I spent this morning doing an interview for a property programme. We talked about all the usual things how subprime happened, how securitisation changed the way the market worked, how the rules of the mortgage game changed after 2000, and so on.
But the real question the interviewer wanted answered was: "How come no one saw it coming?"
My answer was that a great many people did. It wouldn't be true to say that any of us knew exactly how the crisis would play out. We didn't. But there was plenty of evidence that a nasty credit bubble was building years before it popped.
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The participants in the MoneyWeek roundtable had been banging on about it for years. I remember one roundtable in early 2007 where we explicitly discussed the subprime market: a hedge fund manager at the table told us exactly what he expected to happen and expressed his amazement at how so many people were still investing in subprime assets when they knew perfectly well they were set to blow.
But if so many people knew, asked my interviewer, then why did the government do nothing about it? The answer to this bit I think, is that once the bubble existed the authorities could see no way out of it. The obvious answers bring interest rates up to normal levels or introduce regulations that would stop the issuance of mortgages to non-prime borrowers would both have kicked off recessions, given the debt-laden nature of the public and private sectors. That just wasn't politically acceptable. So they did nothing.
I bring this up now because in the course of conversations about house prices these days, the main defence used by the bulls is still that the government in the UK "won't let" house prices fall. But how can they not? This isn't about the government. It is about the credit cycle.
We had the boom which it seems the government was unable to control. And now we have the bust, a period in which the supply of credit is very tight, and the price of what credit is available is relatively high. And hence one in which mortgage lending is going to stay low.
If we should have learnt anything over the last ten years it is surely that the price of a house is not defined by how many people would fancy living in it, but by how many people can raise the finance to buy it. I simply don't see how the government can change that basic dynamic.
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