a reflection of the economic paradigm which they accepted.

Admittedly, I don't find the "efficient market hypothesis" even slightly credible myself. It's frankly bunkum - but it has plenty of believers, amongst whom we should count the late and unlamented government.

cordially,
Scofflaw

later12

Scofflaw wrote: »

I don't think one can disprove the possibility of a soft landing - but one can point to the fact that soft landings from asset/property bubbles aren't observed, and, as far as I can see, never have been.

Once you are on top of a tigers back and the tiger is running away with you, how do you dismount? Do you jump off, strangle the tiger, or plead to the better part of his humanity?

Answer: steer the tiger into a herd of livestock. In dismounting a tiger economy, you ideally lessen the impact of what appears to the the inevitable (death by tiger mauls/falling house prices) by driving an economy into a place where survival is most likely. So a Government might try to restrain unit labout costs whilst indeed, deflating the housing bubble, but whilst also accelerating exports. After all, in most cases, housing busts are macroeconomically uncomfortable but not disastrous (M. Kelly, 2006)

Sure, there will be a slowdown as the focus shifts from one asset to another, but the financial deceleration would possibly be lessened by increased inward investment and improving exports. Similar to what is happening now, in other words, but hopefully without having to nationalise the banking system - remember, in our hypothetical situation, the interbank market is as healthy as ever.

What the government could claim is that they didn't think the bubble was a bubble

It would be a little incredible, but yes. But then again, going back to your question of whether there has ever been a soft landing in response to an asset price bubble, yes, I think there has. But the problem is, because there were soft landings in metals, commodities, and shares over various time periods, people just argue that a real bubble didnt exist in the first place since these people interpret economic bubbles and soft landings as being mututally exclusive of one another.

Anyway, as I said, it is not necessarily an issue of asset prices remaining at their unsustainable levels, but whether prices might have fallen slowly, their fall being carried down by increasing productivity elsewhere in the economy.

Sand

Later10 - Irish banks difficulties had little or nothing to do with a credit crunch. It was not "Lehman whut dun it". Knowing what we know about lending standards (NAMA being apparently appalled by the paperwork) there was never going to be a soft landing.

Regarding the DoF - well, it shows the DoF report on the DoFs incompetence in its true light. They didnt have a breeze of what was going on. And even more interestingly, it shows the way the DoF tells the Minister what to say and what line they should take. Yet, civil servants will then refuse to accept any responsibility. It underlines the need for decisive changes in our civil service.

later12

Sand wrote: »

Later10 - Irish banks difficulties had little or nothing to do with a credit crunch. It was not "Lehman whut dun it".

Pointing out that the international financial crisis aggravated the Irish crisis is not the same thing as saying that it was the cause.

Lehman's certainly is relevant, but probably as relevant to governmental policy on letting banks fail as it was to banking industries in themselves. I wouldn't say that the credit crunch, in a broader sense, had nothing to do with the Irish crisis.

Sand

@Later10

Pointing out that the international financial crisis aggravated the Irish crisis is not the same thing as saying that it was the cause.

In the parallell universe where the credit crunch did not happen and there has been nothing much out of the ordinary to report upon in terms of global markets and investment banking, can anybody tell me what happened to irish house prices, or disprove the possibility of a soft landing?

Describe a problem worthy of the name of "the Irish crisis" where, somehow, a "soft landing" in the Irish property market had been achieved.

later12

Sand wrote: »

Describe a problem worthy of the name of "the Irish crisis" where, somehow, a "soft landing" in the Irish property market had been achieved.

If during almost full employment and record breaking good times, a government had deflated the housing industry whilst manoeuvring an economic shift into industrial and agricultural exports, thereby parachuting income losses with gains in exports, you would have still have had many thousands of people in negative equity and going on Joe Duffy talking about the negative equity crisis*

*it being the worst possible thing the government could have ever done and how it was all so outrageous and nothing could ever possibly be as disgraceful... just as it is now with the bank guarantee having been the worst possible thing the government could have ever done and how it is all so outrageous and nothing could ever possibly be as disgraceful

tara73

later10 wrote: »

Once you are on top of a tigers back and the tiger is running away with you, how do you dismount? .

that's where the problem is: why go on a tigers back? never go on a tigers back!
one should know it's completely dangerous and could only end in a disaster...

Scofflaw

later10 wrote: »

Once you are on top of a tigers back and the tiger is running away with you, how do you dismount? Do you jump off, strangle the tiger, or plead to the better part of his humanity?

