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THE GREAT CRASH
OF 2008
- Mason Gaffney, July 2008
This crash is The Big One; it has the signs of
becoming a Category 5. How do we know? We’ve “been there and done
that” so many times before, roughly every 18 years over the last
800 or more. Major wars and, rarely, plagues have broken the
rhythm, but the cycle has persisted.
Homer Hoyt published his classic 100 Years of Land Values in
Chicago, 1833-1933, in December, 1933. He covered in fine
detail the 5 major cycles that crested and crashed in 1837, 1857,
1873, 1893, and 1926-29. At the end he generalized “The Chicago
Real Estate Cycle”, a regular rhythm of boom and bust with the same
features in the same sequence. The boom sets us up for the bust. He
could have omitted the limiting word “Chicago”, its cycles were
synchronized with national waves recorded by other scholars like
Arthur H. Cole, Philip Cornick, Lewis Maverick, Frederick Lewis
Allen, Harry Scherman, Carter Goodrich, Ernest Fisher, Homer
Vanderblue, Herbert Simpson, and others – surprisingly few others,
in fact. Alexander Field has recently reviewed much of this
literature, but held back from seeing cycles in the present or
future.
It is uncanny how the latest boom tracks the events that Hoyt
recorded and generalized. There was “an increase in rents,
building ..., and subdivision ..., each of which was carried in
turn to speculative excess, and each of which interacted upon the
others and upon land values to generate and maintain the boom
psychology”. The cycle, Hoyt continued, is “the composite
effect ... of a series of forces that ... communicate impulses to
each other in a time sequence, ... in a definite order” (p.
369).
He breaks the major events down into 20 elements (pp. 373-403).
We can consolidate a few to simplify, but the cycle is not so
simple: if it were, mankind would have mastered it long ago,
instead of constantly repeating it. Rather, I add a few events that
others than Hoyt have noted – an asterix *precedes each of these
non-Hoyt elements, below.
- Population grows
- Building rents rise
- Values of standing buildings rise
- New building rises
- Easy credit comes forth to builders, land buyers, and
subdividers
- Nationally, people moving to new areas raise total need for
buildings, because migrants leave their old homes behind them
- *Construction itself makes jobs, with demand for more
buildings
- *Outside money flows into growth areas, taking as security
liens on new buildings and on lands. As to the local balance of
payments, this has the same temporary effect as exporting
the buildings and lands: unearned increments become part of the
local economic base. However, this is a trap: it evolves into
debt service, an outflow of funds that, over time, exceeds the
original inflow
- Easy credit evolves into “shoestring financing” (the 1933
expression for today’s “subprime lending”)
- New buildings absorb vacant land; land prices boom and spread
outwards
- Governments spend freely, on borrowed money, for street
improvements and public works to boost land sales
- Population growth rate slows, but “authoritative” forecasts
come forth of more population growth – today’s “irrational
exuberance”, which Hoyt calls a “mania”
- *Builders’ Illusion” sets in, where builders conflate the rise
of land prices with a return on their building investment, boosting
the incentive to build above what the actual return on building per
se would justify. This is because building, however legitimate,
entails buying and selling land, a form of “flipping”. Unearned
increment becomes, for some parties, part of the incentive to
build. Ditto for “flipper-remodelers”: it’s fun to remodel or just
redecorate on a rising market. This illusion may be most extreme in
large, self-contained, integrated developments, where each building
is expected, even in a steady market, to pay for itself in part by
raising the value of adjoining parcels. The big developer, being
human, may credit himself for the rising tide of the market in
general. Such illusions, widely shared, can result in
overproduction of new buildings relative to the basic demand.
- Land subdivision and development (or partial development) for
urban use goes to greater excess than any other variable in the
cycle. The quantity of land is fixed, but people spread out over
more and more land. Call it bringing more land into the market, or
bringing the market to more land, the effect is the same: a growing
overhang of ripening land.
- *”Expert” appraisals of land are based on sales of comparables,
and upward price trends. These sales, in turn, were influenced by
appraisers who based their opinions on earlier comparables and
upward trends, and so on. This is because there is no cost of
production to check excesses. Thus a herd mentality can take over,
divorcing prices from reality: “Irrational Exuberance”.
- *Rising debt service overtakes inflow of new capital
- *Corruption and graft that inevitably accompany easy money come
to light, eroding and then cracking confidence in markets and banks
and the “high, wide, and handsome” libertine boomtime philosophy
that has papered over coven and fraud.
