James Saft

UK houses, Occam’s razor and fraud

Jul 15, 2010 12:43 UTC

We may just possibly have an explanation for how British property prices have held up so well though the crisis: fraud.

One of the puzzles of the past year is the way in which British house prices have managed to recover in value despite still being extremely expensive relative to both British earnings and historical precedent. While house prices are down a bit more than 15 percent since their peak, on the Halifax measure, they have actually risen 6.3 percent in the past year, not the best vintage in British economic history.

Even more astounding, a British house now costs 4.76 times average earnings, down from the silly 5.85 times in early 2007 but still 20 percent above a historical average which itself is inflated by two bubble periods. How, you must wonder, do these people afford those houses?

Medieval British logician William of Occam taught that when considering competing explanations for a phenomenon a good rule of thumb is to choose the simplest, a rule called Occam’s razor. In this instance the simplest explanation is mortgage income fraud.

It all begins to make sense once you look at one statistic recently released by British regulator the Financial Services Authority: even as late as the first quarter of this year 43 percent of all mortgage loans were made without proper verification of the borrower’s income.
What’s more, a survey by the FSA found that 46 percent of mortgage-holding households in Britain either had no money left or a shortfall after they had forked over mortgage payments and living costs every month.

What the shipping market tells us about the air freight and export market

Jul 13, 2010 12:09 UTC

An interesting contrast is shaping up in global trade, where some indicators of the movement of raw materials are crashing even as exports from China and air traffic continue to show outstanding strength.

Depending on your reading of the data you could decide that the threat of a double-dip recession is overblown or, perhaps more simply, not a threat but a promise.

First, the good news, at least if you are exposed to Chinese exporters. China said last week that export sales rose a stunning 43.9 percent in June from the year before, taking the trade surplus to $20 billion, its highest in eight months.

Stress tests and cargo cults

Jul 8, 2010 21:14 UTC

How are European officials orchestrating the bank stress tests like Pacific islanders speaking into coconuts and waiting for cargo to drop from the skies?

They both make the elemental error at the heart of all cargo cults; they mistake necessity for sufficiency and hope that imitation and affect will make up for a lack of substance.

Most often associated with the south Pacific after World War II, cargo cults are religions whose practitioners try to use magic to produce the results of more powerful technologically sophisticated cultures.

In praise of default

Jul 6, 2010 12:17 UTC

Join us for a live chat today at 1 p.m. ET with James, who will be taking questions about his piece.

Call me a default-ista.

For a huge number of borrowers, be they U.S. homeowners or the sovereign nation of Greece, a default or radical rescheduling of debt might just be the best, most practicable option.

More to the point, default in many of these situations may be not just in the best interests of the debtor but of the economy as a whole.

Inflation or Deflation, why settle for just one?

Jul 1, 2010 16:48 UTC

If you are trying to decide whether to fret about inflation or deflation, don’t bother: you may just get both.

Yes, in the spirit of these austere times, it is a two for one offer; deflation comes first, followed by an almighty inflation after central banks press the “go nuclear” button on the quantitative easing machine.

It seems clear that, at least in the near term, the stars are aligned for deflation. Rather than lancing a massive debt bubble, policy-makers have added to it and the intense pressure to clean balance sheets has spread from corporations and households to nations.