Answer: steer the tiger into a herd of livestock. In dismounting a tiger economy, you ideally lessen the impact of what appears to the the inevitable (death by tiger mauls/falling house prices) by driving an economy into a place where survival is most likely. So a Government might try to restrain unit labout costs whilst indeed, deflating the housing bubble, but whilst also accelerating exports. After all, in most cases, housing busts are macroeconomically uncomfortable but not disastrous (M. Kelly, 2006)

Sure, there will be a slowdown as the focus shifts from one asset to another, but the financial deceleration would possibly be lessened by increased inward investment and improving exports. Similar to what is happening now, in other words, but hopefully without having to nationalise the banking system - remember, in our hypothetical situation, the interbank market is as healthy as ever.


It would be a little incredible, but yes. But then again, going back to your question of whether there has ever been a soft landing in response to an asset price bubble, yes, I think there has. But the problem is, because there were soft landings in metals, commodities, and shares over various time periods, people just argue that a real bubble didnt exist in the first place since these people interpret economic bubbles and soft landings as being mututally exclusive of one another.

Anyway, as I said, it is not necessarily an issue of asset prices remaining at their unsustainable levels, but whether prices might have fallen slowly, their fall being carried down by increasing productivity elsewhere in the economy.

That's very much the point about a bubble - it's not simply a rise in prices, and it is incompatible with a soft landing, because it's a situation where the asset prices are driven by nothing but people's belief they'll continue rising. I'm not sure you're thinking of the same phenomenon when you refer to there having been soft landings in metals etc - I think you're thinking of periods of unsustainably high prices driven by external factors.

Gold, for example, may or may not currently be in a bubble - there's a lot of exactly the kind of currency-related uncertainty that gold is traditionally a hedge against, and concerns about the possibility of a sudden slump in gold prices have been present all along, both of which suggest that gold is not in fact in a bubble (although there may well be a certain amount of fizz in the market). Gold prices, then, should see a slow deflation whenever uncertainty reduces...but that will not be a 'soft landing', because it won't be from a bubble.

That is exactly the mistake I think the government may have made - believing that house prices, while unsustainably high, were still driven by fundamentals, and that therefore when the economy slowed, house prices would deflate gently, in line with a slow lowering of the external demand that drove the prices high.

Unfortunately, there's always room to make such an argument, because economics is sufficiently imprecise to fail qualification as a science, and sufficiently doctrinally led to nearly qualify as a religion, while being a good deal more complex than either. And, also unfortunately, one of the main ways of telling a bubble from a period of externally-driven high prices is the fact that it doesn't deflate slowly, because the rise in prices is driven by the expectation of further rises in prices, and once prices reverse or even stabilise, that expectation immediately disappears, leaving only the task of getting out of the asset as swiftly as possible while prices are still high - which means the price of the asset is then driven downwards by the expectation of falling prices.

So one can't necessarily tell a bubble when one is in one - but I think there are various signs. In a housing market, 'flipping' is one of the more obvious, but another is a pervasive belief that there has been a shift in the fundamentals that justifies an entirely new valuation of the asset, even though nobody can tell you what it is - and I think both of those were characteristic of the Irish property market.

cordially,
Scofflaw

Nijmegen

I think, Scofflaw, that your post highlights the need to take data from various sources: Economic indicators can tell you 'there may be a bubble'. How can you tell?

Sit down and interview a broad sample of people about the housing market. People who are flipping homes, people investing for rent, people trying to buy, sell.

Ascertain what their motivations are. Take that colour sheet and put it over your economic data. Come to a conclusion.

The trouble is when group think takes over. There should be a 'Contrarian Economics Section' in the DoF that, when there's a concensus around what is happening in the economy, works to prove the opposite.

ART6

In (I think) around 2007 my son and daughter in law were in a small rented house for which they paid an exorbitant rent. They were both is relatively well-paying jobs, and being alarmed at the rising house prices they decided that they had better get themselves a mortgage and buy before it became too late. My advice to them was first look at what happened in the UK in the early 1990s, when house prices had risen to the point where they became unaffordable to first time buyers. The bubble collapsed.

I then suggested that they consider a risk analysis based on the premise that prices would sooner or later become unaffordable, when the bubble would either stabilise or collapse. If the former occurred they would be in no worse a position than they were then. If the latter then they could easily end up being financially crippled for life. They took that advice and backed off, and they are now negotiating for a property that is much better than they could have afforded then and is on the market for 40% of it's original price.

I am no economist, but I can give some consideration to what has happened elsewhere and try to work out why. I can switch on my limited intelligence and ask myself if a market trend is sustainable, and what would be the consequences for me if it wasn't.

