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Life Arts    H4'ed 9/18/13

Reverberations between immoderate land-price cycles and banking cycles

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   One major change came along with Reagan-Cheney and their Laffer staffer after 1981.   "The Right", long a bulwark against deficit finance, converted to it.   Instead of taxing the rich, the idea now is to borrow from them, and pay them interest, leading to an explosion of Gini Ratios in real estate, stocks, bonds, income (personal and corporate), estates, and nearly anything that gets measured.   Concentration has grown so extreme there is no longer much need for anything as nuanced and comprehensive as a Lorenz Curve or a Gini Ratio: it is now the 1% vs. the 99%.  

 

5.   Meantime, other scholars published a distinguished body of research into topics equally or more important, matters of the real economy.   The academic clerisy has purged most of these from macro by compartmentalization.   One may study them at length, but only within accepted confines.   If one spills over the boundary lines of one's compartment one is "overambitious" or "swellheaded" or "spreading himself too thin".   When submitting work for publication one is required to self-classify it by pigeonhole, taken from a standard list we have all seen.   There is an implicit hierarchy of little boxes [2] , with macro on the "commanding heights".  

   Thus the clerisy sanitizes macro from contamination from at least the following:

a.   Real estate and its endogenous cycle of about 18 years, firmly documented from primary sources and established by Homer Hoyt in his classic, 100 years of Land Values in Chicago, 1833-1933. Other writers reinforced and replicated the findings: Ernest Fisher and John J. Holland in Michigan, Phillip Cornick in New York, H.D. Simpson in Chicago, Lewis Maverick on subdivision cycles, Arthur H. Cole on cycles in sales of public land, Harry Scherman on foreclosures, and others.  

     Hoyt carried this back no further than 100 years because there was no Chicago before 1833, but 18 years before Chicago's and Andrew Jackson's great crash of 1836-37 there was Monroe's crash of 1819. 21 years before then was Hamilton's crash of 1798, when Andrew Jackson lost his lands and William Morris   and William Duer went to debtors' prison. Before that one can find crash before crash before crash in the annals: the Mississippi Bubble crash of 1720; the Dutch crash of 1630 or so, synchronized with the reverse migration from New England after 1630; in the 15th Century it was the Fugger bank in Augsburg that went down with the fortunes of imperialistic Spain; the Florentine and Medici-banker bust of 1494 leading to Savonarola's Bonfire of the Vanities; boom and bust around Orleans following its liberation by Joan of Arc in 1429; and so on back and back.

   Apart from the endogenous 18-year cycle, major peace treaties can be shown to generate irrational exuberance for future land rents, and to release funds to the private sector where they are used again to bid up land prices.   The interplay of these two cycles explains much of cyclical economic history.

b.   Austrian economics, analyzing causes and effects of the time-structure of capital and the pace of capital turnover.   Oddly, many economists who should know better identify Hayek with the Chicago School because he once taught there, but he was never welcomed in the Department of Economics.   Frank Knight's many learned articles attacking Hayek's capital theory were an obsession, carrying on J.B. Clark's vendetta against Eugen von BÃ ¶hm-Bawerk.     Knight, like Clark, could not abide the Austrian's concept of a "period of production" because it implies a sharp distinction of capital goods, which have one, and land, which does not.   Keynes, too, put down Hayek and von Mises and drove them from macro dominance in England.

   Hayek and fellow Austrians finally found happiness and support with libertarian foundations and other wealthy patrons, by attacking regulations and contra-cyclical fiscal policies of all kinds, to the applause of Chambers of Commerce, but they remain outliers In the profession.   Roger Garrison remains one of the few self-called "Austrians" who publishes on cycles, and even he attributes the bias to over-long periods of production exclusively to central bank policy, ignoring all the other causes inherent in tax policies and land policies.

c.   Institutional economics, the heritage of Veblen, Commons, Ayres, Montgomery, Means, Thurman Arnold,   Corcoran and Cohen, the TNEC investigations, and Senator Harry Truman's   hearings on arms profiteering in the early 1940's.   Dominant figures in the FMP camps, both Keynesian and Chicagoan, diss and dismiss such work by compartmentalizing it as mere "structural reform", unworthy of attention in the greater world of Y = C+I+G.   Studies of Industrial Organization and cartelization and market power have dwindled to a shadow, although Joe Bain, Frederick Scherer and others produced excellent texts on the subject.

6.   The obvious link between FMP and real estate is the quality of credit.   Hoyt emphasized how subprime (which he called "shoestring") financing had waxed in the boom phase of every one of the 5 major land cycles he documented in detail from 1833 to 1933. The commercial loan school of banking, dominant in the Progressive Era, helped save us from a crash that was due in or near 1911, following the 18-year cycle from 1893.   In the roaring 1920s such old fashioned caution was cast aside, and deposit expansion was again used freely to pump up land and stock prices.   These reverberated with deposit expansion, in the manner to be shown, leading to The Great Real Estate Crash starting from 1926, followed by the stock crash of 1929.  

   And yet,   Friedman and his school of "monetarism", as they rose to dominance, ruled this out of consideration, both in theory and practice.   They damned Quality Control as bureaucratic "intervention" with private bankers.   Only Quantity Control was permissible.   Ignoring Pecora's revelations,   Friedman et al. knew that profit-seeking bankers, proven survivors in free markets, must possess sounder judgment than nosy governmental officers.   Pecora's findings were not refuted or denied, which would remind people of them.   They were not even compartmentalized and buried in low-level pigeon holes, but just quietly ignored, thrust down the memory tubes of history.

7.   With such notions regaining ascendancy, what kept us out of serious trouble for so long?   After 1945, nearly everyone forecast a postwar depression.   The standard FMP line was (and   is) that only wartime spending had jolted us out of the Great Depression, and peace would spoil the party. This postwar gloom capped land prices.   Affordability of land ran high, e.g. for housing and farming.   Ambitious young entrepreneurs and home buyers could borrow to buy cheaply.   Loans were mostly for production and use; price/earnings ratios ran low, payoffs were fast.   All kinds of taxes remained high, stifling any kind of long-term irrational exuberance, and any "Reverberations" between land prices and bank expansion, Ã ¡ la 1920s.

   Soon came the Cold War, the Korean War (1950-53), the costly Interstate Highway Program,   urban sprawl with need for new infrastructure,   the boom in airports, the Central Valley Project and the California Water Plan in California, huge new "Big Dam Foolishness" and reservoirs on the Colorado and Missouri and Tennessee and Saint Lawrence Rivers, all costing huge sums and presaging continued high taxes, meaning continued low land prices.   Politically and socially, the disgraces of Senator McCarthy, Spiro Agnew, and Richard Nixon, along with social programs supported by the Warren Court,   presaged more social spending and continued high taxes of all kinds. The result was to keep stifling   irrational exuberance and resulting high land prices.

   As to credit, S&Ls got favored access to housing lending, keeping banks of deposit in their proper place.   These banks were fed a steady diet of Treasuries, considered "non-defaultable", keeping them out of real estate which had proven so unstable before.

 

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Mason Gaffney first read Henry George when a high school junior , and became notorious among his classmates for preaching LVT to them . H e served in the S.W. Pacific during W.W. II, where he observed the results of land monopoly in The (more...)
 
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