- *Lenders’ loan turnover has to slow down as they turn from
short-term trade credit or commercial loans to long-term loans
based on land collateral. A bank that is all loaned out, no matter
how sound its balance sheet, can not make new loans much faster
than its debtors pay back the old ones.
- *A rise of land prices cannot simply flatten out at a high
plateau, because the increment has become part of the expected
return that buyers are paying for, and lenders are relying on. So
prices that cannot rise further have to drop: there is no
equilibrium level. (I expand on this point a few paragraphs
below.)
- At the crest, asking prices almost always drop slower than bid
prices. This makes sales (deeds recorded) drop sharply, even as
recorded prices hold steady.
- Subprime borrowers face foreclosure; their distress sales force
prices down, in a cumulative spiral
- Banks, whose capital and surplus is always a small fraction of
their liabilities, lose much of their capital and surplus when many
debtors default. They are always vulnerable, since they borrow
short and lend long, so they have to stop making new loans. Some or
many fail. Depositors may panic.
- *Lending slows faster than recorded interest rates rise,
because banks cut off sub-prime borrowers. (Professor Ben Bernanke,
in calmer days, developed this thesis for the 1930’s.)
- *Self-financed firms fare better than bank customers, but their
capital returns slower than before, or not at all, cutting their
rate of reinvesting
- *Building stops; workers starve or emigrate; chaos reigns, we
hit bottom
- *Governments and leading gurus blame the crash on falling land
values, bend their efforts to bailing out big banks and sustaining
land values, prolonging the depression. In the process most actors
lose sight of the original cause, speculation in rising land
values, and the stage is set to begin the next cycle.
Hoyt carried his research back to 1833, the birth of Chicago,
but that was not the birth of history. The Second Bank of the
United States, founded in 1816, helped along the “peace-dividend”
boom that crashed in 1819 during James Monroe’s “Era of Good
Feeling”. Twenty-one years earlier, 1798 saw a serious crash, over
which the First Bank of the United States presided. Among other
results this sent several rich Americans to debtors’ prisons,
discredited founder Alexander Hamilton and ruined his Federalist
Party, and cost Andrew Jackson his first big plantation. Jackson’s
ensuing hatred of central bankers smoldered until it erupted in his
erratic handling of the Second Bank of the U.S. when he was
President, 1829-37, and this Second Bank was presiding over the
great Canal Boom that busted in 1836-37.
History did not begin in 1798, either. Records grow murkier as
we look further back, but some colorful events stand out. One was
the Mississippi Bubble of 1720, to which Andrew Jackson compared
his debacle of 1798. It saw the founding of New Orleans, but was
part of a worldwide event, centered in Paris and in London (where
it was “The South Sea Bubble”). Scottish banker John Law sold
himself and his paper-money ideas to the Duc d’Orleans, Regent
of France, took over the Bank of France, and engineered one
of history’s more famous speculative manias – mostly based on the
insecure security of land titles in the Mississippi Valley. Across
the Channel, sober Englishmen and their famously conservative
bankers built castles in air in southeast Asia – their “south seas”
– and mighty was the fall thereof. After the Fall, of course,
credit tightened for everyone.
Before London, Amsterdam was the financial kingpin of the world.
In the 1630’s it suffered something known to history as “The Tulip
Bubble”. Recent research by Maastricht Professor Piet Eichholtz,
endorsed by our own Robert Shiller, discloses that this had more to
do with real estate than tulips per se. They find that
housing prices dropped 50%, 1634-36, along the Herengracht,
an upper crust residential district. London scholar Anne Goldgar
dissociates this from the more famous Tulip Bubble that crashed in
1639; we leave this detail for the specialists to settle. Our point
is that there WAS a land bubble that burst, even back then. Shiller
has also traced such a bubble in Norwegian history.
Back in New England, our first land bubble burst about the same
time, 1640. This is when “The Great Migration” of Puritans stopped
and reversed itself. This happened just after Captain John Mason’s
massacre of the Pequods (1637) opened up the whole Connecticut and
Thames Valleys to English settlers. It seems, though, that
speculators got there first, deflecting English settlement to the
rocky soils and harsh climate and precarious land titles of New
Hampshire, which boomed then while Connecticut languished. We will
see this pattern of continental sprawl repeated throughout American
history. Indeed, it was repeated next door in New York State where
Dutch speculators, called “patroons”, tied up the Hudson Valley
while settlers poured from northern New England into the Mohawk
Valley.
Before Amsterdam were Augsburg and Antwerp, and before them was
Florence, premier banking center of the 15th Century.
