If you’re looking for a book to read on your long-awaited beach holiday, or have exhausted Netflix’s options on the film front, may I recommend The Big Short.
The non-fiction tome, from the pen of former Wall Street bond broker Michael Lewis, tells of the events that precipitated the ‘Great Recession’ in the United States from 2007-09, identifying one of the root causes and those that were able to profit financially from it.
The film, an adaptation of the book, stars Christian Bale, Steve Carell and Ryan Gosling and won Oscars for its fast-paced look at the story which – in hindsight – seems pretty obvious as a path to disaster.
Essentially, there was a major property boom in the US in the early 2000s, and so swept away by the dopamine rush of making money were banks, lenders and other financial institutions, they came up with a new type of lending scheme.
Sub-prime mortgages are, in the Hollywood movie, explained by Margot Robbie in a bubble bath, and while I can’t replicate her graceful pizazz the bottom line is that these were loans given to high-risk individuals, i.e. those with bad credit or likely to default, in order to help them onto the property ladder.
The problem is that many homeowners were unable to keep up with their payments, leading to bad debt and millions being wiped off the value of these assets.
Simultaneously, private investors and hedge fund managers were shorting stocks in the banks and lenders – this basically means they were betting on the share price of these firms plummeting (as they did).
This ‘big short’ was a major contributor to America’s worst recession in decades, and yet the conditions that enabled it to happen feel almost a little too close to home in the UK in 2022.
As we know, the pandemic has – for a long time now – led to the UK property market enjoying a period of incredible growth and strength.
The scrapping of stamp duty payments assisted a number of buyers acquiring their first/next house, and with property values so high many decided to take a chance on upscaling by taking out a new (and bigger) mortgage.
But when economic conditions take a downward turn, that’s when property owners that have gone to the edge in terms of what they can feasibly afford each month are stretched to the absolute limit – a set-up not dissimilar to that of The Big Short.
The UK is now facing a cost of living ‘crisis’ – a word that is routinely being used to describe the situation by the media – with soaring energy bills, a national insurance increase and inflation all contributing the problem.
The main concern is that these aren’t issues that can be easily ironed out by governmental spending or Bank of England controls….meaning that the crisis, for want of a better word, has no measures in place to stymy it.
When some low-income families are having to choose between having the heating on or eating dinner, the risk is that they too might default on their mortgage – which may or may not have gone up in monthly cost since the start of the property boom.
The economy is flatlining too as people have less money to spend as consumers, and Michael Burry – the real-life ‘star’ of The Big Short – has warned that stock market prices are so over-valued that Wall Street could implode….leading to mass redundancies, major financial institutions failing and government bail-outs becoming commonplace.
It’s all cheery stuff….
You may have heard the notion of ‘Hobson’s Choice’ before – that is, an illusion of free choice when in fact only one option is available.
A post on the Official Monetary and Financial Institutions Forum has claimed that a UK recession is very much a Hobson’s Choice – it’s an inevitability, it’s just when, not if, financiers start to call it as such.
With regards to the property market, the outstanding value or all residential mortgages had risen nearly 5% in 2021, and a staggering 17.5% rise in ‘gross mortgage advances’ – basically, the amount being lent – for the same period.
Re-mortgaging also reached a two-year high in 2021, and the concern is that too many have reached too high with their property aspirations – and they, not the banks, will be the ones left shattered if an economic recession follows due to the cost of living crisis.
At the end of The Big Short, those speculators that gambled on financial institutions collapsing ‘won’, making billions of dollars. But with millions of lives ruined, they weren’t in the mood to celebrate.