While the media and many leveraged investors certainly wouldn’t admit it, there is nothing more cleansing to an economy than a recession. Consider some of the financial myths which have perpetuated as near truths as the debt-funded boom, which began in 2002 has been unwound this year in brutal fashion.

Myth #1: Property never goes down.

For more than a decade, a generation of investors have believed the notion that the value of property, be it residential or commercial, doesn’t go down. How quickly property and asset investors forgot the lessons of 1991. Already, property in Western Sydney has dropped substantially from its highs. Now, with the stock market down by around 45 percent from its November 2007 peak, corporate activity drying up and banks lending on more sensible LVRs, fashionable, Melbourne and Sydney eastern suburbs (and Perth in general) are starting to feel the pinch. Some agents claim that high-end Sydney property is off 25 percent in recent months. Clearance rates in Melbourne have dropped from 82 percent to less than 50 percent.

The US and European property markets have been even harder hit. In some parts of California and Florida, prices are down 40 percent. Worryingly, on some measures (such as value — disposable income), US and European property appeared less overvalued than Australian property.

Like any asset, property is subject to market forces which can temporarily lead to a price which is above its intrinsic value, especially when aided by enormous leverage and tax imbalances such as negative gearing. Many properties in exclusives suburbs like Hawthorn or Vaucluse trade on implicit yields of less than two percent. With little or negative capital growth, that it equivalent to buying a share on a PE of 50. If Centro, Becton, Mirvac, Valad, GPT, Lend Lease, Babcock & Brown Communities, FKP and Abacus are any guide, property investment does not defy gravity indefinitely.

Myth 2#: Metal prices will remain stronger, forever

Led by the likes of Oxiana’s former CEO, Owen Hegarty and stockbrokers such as Charlie Aitken, Australia experienced a mining boom not seen since before Poseidon was salty. Under the guise of China’s insationable demand and the principle of “decoupling”, base metal prices and small miners rose dramatically. Nickel rose from around US$5.00lb in 2003 to almost US$25.00lb last March (it then fell to US$4.20lb in late October). Zinc, another key ingredient in steel rose from US$0.50lb to more than US$2.00lb before falling back to US$0.50lb.

Many small mining companies rode the mining boom earnestly, raising billions from investors in floats and placements premised on over-inflated valuations. Before backing in mining companies, investors should take the time to read Trevor Sykes’ classic prose, The Money Miners. Sadly, in some cases, there has been a grain of truth behind the cliché a mining executive is little more than a liar standing next to a hole.

Myth #3: Alan Greenspan was a reputable economist

After the Dot.Com bubble and September 11, former Chairman of the US Federal Reserve, Alan Greenspan, drastically reduced interest rates until they were, in real terms, below zero. This had the direct effect of spurring a real estate and credit boom in the US. When coupled with lax regulation of financial derivatives (also encouraged by Greenspan under the premise of “spreading around the risk”) and aided by incompetent ratings agencies, the effect of the inevitable bust was spread throughout the world.

While no one specific person was solely responsible for the US’ economic malaise, few contributed more than Greenspan, who proved that money may be almost free, but it doesn’t come cheap.

Myth #4: People who work on Wall Street were the smartest guys in the room

An entire generation has grown up believing that Wall Street investment bankers, hedge fund and private equity managers were smarter than everyone else. Instead of joining industry, legal firms or practice medicine, America’s top graduates from Ivy League colleges rushed to join investment banks and private equity firms. While on an individual basis, many bankers and money managers are highly intelligent, many have realized that the investment sector is little more than a shrewd sales pitch. Even the smartest guys in the room, the hedge fund guys, have been exposed.

Bloomberg reported that up to a third of all hedge funds are expected to close their doors. Last week, it was announced that Fairfield Greenwich, a hedge fund-of-fund manager lost US7.5 billion of client’s money investing in Bernie Madoff’s Ponzi scheme. Finally, investors are frantically redeeming funds, not necessarily due to performance, but also after realizing that paying “2 and 20” may not represent fantastic value for money.

Myth #5: You can make money buying and selling stuff

When debt is cheap and asset prices appreciating, you can acquire an asset, hold it for a while and inevitably sell it for more than what you paid. That strategy worked well for the likes of MFS, Babcock & Brown, Allco, City Pacific, GPT and even ABC Learning Centers to the point where being an asset originator and financial engineer was a respectable profession. The great de-leveraging has quickly shed light on such dubious business model which profit through skimming investors’ funds, rather than by creating value. Companies like IBM, Microsoft, Google, BHP or Woolworths make money providing a service or selling goods. They grow their earnings through technological improvements coupled with an expanding customer base.

The paper-shufflers do no such thing, growing earnings through a Ponzi scheme of sorts. Companies like Babcock and MFS profited by charging investors fees when they bought assets, sold the asset to a related party, held the asset on trust and sold the asset. It took a while but eventually, investors realized that the only creative thought going on at MFS and Babcock was in trying to devise new fees.

Myth #6: You need to pay executives millions to ensure good performance

During the boom, as profits rocketed and share prices inflated (largely due to burgeoning multiples), executive remuneration rose even more. According to a study conducted by RiskMetrics, between 2001 and 2007, the average short-term cash bonus rose from $768,125 to $2.18 million per year. In addition, long-term incentives leapt by 44 percent in 2007 alone. Executives like Phil Green, Alan Moss, Rupert Murdoch and John Alexander earned tens of millions of dollars, despite shareholders losing a large proportion of their investments. It appears that the alleged executive brilliance was a mirage, fuelled by debt and irrational exuberance of investors who unwittingly pushed share prices (and earnings multiples) higher, despite the intrinsic value of those companies falling.

Myth #7: Kevin Rudd and the Australian Labor Party are responsible economic managers

While John Howard (and for the briefest of moments, Brendan Nelson) did his best to destroy the credibility of the Liberal party as economic managers, Kevin Rudd has proved that no one does ill-conceived fiscal regulations than the comrades at the Federal ALP. Just when Kevin and Wayne looked to be responsible, taxing alcopops and luxury cars, they fell for that old Irish joke of providing unlimited guarantees on all bank deposits. You don’t need to be Adam Smith to realize that when you provide a costless, unlimited guarantee on one asset class, it may have certain side-effects on other asset-classes.

Rudd also thought it would be a good idea to squander half the ostensible budget surplus on political bribes to “working families” and pensioners to take it down to the local pokies. Not to mention the First Home Buyer’s grant, which doesn’t actually help first home buyers, but is great for millionaires trying to sell their third investment property. As it turns out, the surplus wasn’t really a surplus, and Rudd has blown $10 billion on politically targeted handouts, rather than value-creating investment.

To paraphrase Bill Bonner, in economic terms, the Liberals tend to be a disaster by accident. Labor are a disaster by choice.