Harry
At 13:31 06/01/2011 -0800, you wrote:
Keith, old lad,
It was all analyzed in the 19th century and everything that has happened
is happening can be traced to basic principles.
You properly point to the great changes that have happened since then,
but if the basics are correct they will still apply. Just as
multinational corporationswasnt a phrase back then, but now still uses
the same basic 26 letters that were used back then, so the basics of the
Science of Political Economy are still proper.
If there were any light in the neoclassical economic darkness, perhaps
your contention that the classical stuff is out of date would have credence,
I'm not saying it's out of date -- but that it's not up-to-date. There's a
lot more bearing down on the economic scene than the classical economists
(or Henry George) were aware of (world-wide overpopulation and shortage of
freshwater, increasing costs of energy, international strategies of big
business [increasingly evading attempts of government restrictions], a
totally inadequate education system for most in the Western world,
increasing automation, etc)
but they havent departed yet from the Let's try this and see if it
worksploys. Further, almost the entire attention of the political/economic
fraternity is concentrated on the financial sector -- which is not where
the depression problems are.
But it's where the backhanders come from. Harry, we don't elect bankers and
we can't expect that they'll look after us, but we do expect it from our
polticians whom we elect and who say beforehand that they have our
interests at heart. Enough of them, however, actually have their own
interests at heart -- especially when they get to high level -- and that's
why government (in the sense that we understand it) has become a mockery,
despite the ballot box.
The financial skullduggery was certainly exposed by the earlier economic
downturn, but nothing that initiated that crash is really being addressed.
To remind you, Land Rents and their extension, land prices, press upward
as people demand whatever the market will bear. So long as the economy is
advancing this upward pressure can be born.
But land prices can't go up on their own accord unless there's inflation.
True there was no governmental printing press in Henry George's day, but
there were plenty of banks who were issuing their own banknotes without
reference to underlying assets -- just like the Fed today.
Also, inflation is the time honored Band-Aidthat government uses to
keep alive business which is close to the edge. Inflation makes land
costs less onerous - if they can survive for a while. But their existence
still depends on the economy advancing.
If the economy falters, business that is barely making it is immediately
in trouble. They go belly-up and their problems affect others and the
downturn begins.
However, thats just a beginning. Banks, pressured by greed, and encouraged
by politicians, offer mortgages with suspect collateral.
Banks are no more greedy than anyone else or any other institution. But if
governments give guarantees that they'll keep the biggest banks alive
almost whatever they do then banks will take advantage of it.
Banks can't fail if they protect themselves with proper collateral. That
is collateral that over-protectsthe amount lent. If you have land and you
want to build a factory costing $100,000, a bank could easily lend you
(say) $70,000 with as much safety as anyone can expect.
Of course.
In the case of homes, the plot thickens. Before the crash, land costs were
a large part of the total cost of a home reaching as much as 70%, (An
Australian research study found average land cost under homes was 65% of
the total.)
It is usual for home-buyers not to separate land costs though they may be
aware that identical houses cost different amounts depending on location.
They buy a $100,000 house as a package with a relatively low down payment.
---- change Didnt finish the thought, but have now corrected it and made
it more realistic! ------
Lets say they pay a huge $10,000 down (an amount that became increasingly
unlikely under pressure to provide the poor with homes of their own).
Yes, the original pressure for the sub-prime crisis was from the Bush
government when it eased the criteria by which Fannie stood behind
mortgages granted on the most dubious of evidence.
Perhaps $50,000 of the $100,000 loan collateral is land-value which may
have dropped during the crash to $25,000. If a default occurred, and the
property was foreclosed, the bank will have obligated itself to pay
$100,000 but could recover only the $10,000 deposit, plus land-value
$25,000, plus the house $50,000.
That is, assuming the bank could sell the foreclosure at full price (not
likely with lots of foreclosures). The best they could get would be
$85,000, not exactly adequate collateral to cover their $100,000 outlay.
A lot of foreclosures and they are screaming bankruptcy.
I've no quarrel with this description.
If the home was in the more likely $300,000-$400,000 range, the problem
with low down payments coupled to crashing land-values becomes horrendous.
At the time of the Savings & Loan debacle (another land speculation crash
overshadowed by the discovery of financial crooks) more than 5,000 banks
and S & Ls crashed. The Bank of America sold its $2 billion real estate
portfolio for $1 billion, yet apparently has learned nothing.
The S & L collapse was again caused by the government which had allowed S &
Ls to go into mortgages and property-based loans -- which they were
originally never intended to.
Now, of course, we have the stimulus to help out the banks. There is a
good argument that perhaps the banks should have been allowed to fail.
More trouble at once but less in the future.
Of course, the big banks should have been allowed to fail, just as small
banks are always allowed to. It would have been chaos for a while but the
banks that weren't bankrupt (and could show why in their balance sheets)
and the banks that acted quickly enough to reform (and could clearly show
how) would have been supported by enough investors. Even if the latter had
sold their assets to the last penny they would have done so because the
banks that remained would have the field to themselves.
Back in the days of prudent bankingmy favorite oxymoron - bankers would
not lend on a land-value collateral because land-values were too volatile.
Yes. This is why India was the least affected of any country during the
credit crunch. Their banks never lend on property collateral.
In the present mad rush to get business and undeterred by sound economic
advice, not only did they support their loans with this dubious
collateral, but pressed by mainly Democrat politicians, they accepted
lower and lower down-payments. This meant that more and more of the loan
was protected by volatile land-values. We see this clearly with the
problems of Fanny and Freddy most likely to heed the requests of the
politicians even as they gave them contributions.
Came the crash as it always has. The Great Depressionwas the 5th major
Depression in 100 years. (See Homer Hoyts history of Chicago.)
But before central banks and the US Fed, depressions in the 1700s and 1800s
were relatively brief (and were as likely as not to be caused by bad
harvests as anything else).
So, now, the banks were faced with bad loans that were protected by
collateral that covered only (say) 70% of their losses. They were in
trouble. Confronting not an occasional bank failure, but a widespread
disaster, the insuring companies were also in trouble. And so it spread.
Then, came to the light of day, the dubious, and perhaps criminal,
operations of the financial sector. Politicians and economists swooped on
to these exciting revelations.
The financial sector has been no more criminal than Western governments
which neglected to oversee them.
But ,. . . Harry . . . I largely agree with your description of what has
happened. But you haven't explained why it happened. How (without inflation
that had been going on for 40 years since 1971) did land become so
over-valued?
Ive written this bit before but it is so appropriate. It concerns a fellow
on his knees searching around in the kitchen. Asked what he was doing, he
replied:
Im looking for my contact lens.
Where did you lose it?
In the hall.
Why dont you look for it in the hall?
The light is better here.
Obamas economic gurus are looking in the kitchen when they should really
be checking out the hall. Until they do, we dont have a snowballs chance
in hell of coming out of this Great Recessionin the next decade assuming a
useful war is not in the cards.
Im gloomy today, but perhaps it is justified.
But what, precisely, is the thing that Obama supposed to be looking for?
All you've been doing is to describe the credit crunch from a Georgist
perspective. Again -- what precisely should have been done to prevent it?
And what, precisely, should now be done to prevent it happening again?
Keith
Keith Hudson, Saltford, England
<http://allisstatus.wordpress.com/2010/12/>http://allisstatus.wordpress.com/2011/01<http://allisstatus.wordpress.com/2010/12/>/
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