So the question I would ask of the DoF and Cowen is did they ever analyse the UK experience to see if there were any parallels to the Irish situation? Did they ever do a financial risk analysis to examine the consequences of a burst bubble? It would appear that the answer to both questions is "No." which, to me, says little for the competence of the lot of them! It's called "due diligence" lads!

jmayo

later10 wrote: »

In the parallell universe where the credit crunch did not happen and there has been nothing much out of the ordinary to report upon in terms of global markets and investment banking, can anybody tell me what happened to irish house prices, or disprove the possibility of a soft landing?

As others have said, even without the credit crunch brought on by global financial mismanagement, our banks as has become evident were engaged in wholesale reckless lending.
One bank in particular didn't appear to consider due diligence on some huge loans and just went on track record of individuals.
Now sooner or later this would have huge implications when construction had really slowed.

IMHO the construciton industry had slowed before the credit crunch, we had reached a point where supply had started outstripping demand and prices realistically could not get any higher.

Sentiment I believe would have changed to not buying, indeed savy investors had long left Ireland and were concentrating overseas and this would have continued.

Even if the grand projects of bernie mac, carroll, ronan/barrett, the kellys had reached fruition they would not be selling as before, property prices would have to be chopped.
There was already a glut of retail space and office space that was unfilled throughout the country.
We had already had enough hotels and didn't need anymore.
This all would have knock on affect on ordinary sellers.

The banks would suddenly be writing off huge debts and this would have knock on affect on lending.

Construction slowdown would have resulted in job losses, tightening of lending by banks/institutions still capable of lending all leading to house price drops.
The rate of drops might not be as fast as we have had, but they would be no soft landing.
I am presuming by soft landing you mean zero growth or slight price drops ?

Actually we have not had a complete crash due to the likes of NAMA and the government forcing banks to not chase those in arrears.
We have been in a limbo reality.

eigrod wrote: »

Two different economists, Morgan Kelly & John McCarthy, offering different opinions....unfortunately Cowen picked the wrong one.

Eh there were more economists on both sides of the argument.
As others have said one should look at the background of who is making predictions.
First question I would assume someone should ask is what is their vested interest in having their prediction come true.
For a start who pays them.

later10 wrote: »

One thing that always intrgues me is the idea that an established economist should know what is going to happen to the economy. Nobody ever blames meteorologists for failing to predict bizarre weather patterns far in advance, because most people appreciate the dynamics of small occurrences significantly affecting the outcomes of seemingly unrelated events... in other words, the principle behind chaos theory which has as much significance in financial markets as it has in meteorology.

Ahh the poor misunderstood economists.

The problem with some economists is that they got carried away, started believing their own waffle and left their common sense at home.

Even a gobdaw knew it was a bad idea to replace manufacturing/service somewhat sustainable possibly export earning industry/jobs with short term unsustainable constrution industry/jobs where no export, only imports were achieved.
Then add in fact the construction industry, together with the massive reatil industry was fueld by cheap credit.

They were as stupid as the bankers who believed that risk had been eliminated.

later10 wrote: »

...
Policymakers should be open to assenting and dissenting voices on economic matters, but policymakers cannot simply lay the blame at the feet of economics professionals when it all goes wrong.

What you don't like the "we have to hang someone so we will hang you guys" mindset.
I charge you are a vested interest in this debate.

ART6

jmayo wrote: »

A

IMHO the construciton industry had slowed before the credit crunch, we had reached a point where supply had started outstripping demand and prices realistically could not get any higher.

Sentiment I believe would have changed to not buying, indeed savy investors had long left Ireland and were concentrating overseas and this would have continued.

Even if the grand projects of bernie mac, carroll, ronan/barrett, the kellys had reached fruition they would not be selling as before, property prices would have to be chopped.
There was already a glut of retail space and office space that was unfilled throughout the country.
We had already had enough hotels and didn't need anymore.
This all would have knock on affect on ordinary sellers.

Good post! Here in Waterford a large new shopping centre was built on the ring road several years ago now, at a time when the city needed even more retail space like it needed a hole in the head. The dozens of shops in the place were never occupied and still aren't, and the new road that was put in to access them is closed off with concrete blocks. Presumably that is now yet another dead duck that is costing the taxpayer big money as they pick up the bank loan that funded it. Due diligence indeed!

later12

Scofflaw wrote: »

That's very much the point about a bubble - it's not simply a rise in prices, and it is incompatible with a soft landing, because it's a situation where the asset prices are driven by nothing but people's belief they'll continue rising.

