We could have seen it coming

May 23rd, 2012 | By | Category: Ireland

We are surrounded by the great unknowing: politicians, economists and commentators who said that the economic crisis could not be foreseen, that no-one could have predicted that things would turn out the way they did. The subtext is, of course, that they could not be held responsible.

Listening to a suggestion that five years ago, at the time of the 2007  general election, our crisis could not have been foreseen prompted the desire to object that it could have been foreseen by anyone who wanted to think things through.

Six years ago, a year before the election, I wrote:

“It is a long time since I sat in an economics class.

I used to have problems with economics at times during my teenage years, not because of any inadequacy on the part of the teacher, but because I was too vain to admit that I needed to wear glasses to see the blackboard, so would sometimes misread figures and graphs that he wrote on the board. (When I hear economic policies described as ‘short-sighted’ by Government critics I wonder if this is due to vanity on the part of the finance minister).

Being out of touch with much of current economic thinking, I was delighted to discover a new theory in Saturday’s Financial Times.A column by Tony Jackson was an exposition of what he calls the “Greater Fool Theoryâ€?.Jackson writes that there is no rational explanation for why everything was at such high prices, shares, commodities, property, all sorts of exotic assets; there was no sensible explanation as to why prices had gone up so much.The income you might get from such investments was too low to explain the prices people were paying.

The only logical way of understanding what had happened was the Greater Fool Theory. The theory says that people buy things they know to be at foolish prices because they believe they can count on a greater fool to whom to sell their investment at a higher price.

The Greater Fool Theory explains the Dublin property market.Everyone knows it is overvalued, everyone knows that they are having to pay prices in excess of anything justified by their earnings or by comparisons elsewhere, but the market keeps going up, so they buy in the hope that there is a greater fool who will buy from them if they have to sell.

The Greater Fool Theory suggests that much of our economy and our society is founded on a deceit”.

There has been no reason to change that view.

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  1. I remember when I first came over to Ireland in 2006 that people were already pointing out the housing market was a giant bubble. Unfortunately, there were too many people with an interest in ignoring or denying that fact.

  2. The dogs on the street here knew it would all end in tears & they don’t have degrees in Economics or Politics!

  3. But at the time of the 2007 general election, who was saying there was a bubble?

  4. I was in high school in Ireland around 2005/2006, and I remember everybody was talking about ‘The Bubble’ and when it would burst. I started to read up on economics because of this, as well as simply to learn the cause of the remarkable and sudden Irish prosperity (I never took the ‘dismal science’ in school). Through that I learned about the pernicious role of the ECB and the euro system that had created the property bubble. On reading Austrian School views on money and Central Banking, I ended up buying gold and silver without my parents knowing, with all my savings and the money my family gave for college and such. It turned out I could have paid my way through college with the eventual markup!

    Now I have some gold, silver, other commodities, six months worth of food in the house and some firearms, waiting for the real crash. I’d encourage everyone else to do the same.

  5. I think that’s unduly pessimistic – look at Europe in 1945 and how it recovered.

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