An informed review by political economist Ed Dodson of Tim Howard’s new book about the collapse of Fannie Mae. The senior people understood that they were in trouble due to politics and ideology, and they saw the collapse of underwriting standards, but most had no interest in addressing the fundamental cause.
Finally I’ve stumbled over a simple explanation by an Austrian of what causes housing bubbles. According to data cited in Mark Thornton’s article, Oslo’s housing prices continue to rise even as other places have slowed or tumbled.
What explains the large increase in prices is an increase in the demand for housing. Part of this increased demand takes the form of people simply being unwilling to put homes on the market in the face of persistently rising home prices….[Also] Oslo, the capital city with almost 1/5th of the nation’s population, has land-use restrictions that keep much land unavailable for construction. This is the same fundamental case that was given for the severe housing bubble in Las Vegas: the government prevented land from being developed. Housing prices in Oslo, however, have not risen much more than the average increase. The largest increases have occurred in areas associated with the oil and oil exploration business…. Norway’s rosy economy is not the result of good policy, but of oil revenues that subsidize their socialist government.
Another factor is Norway’s central bank holding interest rates at an “artificial” low, because they don’t want their krone to appreciate too much (it is viewed as a “safe” currency in a world of depreciating euros, dollars, yen, etc). Low interest rates of course drive housing prices higher.
If the central bank did act and raised interest rates and simply allowed their currency to float, the krone would appreciate and Norwegian savers would get a windfall as the value of their savings increased. This would encourage them to work more, save more, and become wealthy. Every krone would buy more goods from around the world and would buy even more goods tomorrow than today. This appreciation would indeed hurt exporters, such as oil and cheese exporters, but most importantly it would stop and reverse the housing bubble before things get even worse and more distorted.
So, if you were to “get a windfall as the value of [your] savings increased,” would you “work more and save more?” Or would you be inclined to work less, at least for money, and maybe spend some of the windfall?
Thornton doesn’t tell us much about the incomes of ordinary Norwegian working folks. If exports drop, might unemployment increase? How, if at all, does Norway’s sovereign wealth fund contribute to incomes? What proportion of personal income in Norway comprises economic rent, and how is it distributed?
A couple of other issues: Thornton says that Norway looks good not because its citizens govern themselves intelligently, but because they have oil revenues. If that’s true, how to explain Venezuela? They have oil too, but don’t seem to govern themselves so well. Some other explanation?
Then there’s the assertion that land use restrictions exacerbate housing bubbles. A smart growth policy coordinates land development with provision of needed facilities such as roads and sewers, and allows some leeway to avoid worsening the land monopoly that exists everywhere, and in case forecasts don’t exactly come to pass. Over time it makes development less expensive and the cost (monetary and nonmonetary) of living lower (which would increase land prices unless land rent is publicly-collected). The example of Las Vegas is cited, but I always thought Portland had much stricter controls, yet much less of a bubble. Is there somewhere data about this?
Last time we looked, Chicago taxi medallions were going for slightly over $250,000, far higher than a few years earlier. In the subsequent 17 months, they’ve continued their rise, and here are the most recent transactions reported on the City’s web site:
4/27/12 6601 $325,000
4/27/12 5594 $345,000
4/30/12 6182 $348,000
5/3/12 1839 $360,000
5/4/12 2297 $370,000
Now, I do not follow taxi matters in great detail, as I am not of the economic class which can regularly use cabs. But it’s hard to believe that, in less than two years, the economic value of the privilege of operating a taxi has increased by anything like 50%.
The best explanation, I think, came from a driver who styles himself Samuel Langhorne Insull. He explained that medallions aren’t used by taxi passengers, but by taxi drivers. And who are the taxi drivers? For the most part, they’re people unable to get work in their chosen or more lucrative professions, who drive a cab for survival. And are there more of those people nowadays, or fewer?
That makes sense as the main cause. Of course, additional pressures are the general levitation of financial asset prices due to the FRB’s zero-interest-rate policy, and perhaps anticipation of future increases in value.
This one was “Bernard Callebaut, Alberta’s most famous chocolatier,” who purchased land to build a new chocolate factory. Those who understand land rent and the business cycle won’t be too surprised at what AlbertaVenture.com tells us happened next:
[Callebaut] insists that it was an ill-timed decision to buy a large plot of land near the Petro-Canada station on the TransCanada Highway just west of Highway 22 for $5 million, and his bank’s unwillingness to exercise patience, that really did him in. “The idea was we would sell 30 acres for development, and we would keep the back part, which is actually the less-expensive part,” Callebaut says. He planned to build a manufacturing and warehousing facility there, and he even held out hope that the project would serve as a tourist attraction. “People love to see chocolate factories,” he says.That never happened. Instead, the value of the land plummeted, and his bank decided to pull the plug.
Of course, under the current system of public finance he really had no choice. He needed land for his factory. If he rents instead of buying he is hostage to the landowners. Only if he really understood how the land cycle works, possibly he could have prospered. But no, Bernard Callebaut is not a political economist, he is a chocolatier. But perhaps he might have benefited from a learning some of what we teach at the Henry George School.
