The 2008 crash.

Cheap money, deregulation, more cheap money, re-regulation.

1. Inflation.
Alison Marshall, November 2001.

At present the main cause of inflation is the reductions in interest rates because of the fear of recession, which enable higher mortgages, which cause higher land prices.

2. Land tax. Alison Marshall, 2004.

In this latest land price bubble in the UK there has been an increase of 130 percent in the average house price since 1997. That’s an annual increase of 12.6 percent, about ten percent more than inflation. Ten percent of the average house price is approximately equal to the average annual wage.

This crazy redistribution of wealth to landowners from everyone else wouldn’t have been so extreme if land was taxed realistically. The purpose of land tax is the prevention of bubbles and speculation, and the collection of some of the unearned rent, and I don’t think a logical fair economy can be achieved without it.

3. The K-wave. Alison Marshall, March 2008.
Data from Kaletsky, A. ‘Black clouds loom on horizon after years of plenty’, The Times, 22 October 2007.

In a comparison of data from 18 countries from 1997 to 2006, house price inflation relative to disposable incomes was lowest and negative in Japan, Germany, and Korea. It was positive and close to the median value in the US, and highest in Ireland, the Netherlands, the UK, and France.

4. Current global banking crisis was predicted by 1993 academic study.
30 September 2008.

. . . the current international turmoil in banking was accurately predicted some fifteen years ago in a study by an eminent Southampton economist and lawyer.

In his book ‘International banking deregulation: the great banking experiment’ published in 1993, Professor Richard Dale, Emeritus Professor of International Banking in the University of Southampton’s School of Management, considered the possible consequences of banks’ increasing involvement in securities markets world-wide, particularly in the light of the US banking collapse of 1929.

This detailed study, based on historical evidence as well as legal and economic analysis, concluded that, by permitting banks to engage freely in securities markets, policy-makers were engaging in a vast banking experiment whose outcome would be “increasing potential for a self-feeding and large-scale crisis engulfing both banks and securities markets internationally”.

Professor Dale specifically warned against repeal of the US Glass-Steagall Act that separated banking from securities business: “The Act was repealed in 1999 and eight years later the banking industry is facing a meltdown due to its risk exposures in securities markets,” he comments.

5. Capital flows and leverage have been identified as major contributors to the credit crisis. The Chinese Government, to support its export-driven economy, controlled capital flows and kept its currency low. In the US, surpluses from China inflated the housing market bubble, and banks were allowed to make bets which were much larger than their underlying assets. (Stephen Foley, 12 November 2008. ).

6. Why are US home foreclosures so high?
Economic Outlook, Volume 33, Issue 3, Version of Record online: 28 July 2009.

The distress level among US mortgage borrowers has surged to unprecedented levels in recent months. . . Around 13% of US mortgages are now estimated to be either in arrears or in foreclosure. . . The . . . ‘charge off’ rate for mortgage loans (essentially the amount written off as lost) among US banks reached 1.8% in the first quarter of this year . . . Banks have also taken massive losses on asset-backed securities, constructed from pools of mortgages, as the underlying assets have soured.

. . .The levels of arrears and especially foreclosures are . . . much higher than in other countries suffering housing downturns . . . A crucial factor appears to be the widespread existence of ‘non-recourse’ loans in the US, which allow borrowers in negative equity to walk away from their mortgage debt . . . In the UK, by contrast, there are strong incentives for home owners to remain in their properties, even when in negative equity.

. . . Most US mortgages are de facto or de jure ‘non-recourse’ meaning that the lender cannot pursue a defaulting borrower’s other income or assets if the realised value of the house, post foreclosure, is not enough to cover the outstanding debt. This creates a strong incentive for borrowers to simply walk away from their homes once price falls tip them into negative equity.

. . . the incentive to ‘post the keys back to the lender’ is still high even if the borrower is able to maintain payments on the loan. This is dramatically different from the UK, where non-recourse loans do not exist. In the UK, borrowers are strongly incentivised to remain in their homes, even in a negative equity situation, in the hope that values will eventually recover. For in case of repossession, borrowers will be vigorously pursued to pay the remaining debt from income or other assets.

7. The weakness of European banks was primarily driven by their exposure to falling US markets and the US dollar. (Michael Burke, The Guardian, 18 July 2011).

In the eurozone, average current account deficits between 1999 to 2007 are a better indicator of current problems than fiscal deficits or public debt. (Martin Wolf, Financial Times, 7 December 2011).

Current account: Net flow of goods, services, and unilateral transactions (gifts) between countries.
Fiscal: relating to government finances, esp tax revenues.
Public debt: Issues of debt by governments to compensate for a lack of tax revenues.
( ).

8. After historically unprecedented monetary easing and a lengthy and fragile recovery, central banks will need to balance their religion of price stability with new roles as guardians of financial stability. (Martin Wolf, Financial Times, 2 May 2012).

UK plans for separating retail banking from trading and investment banking resemble US restrictions on proprietary trading by the Volcker Rule in the Dodd-Frank Act. (Paul Volcker, Financial Times, 14 February 2012.)

9. Before 2006, to meet their inflation targets, central banks created excessive liquidity to balance the deflationary effects of Chinese trade. (Financial Times, 13 December 2012).

The problem of imbalances between surplus and deficit countries is not new. It was discussed at length at Bretton Woods in 1944. (Mervyn King, 10 December 2012, ).

10. Back in the downwave.
Alison Marshall, 2012-4.

A k-wave downturn, driven by demographic change, may be a factor in the global financial crisis. Other factors are Chinese exports, American mortgage law, and financial deregulation.

The Chinese problem is part of a long term transition away from the dominance of Europe and the US. The other three are related to the longwave crises which tend to occur once in every 1.7 generations. ( ).

The US mortgage law was a response to the crisis of the 1930s, (Michael Robinson, 29 July 2008, ), the dominance of the New Right deregulators came after the crisis of the 1970s, (“Inflation”, ), and now in the 2010s, here we are again in another longwave downturn.

11. Neoliberalism has been the dominant economic ideology since the 1980s. But some senior IMF economists say that two of these free market policies, public spending cuts and free movement of capital, have not delivered as expected. (Jon Stone, 27 May 2016, )

12. The Treasury is no longer part-owner of Lloyds Banking Group. The profit on its rescue investment in 2008 was £0.9 billion. But the profit on the same money invested for the same period in a FTSE tracker fund would have been £25.7 billion. (Alistair Osborne, The Times, 18 May 2017.)

13. Globalised labour keeps wages down, stimulus from central banks goes into asset bubbles, and trouble builds up before inflation emits warning signals. After a decade of ultra-loose money, normalisation is an unprecedented challenge. (Ambrose Evans-Pritchard, The Daily Telegraph, 26 June 2017).

The Bank of England’s decision to raise interest rates is the first since 2007. But the cost of borrowing remains extraordinarily low, and it has probably encouraged a misallocation of scarce resources. (The Times, 3 November 2017).

Further reading.

Inflation, interest, and the supply of money.
Inflation, interest, broad money, base money, foreign exchange.

Monetary sects.
Positive Money, full reserve banking, Modern Monetary Theory.

The search for a stable economy.
Land tax, protectionism, demography, Green taxes, citizens incomes.

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