In 1454 the Peace of Lodi ended 20 years of costly warfare
and left Florence with a great peace dividend, a secure, peaceful
position. As has happened so often since, this led to
prosperity, luxury, conspicuous consumption, a land boom and a bust
in the late 1460’s, when several banks folded. Florence rebounded
for another cycle led by Lorenzo di Medici. Popular history
remembers Lorenzo as The Magnicent, a patron of the arts, but as a
banker he retrenched (works by Michael Veseth and G.F. Young).
He blew on art and other luxuries the money that Cosimo had
made by hard work, serious banking, and a communal attitude toward
fellow Florentines. Politically, Lorenzo appeared strong and
effective, but in 1494 the Medici bank failed, Florentines sacked
the Medici art collection, and raised to power Savanarola, who
ended an era with his Bonfire of the Vanities.
The French scholar M.E. Levasseur went back even farther in
history, publishing data on the price of land in France from 1200
A.D. to 1799, its ups and downs in war and peace, prosperity and
depression, territorial expansion and contraction, good kings and
bad. Suffice it here that land cycles have a long history. None of
it, to my knowledge, differs in substance from Hoyt’s findings from
Chicago, 1833-1933.
Why must there always be an upper turning point? Why cannot the
good times go on forever? Let us expand here on a previous point
that I oversimplified for brevity. I alleged that the “Rise of land
prices cannot simply flatten out at a high plateau, because the
increment has become part of the expected return that buyers are
paying for, and lenders are relying on. So prices that cannot rise
further have to drop: there is no equilibrium level.”
In abstract algebra, land prices could rise forever, unlikely as
that seems, provided market agents expect rents to rise forever,
interest rates not to rise, and exhaustible resources not to rise.
The algebra is fairly simple. Let:
a = current annual land rent
i = interest rate expressed as a
fraction
g = annual growth of “a”, expressed as
a fraction
V = value of land, derived as a
discounted cash flow
Then, by summing the infinite geometrical progression, we
have:
V =
a/(i-g)
(1)
Rearranging terms:
V = [a +
Vg]/i
(2)
(1) is more “elegant”, but the two equations are equivalent, and
(2) is the way most market agents see the matter, and salesmen
present it. Vg is the annual rise of land price this year, and it
grows every year as V rises.
Rents could keep on rising, if not to infinity, at least to
googol, far in the future, and land values would follow along
without a hitch. Common sense and experience, however, tell us that
does not happen. There are several reasons why not.
ü We do press on the limits of exhaustible resources, as
is so evident today
ü Landowners treat unearned increments as current income,
raising their consumption and lowering their real saving, in the
manner of Lorenzo the Magnificent, raising interest rates
ü In practice, in boom times, lemming psychology causes
the “Vg” of Equation #2 to get ahead of a realistic forecast of
future rents. Many buyers don’t even know where it came from;
others are operating on the “greater fool” theory. Historically,
the V/a ratio – what Brits call the “years’ purchase” of land –
rises well above historical and sustainable levels.
ü People spread out over more land, as discussed below
Galloping settlement sprawl, such as that of the last 16 years,
has set us up for The Great Crash of 2008. To repeat, we may call
it bringing more land into the market, or bringing the market to
more land, the effect is the same. There are both urban sprawl, and
continental sprawl. Let’s start with a modest case of urban
sprawl.
In Milwaukee County, WI, there are 17 municipalities,.
Only two of these are fully built-out: Shorewood and Whitefish Bay,
north of the City along the lake. Each houses about 10,000
people per square mile in the green comfort of detached houses on
tree-lined streets. The others are full of vacant and derelict
land. The central City itself has hollowed out badly, while also
annexing the northwest corner of the County in 1960, still unfilled
after 48 years.
At the density of these upper middle-class suburbs, the
population of the U.S., 300 millions, would require 30,000 square
miles. That is the area of a circle whose radius is 98 miles. Or,
if we divide the needed area among 50 states, it is the area of 50
circles of radius 13.8 miles each. Either way you cut it, or any
other way, it is lost in the vastness of the U.S.A.
Yet, while the City of Milwaukee hollows out, and the inner
suburbs remain unfinished, Milwaukeeans spread into the neighboring
counties, where growth is faster: Ozaukee to the north, Washington
to the northwest, Waukesha to the west, and Racine to the south. In
addition, some substantial fraction of factory jobs, during times
of peak need, go to residents of small outlying towns or farms far
away, who move in temporarily when opportunity knocks.