Okay I'm writing this on a device so bear with me on errors, paragraphs, etc. First of all, a bubble is not a situation where prices ''are driven by nothing but popular belief that prices will continue to rise''. That statement is at best incomplete, but possibly quite incorrect. There are entire books written on speculative mania and price bubbles, entire careers built out of researching them, and I dont think your synopsis quite does the literature justice.

There was an interesting analysis carried out on the stock market bubble in the end of the last century, which continued to grow despite the cynicism of both indvidual and institutional market investors of market return (Fisher, 2002). There has also been research to show that bubbles can appear when speculation is not possible. How does that fit in with your statement that "[bubbles] are driven by nothing but popular belief that prices will continue to rise''?

Also, the greater fools theory -- or at least some variation of the rational expectations phenomenon that you appear to be talking about -- is only one possible origin of an economic bubble.

So there also appears to be some confusion here as regards what a bubble actually is. Lets use the simplest explanation, that an asset bubble is a price trend that is unjustified by the fundamentals of that asset.

I think that a part of the problem is that you seem to be defining a bubble in some very strict personal term which, I'm sure you must appreciate, is not a unanimous interpretation. If you are going to persist in using a very narrow interpretation which does not take account of others' definitions of what a bubble is, or interpret a bubble as something that only existed if it was followed by a severe crash, then nobody is really in a position to debate with you.

It would be the same if I walked onto a football pitch and said "all goals against my side are invalid, the ball is my ball and only I can kick it, now lets play". Obviously the other guys would be wasting their time engaging with that.

Lets now return to the conjunction you employ in the above statement:
You suggest that economic bubble is not incompatible with a soft landing "as" it is the belief that prices will continue to rise. As we have seen that is not the case. Even if it were, how would belief in rising prices alone make a soft landing impossible? Who is to say that a price cannot fall back modestly? Soft landings are covered in Jonung (Building the Euro) where he finds four soft landings in residential construction booms - Holland 1978, Belgium 1990, UK 1998, Finland 2000. There the decline in residential investment was <⅓ of the increase that occurred during the residential property bubble. He counts 20 of 49 instances of gradual declines, where it takes 3 years to hit the trough, which could also be called a soft landing. But I suspect you are using another interpretation which is that these were never bubbles anyway since the landing was soft - therefore nobody can argue with you.

I'm not sure you're thinking of the same phenomenon when you refer to there having been soft landings in metals etc - I think you're thinking of periods of unsustainably high prices driven by external factors.

But external factors can, and do, influence economic bubbles. Irish house prices were aided by external factors. So are commodities. I'm not sure where you can be going with this.

Gold, for example, may or may not currently be in a bubble - there's a lot of exactly the kind of currency-related uncertainty that gold is traditionally a hedge against, and concerns about the possibility of a sudden slump in gold prices have been present all along, both of which suggest that gold is not in fact in a bubble (although there may well be a certain amount of fizz in the market). Gold prices, then, should see a slow deflation whenever uncertainty reduces...but that will not be a 'soft landing', because it won't be from a bubble.

I am a little amazed by what I am reading here, mainly because of the assured certainty with which you talk about gold. I wonder why investment banks spend so much money researching gold risk when the answer is available here on boards.ie.

amacca

hinault wrote: »

The two-page document is the only record held by the department that deals with a spate of warnings about a property bubble
It is interesting that there is only one document in the DoF dealing with warnings about the forecasted property crash.

yeah...very strange that one all right

some posters would have you believe that these advisors/officials/flunkies etc were stupid or didn't know what was happening - and perhaps some of them were...however

I reckon of you were to check what sort of property transactions were made (by dof officials/ those in the know) just before the "soft landing" period and just after you wouldn't think they were quite so stupid.

I'd be willing to bet that a lot suspected the worst/believed/knew what was likely to happen and kept it going long enough to safeguard themselves + knew that even if they did object it wouldn't do much good, the thing was just too much of a run away train with cheerleaders coming from every section of the herd that they might as well ride it to oblivion and take whatever personal safeguards they could.

I'm sorry but I just dont buy this idiots in the DOF / not qualified malarkey being bandied about - a great many of them were more than intelligent enough to know the end result of what was happening around 07 (qualification in economics or not).......if you had your head screwed on and were of the older generation you didnt have to be qualified to know something wasn't right then - my father (intelligent but no economist) was aghast at the amounts I would have had ro borrow for a v.modest house back then - most people in my area (above a certain age at least) just thought that property prices were insane....I'm fairly sure there were plenty of older people in the DOF then - old enough to know what excessive borrowing and overpriced houses were?