Private equity, derivatives, bubbles and busts

Will the same happen in London and the UK?

There are similarities. The bubble will certainly deflate - and probably very fast, once it starts. The impact will be lasting but how wide will the implications be? How many people will it hit - hit severely?

Interestingly, the IHT report says "Driven by a surge in bonuses among London's financial traders, and an influx of wealthy foreigners, prices in central London have doubled and, in some cases, tripled over the last ten years while the market in New York has cooled."

So the property bubble in London is not fuelled in the same way as in the United States, where the main propellants have been loose credit, refinancing and extraction of equity.

In London, the propellant for one bubble - the housing bubble - seems to have been derived, significantly, from another bubble - the finance trading, derivatives, hedge-fund and private-equity bubble(s). So one might reasonably postulate that the housing boom in London and, at least to some extent, further afield in the United Kingdom - in the country-house market, for example - will go on as long as the finance-capitalism bubble keeps inflating or at least does not suffer from a significant bout of uncontainable flatulence.

Is the finance-capitalist boom based on those largely speculative devices of private equity, hedge funds, derivatives and the rest sustainable indefinitely?

In principle - not to claim any particular insights but as a matter of reasonable prediction - one has to say that it cannot. The only question is when severe flatulence will set in and the bubble - to be crude - will fart its way into the sorry records of economic and financial history.

So then presumably, if the IHT report is to be believed, much of the air will be emitted from the property bubble too. The "wealthy foreigners" who have been helping to inflate the property market will also in large part have derived the means to join in the property scramble by making money in the finance markets spread around the globe.

Thus it looks as though we could be facing the prospect that there will be a back and forth, repercussive effect from one bubble to another and, in a relatively short space of time, months rather than years. Those people who get those lovely, massive bonuses will presumably not be getting them any more. They have had it so good - and represent, I imagine, such a relatively small percentage of the population - that they will get little popular sympathy, even if and when they start jumping out of upper-storey windows.

But those who depend on the property market in a variety of ways will be hard hit too. More generally the City is likely to suffer terribly if the private-equity, derivatives and other markets collapse. One imagines that the FTSE will suffer catastrophically along with it.

What will happen to the UK economy as a whole? I'm not sure how far the rest of the economy - the non-financial corporate and general, traditional business economy - is able to stand up by itself. My impression is that it is the financial sector - the highly speculative sector - that has provided much if not most of the dynamism of the British economy for a long time now - perhaps ever since the Big Bang.

When it collapses in a heap, the devastation is likely to hit everything and everyone within the national borders - and have its impact beyond, within the Eurozone, within the larger EU and more widely within the global economy.