Milwaukee is not growing dynamically, so its sprawl is modest.
For immodest, spread-eagle, classic American sprawl look to new and
upstart cities in much of Florida, Texas, Anchorage, AK, or Las
Vegas, NV. Some older cities like Albuquerque, NM, or Oklahoma City
manage to sprawl without even being dynamic. In California,
“From the redwood forests to the Gulf (of California)’s blue
waters” urban sprawl inflates the price demanded for nearly every
section of this land that “belongs to you and me” – or would,
if we could afford it. As Woody Guthrie also sang, “Believe it or
not you won’t find it so hot if you ain’t got that do-re-mi”.
Then there is continental sprawl. Old cities and regions
stagnate or shrivel, while new ones balloon out of nowhere.
Some once-leading cities, and their population ranks in 1890,
are St. Louis, #4; Pittsburgh, #7; Buffalo, #9; Cincinnati, #11;
Newark, #14; Jersey City, #15; Louisville, #17; and Rochester,
#19. These shrinking cities are all in the quadrant northeast
from St. Louis, fairly close together, along with surviving but
diminished giants like New York, Boston, Philadelphia, Chicago,
Detroit, Cleveland, Baltimore, and a dozen middling cities and most
of the U.S. population, as of 1890. People and goods could get from
one place to another within fairly short distances, by rail.
Some new big cities today that were not even on the radar screen
in 1890 are Los Angeles, Houston, Dallas, San Diego, Phoenix, San
Antonio, Honolulu, San Jose, Seattle, Washington (D.C.), Portland,
Atlanta, Miami, Charlotte, Las Vegas, Salt Lake, and Jacksonville.
These are all outside the northeast quadrant, as the U.S. center of
population moves steadily southwestward, from southeast Indiana in
1890 to south central Missouri in 2000. It’s not just the center
that counts, though: it’s the dispersion. Populations south and
west of the center are widely scattered.
Each of these new cities represents the transfer of an entire
subset of the economy. Cities grow, as Jane Jacobs showed so
brilliantly, by import substitution. They and their regions grow
more and more self-sufficient as they add people. Repair shops
evolve into parts makers, and they into assemblers and
manufacturers, some with national and world markets.
At the same time, to tie us together we have the Interstate
Highway System, and many state highway systems. Interchanges create
hundreds of new commercial nodes. In the short run these may seem
to bring urban values to old farmland; in the long run and in the
aggregate they create an artificial abundance of urbanesque land,
an overhang that presages the crash phase of the cycle. They also
create an overhang of deferred maintenance and replacement, for
highways must in effect be rebuilt every 30 years or so, but at
higher prices for cement. Worst of all they create a permanent
commitment to wasting energy. These contingent liabilities have
been hidden during years of euphoria. Today, as gasoline prices
soar and tax revenues falter, they are all too visible. Too much
land accessed, and rising costs of accessing it, combine to lower
land prices.
We also have our inflated air transport system. The U.S. has
15,000 airports, more by far than any other nation or group of
nations. The vastest of these, Denver International, takes 34,000
acres, or 53 square miles, 5 times the area of Maryland! Other
oversized ports are mostly in the south and west: Dallas, Orlando,
Kansas City, Atlanta, LAX, Seatac, and Miami, for example.
Some eastern ports are much smaller: Washington National is 1,000
acres; busy LaGuardia is only 600. Estimating the mean airport area
at 1000 acres, the land required for 15,000 airports would be 15
million acres, the area of Massachusetts plus Connecticut. While
surface area is only one of the resources that air travel consumes,
it is symptomatic of the daunting resource requirements of
spreading people from Nome to Key West, from Eastport to Kauai, and
linking them as tightly as Baltimore and Philadelphia. The soaring
costs, led now by jet fuel, and security aggravations, and falling
comforts of air travel are beginning to drive home these rising
demands on limited resources. Meantime, though, this nationwide
transportation network has brought vast new areas inside the urban
ambit. A rich Montana rancher and his wife can wing it into Denver
in their private plane for a day shopping and an evening at the
theater; but how long can this dream of city-country affluence
last?
To highways and airlanes let us add the power grid; huge
interregional water transfers and systems; several new kinds of
radio communication grids in bewildering novelty and abundance; the
postal service grid; UPS and FEDEX grids; natural gas lines; the
telephone grid; the banking network; the list goes on, and on. Most
of these bring service not just to the end-points, but to most of
the included interstitial lands.
How can land rents and values fall from oversupply, when land
supply is fixed? This fixity feeds the delusion that land rents and
values can only rise with population and capital formation.