Like most good stories, there’s more to it than that. He not only lost his land and his company, he lost his name. To his lawyer. Read it here.
Over the years, Naked Capitalism has provided a fine, if discouraging, play-by-play of the worsening corruption of our financial and governmental powers. Dense daily posts, plus links to relevant news stories, supported by thoughtful and knowledgable commenters, makes it one of the few sites I really ought to read daily. (Cute animal pictures are a bonus.)
When chief blogger Yves Smith published Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, I was anxious to read it. Which I finally did over the last couple of weeks. Continue reading
Of course we should not have bailed out the financial sector. Fred Foldvary gives a concise summary of what happened when Iceland refused to do so.
And since no fundamental change has taken place, I suspect Americans will have an opportunity to use this lesson when an attempt is made to extort a second bailout.
Prize-winning documentary Inside Job was posted for free download at archive.org a few days ago. It was withdrawn late yesterday or this morning, but in the interim I had a chance to watch it. It was pretty much as I expected: A very well-documented expose of the forces which brought down the world economy, emphasizing that they have been rewarded, not punished, for doing so, and essentially escaped prosecution (some paid fines amounting to a small part of their takings.) It’s well put together, director Charles Ferguson seems to be a skilled and persistent interviewer, getting on-camera answers even from some of the guilty parties. Ominous music reflects our ominous economic future, lots of shots showing the Manhattan skyline, other centers of wealth, as well as foreclosed houses and abandoned developments.
As a documentary with a point of view, this film says “The guys who drove us off this cliff and unpunished and still in charge,” which might lead one to suppose that, if only they could be caught and punished, perhaps our long-term future would become brighter. These guys own the government, of course, so exactly how a prosecution would work isn’t clear. Elliott Spitzer’s experience, reported in the movie, does not make one optimistic.
The problem, as I see it, is that Inside Job doesn’t tell the story from the beginning. I would represent the principal causes of the global financial crisis as the five connected items below
5 Regulatory capture and control of the government
4 Concentration of financial power
2 Loans against capitalized rent
1 Private collection of economic rent
IJ describes 5 quite well, addresses 3 and 4, but doesn’t get into the fundamentals. As long as, and to the extent that, we have private collection of economic rent, we will continue to suffer from economic crashes. Inside Job needs a prequel explaining the root cause of the problem.
Economic Ebola is “the virus that infects scientists and engineers and causes them to go to Wall Street rather than create something of societal value,” says Paul Kedrosky. Graduates with quantitative skills are offered salaries up to five times what they could make in productive work, so of course many of them spend their time finding ways to scrape a few million from high-velocity financial markets, rather than designing products or processes that would actually increase society’s satisfaction.
“Let’s save the world by keeping our engineers out of finance,” says Vivek Wadhwa. [Well, they’re not really our engineers, they belong to themselves, but we’ll skip that for now.] A fine idea, but how to do it? One answer might be a financial transaction tax, a tiny levy on each financial trade which could remove the profit from “financial engineering.” It would have no real effect on “long-term” investors who hold a position for more than a day. Seems like a good idea, but of course there will need to be a definition of what is a “financial transaction” for tax purposes, and clever people will find a way to design a transaction which doesn’t meet the criteria.
Maybe a better approach is to eliminate or scale back some of the things that make financial engineering lucrative. For instance, if a land value tax prevented private collection of land rent, the mortage/financial crisis we’re still in would have been much smaller, or perhaps not possible at all. We might want to go back to the classical concept of usury, forbidding all transactions where interest is charged for the use of money. (People can still get compensation for lending money, but it would be as some agreed share of the profits which the investment generates, keeping the lender conceptually closer to the borrower.)
Of course we could start with something simple, like having the government take over insolvent banks, prosecuting and imprisoning criminal executives, letting stockholders, bondholders, and others who have unwisely trusted the bank to absorb the financial loss. That alone would make financial engineering a lot less appealing.
Washington’s blog says:
Virtually all independent financial experts say the size of the big banks is hurting the economy
and fortunately George Washington been keeping (documented) count. It’s a total of 30 (mostly individuals but including a few coherent small groups), of which at least three have received the “Nobel” prize.
So why does “the market” cause such large banks to exist? Perhaps because correlates of bank size include political influence and chief executive salary.
A University of Tennessee study, reported at phys.org among other places, finds that, when incomes are more concentrated, people are more likely to say they oppose governmental redistribution of income. This decidedly includes low-income people. Why would low-income people oppose redistribution of income?
It might be because they’re too busy with survival to pay much attention to the question. Or, having been screwed by the powers-that-be, they assume any redistribution will be away from them, toward those already in control. Might even be that they are “free-market” types who expect to make a better living in the absence of government interference. I really have no idea.
I’ve only seen the news report, the actual paper seems to be behind a paywall, so there’s a lot of detail left unspecified. Such as whether “redistribution” is defined to include the current pattern of redistribution from those who work to those who manipulate, what specific surveys were analyzed, and how the matter of sequence (Does public support for redistribution cause redistributive programs to be expanded?) was handled.