However, people and capital can spread out to encompass and
fructify more land. That is sprawl, urban and continental (and
worldwide, not covered here).
Professor Robert Murray Haig theorized in 1926 that if
transportation costs fell to zero, there would be no urban land
values: one location would be as good as another. That can’t
happen, of course, but lower transportation costs, as by an
abundance of Ford’s Model T’s, would lower land rents and values.
Being cautious, he presented this just as an abstract speculation
in a scholarly journal (QJE, February 1926), but did he see
something coming? My guess is “yes”; but seen or not, it did come
right after he published.
To Henry George, “land speculation” meant holding land off the
market waiting for a rise. He likened it to an unconscious
“combination” (a cartel) of landowners creating an artificial
scarcity. George missed the next trick, however. He attributed
industrial depressions to inexorably rising rents and land prices
that progressively squeezed labor and investors off the land and
into the unemployment lines. It was too simple. A good explanation
must account for land value collapses, like today’s, playing a key
role in the crash.
Like all cartels, the unconscious combination of land
speculators creates a price umbrella under which new resources
enter the market. This “price-umbrella syndrome” periodically
creates an artificial surplus of land. At the same time, the lavish
use of durable capital to bring settlers to all this new land
creates a shortage of liquid capital, a shortage of loanable and
investible funds, a rise of interest rates and a tightening of
credit. The writer has analyzed elsewhere this lavish use of
capital (Gaffney, 1976).
Austrian cycle theorists have dwelt on this tilting of what they
call “the structure of production”, with too much capital getting
sunk irrecoverably in what they call “higher order” goods. Well and
good, but unfortunately they find its cause solely in “forced
saving” from bank expansion, with no reference at all to its
geographical roots, and the role of inflated land collateral
enabling bank expansion.
Forces of containment, notably including George’s land
speculation, have imposed uneconomic scatter and sprawl on
settlement. They have held back the logical areas for continuous
settlement and forced the pioneers to move around and beyond them.
If you examine a map of population density in the United States at
any time in history, you see that urban scatter and sprawl have
their counterparts in national patterns of land use, and they
always have had, in spite of the Indian menace. (A series of such
maps to 1865 is in John D. Hicks, The Federal Union.)
By 1890 the Census gave up trying to draw a "frontier line". The
Director wrote, "the unsettled area has been so broken into by
isolated bodies of settlement that there can hardly be said to be a
frontier line" — a passage that Frederick J. Turner misread, I
think, as he launched from it into his classic "Frontier in
American History." It was not the frontier that was passing, but
the last vestige of orderly advance into it. The center of
population continued to march west-south-westward, as settlements
grew ever more scattered. In 1893 another boom ended, evoking the
populist plaint, “In God we trusted; in Kansas we busted”.
George himself did not, to my knowledge, call the crash of 1893,
or explain its causes to his readers. It would have enhanced his
reputation, but he was preoccupied then with other issues, sick,
and four years from death. Perhaps, also, he perceived that the
facts did not exactly fit the simple scenario sketched in
Progress and Poverty, and he lacked time to revise his
model, in which by then he was heavily invested.
Georgists of the 1920’s did poorly calling the real estate slump
that began in 1926, and the stock market crash of 1929. As late as
1932, at the very nadir of The Great Depression, Harry Gunnison
Brown, leading Georgist economist of the times, dismissed the
wreckage around him as “a period of slack business” (The
Economic Basis of Tax Reform). Albert J. Nock and Frank
Chodorov preoccupied themselves with carping at Keynes and FDR and
labor unions, sympathizing with the Axis Powers, preaching free
markets as though they had discovered them, and alienating a
generation of earnest activist reformers.
Career-minded professionals have to pause before issuing
pessimistic forecasts about land and securities markets, where
confidence hangs by a thread. Senator Charles Schumer warned of the
IndyMac Bank collapse, and critics immediately blamed him for
causing it. Homer Hoyt could publish his masterpiece in the deepest
trough of depression, when anyone with eyes or ears knew the system
had crashed, and revolution was in the air. 20 years later Hoyt had
gone into real estate consulting, and declined to see any revival
of his own cycle. Many have dissed even Robert Shiller for
puncturing the euphoria: Michael Mandel, Chief Economics Editor of
Business Week, recently published Rational
Exuberance, whose title telegraphs its message, while the views
of his senior columnist Jim Cooper remain ever upbeat and
rhododactyllic, week after week as we sink deeper into the mire. No
one will fault Mandel or Cooper for pricking the bubble of
“confidence”.
Robert Shiller has been issuing mild warnings, mainly aimed at
investors, that residential real estate might be overvalued,
but did not link this to a general depression in the forthright
manner of the four Georgists to be cited below, nor with the same
certitude. John Talbott deserves credit, too, although he may have
called an earlier crash that did not occur. Alexander Field has
declined to relate to current events his thoroughgoing history of
the literature on older crashes.
I do not know of a single Nobel Laureate in Economics who
forecast the present crash, or any other. Two of them,
Chicago-Schoolers Robert Merton and Myron Scholes, founded Long
Term Capital Management which went down in flames in 1997, saved
only by a Federal bailout. Nothing daunted, media and public
speakers seeking confirmation lean hard on Nobel Laureates whom
they can cite. The media might better consider others with better
track records.
Modern Georgists enter this period of danger and opportunity in
relatively good shape. Several have outstanding scorecards calling
the current crash. These include Fred Foldvary; Fred Harrison;
Michael Hudson; and Bryan Kavanagh. Each has a slightly different
take on it, but they all saw it coming and stuck their necks out,
far out, to forecast it in print. One of their distinctive
commonalities is their recognizing that land rent and values are
many times higher than most economists realize, and so play a major
role in macro-economic ups and downs.
Bear with me in averring that these Georgists who foretold this
crash deserve a hearing, in preference to those who failed, and
certainly to those who still deny it. What solutions would they
offer? I do not speak for them, and they are not of one mind. There
are a hundred more specifics than can even be outlined here, but
the following elements seem reasonable and likely.
One, of course, is to raise more public revenue from taxes on
property in general and land in particular. These include property
taxes, of course, but in addition a host of other kinds of
revenues. No less than sixteen of these are detailed in this
writer’s “Hidden Revenue Capacity of Land”, forthcoming in the
summer issue of the International Journal of Social
Economics. One of them, which Michael Hudson has explained in
several articles, is to reform the personal income tax to bear
heavier on property income and lighter on wage income.
Another is always to base land assessments on current market
value, and update them annually. Earlier I criticized private fee
appraisers for using current comparables to value owner-occupied
homes, as follows:
“’Expert’ appraisals of land are based on sales of comparables,
and upward price trends. These sales, in turn, were influenced by
appraisers who based their opinions on earlier comparables and
upward trends, and so on. This is because there is no cost of
production to check excesses. Thus a herd mentality can take over,
divorcing prices from reality: ‘Irrational Exuberance’.”
Why, then, would I ask public assessors to join the misguided
herd? Because the public assessor is the one valuer whose
overvaluation stops the herd. The Assessor by law is supposed to
follow a bull market, not outguess it. When the “exuberance”
appears in his wisdom to he “irrational”, his job is still to go
along, not judge. When private fee-appraisers go along they confirm
and reinforce a boom, but when the tax Assessor goes along he
douses a boom with cold water: higher taxes (Gaffney, 1985, pp.
91-109). It was the lack of such an automatic remedy that let the
farmland boom of the 1970’s soar so high above reality, then the
urban bubble of the late 1980’s, and now of 2001-2007.
The present income-tax treatment of “capital” gains, which
nearly forces the elderly to cling to their lands until they die,
should be changed to a tax on annual accrual of value, as proposed
by our same Professor Haig in the 1920’s. The “Hidden Capacity”
article explains practical ways of doing this.
Banks should be regulated away from lending on land collateral.
Following the South Sea Bubble there was such a movement in
England. The emergence of the industrial revolution, flawed as it
was, suggests the results were not all bad. I have not researched
the history enough to say much more, but logically there is a
powerful reason to regulate banks of deposit. This is because they
are always technically insolvent, never able to meet their
short-term liabilities from their long-term assets. A related
reform might be to make mortgage notes part of the property tax
base. This idea is so deeply radical that I only hint at it here,
without claiming to have thought it through.
It is tempting to note that public debt has often been a more
stable asset for banks than mortgages, and recommending that banks
be limited to holding public debt. However it only takes one wild
administration to bankrupt a nation by making a virtue of spending
more and taxing less. In the 1920’s when Andrew Mellon ran a
Federal surplus, local governments and improvement districts ran
wild with debt. In the 1830’s it was state governments. There is no
simple mechanical substitute for sober judgment based on theory,
and history, and selfless public spirit. Let us hope that The Great
Crash of 2008 will inspire our statesmen and teachers to cultivate
those arts and that character. |
