Prosper Australia

photo credit: dave_7

Polly Cleveland

Economists conventionally attribute the Great Depression to blunders by the then-new Federal Reserve Bank. According to this story, promoted by Milton Friedman and the Chicago School, after the stock market crash of 1929, the Fed kept interest rates too high, strangling the economy. This story made most economists confident that it couldn’t happen again.
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But there’s a different story: the story of the great 1920s real estate bubble. It began with cars.

Starting in 1899, the auto industry took off exponentially, dipped fortwo years during World War I, then took off exponentially again during the 1920s. Production reached a peak of over 4 million vehicles in 1929, before collapsing. It did not again pass 4 million until 1949!

The auto suddenly opened up vast suburban and rural areas to housing. Developers–legitimate and bogus–leapt at the opportunity. Banks jumped in too, creating so-called “shoestring mortgages”—effectively allowing property purchases on margin. Within a few years, tens of thousands of acres around major cities had been subdivided and sold. In rural areas, developers bought up farms, dug a pond, built a “club house” and sold cheap “vacation” lots. As reported in Homer Hoyt’s classic One Hundred Years of Land Values in Chicago, from 1918 to 1926 Chicago population increased 35 percent and land values rose 150 percent, or about 12 percent a year.
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photo credit: woodleywonderworks

The Oligarchs’ Escape Plan – at the Treasury’s Expense

By Prof. Michael Hudson
see the original article and the growing list of comments on Information Clearinghouse

The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The U.S. economy cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of U.S. real estate has fallen into Negative Equity, so no banks will lend to them. The economy has hit a debt wall and is falling into Negative Equity, where it may remain for as far as the eye can see until there is a debt write-down.

February 18, 2009 “Global Research” — – Mr. Obama’s “recovery” plan based on infrastructure spending will make real estate fortunes for well-situated properties along the new public transport routes, but there is no sign of cities levying a windfall property tax to save their finances. Their mayors would rather keep the cities broke than to tax real estate and finance. The aim is to re-inflate property markets to enable owners to pay the banks, not to help the public sector break even. So state and local pension plans will remain underfunded while more corporate pension plans go broke.

One would think that politicians would be willing to do the math and realize that debts that can’t be paid, won’t be. But the debts are being kept on the books, continuing to extract interest to pay the creditors that have made the bad loans. The resulting debt deflation threatens to keep the economy in depression until a radical shift in policy occurs – a shift to save the “real” economy, not just the financial sector and the wealthiest 10% of American families.

There is no sign that Mr. Obama’s economic advisors, Treasury officials and heads of the relevant Congressional committees recognize the need for a write-down. After all, they have been placed in their positions precisely because they do not understand that debt leveraging is a form of economic overhead, not real “wealth creation.” But their tunnel vision is what makes them “reliable” to Wall Street, which doesn’t like surprises. And the entire character of today’s financial crisis continues to be labeled “surprising” and “unexpected” by the press as each new surprisingly pessimistic statistic hits the news. It’s safe to be surprised; suspicious to have expected bad news and being a “premature doomsayer.” One must have faith in the system above all. And the system was the Greenspan Bubble. That is why “Ayn Rand Alan” was put in charge in the first place, after all.
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Hat tips to Magnifico, with further analysis

It heats up at 2.10 into the clip.

The economic depression: an occasional commentary # 4
10th January 2009

Bryan Kavanagh, LVRG

[If you wish to keep things simple and ignore unnecessary explanation, please proceed to the final, italicised paragraph.]

The form of reductionism that has provided DNA sequencing of the human genome is leading to enormous gains in medical science; but reductionism in economics has taken the science of political economy into the dead end of an occult art. There’s no overview to put matters economic into perspective. When economic analysis misses the forest for the trees as it has so blatantly in the case of the financial meltdown, it’s time to apply the blowtorch of Occam’s Razor to the debt-bloated carcass of the US economy. We’ve got to ask some basic questions to come to sound conclusions. It has become fashionable for economist to say “There are no easy solutions”: but they’re wrong.

What’s the real problem? Why did these tremendous levels of unsustainable mortgage debt, from which the US economy needs to deleverage, arise in the first place? Monetary theorists would say that money was too cheap. Although that argument clearly has some merit – because money represents produced wealth and the cost of borrowing this wealth was indeed too cheap – it still doesn’t quite cut it in terms of Occam’s Razor, if the bad pun may be pardoned – of getting to the most simple and accurate explanation. Who is to say what the precise rate of interest is that would have stopped a real estate bubble from developing? We should first get down to defining and quantifying what constitutes a real estate bubble, because, as precedes all economic downturns, the US certainly did experience an enormous real estate bubble. And bubbles do burst!

We should first ask: What assets were offered as security for loans? Real estate: either the value of the particular piece of real estate being purchased, or other real estate held by the borrower. OK then, let’s understand that the price of the security consisted of two components: 1) the value of the buildings, and; 2) the value of the land. The value of buildings is easily assessed and may be confirmed by checking the replacement cost of buildings and applying a level of depreciation (if that applies). But how do we assess the value of the land itself?
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photo credit: funadium

Over the next few posts we will bring you a series of reminders about how we and our colleagues have been warning about the impending financial peril for many years.

The Depression
An occasional commentary
(for Australia’s federal politicians)      #1
4 December 2008

ASTONISHING EVENTS?

At last night’s Lowy Institute lecture in Sydney, the former governor of the Reserve Bank of Australia, Ian Macfarlane, said that he found the events of the last year to have been quite astonishing.  Astonishing? But we foretold of this asset price deflation three and a half years ago!  In THE AGE of 15 June 2005, we warned the RBA not to increase interest rates because Australia was “primed to tank into a deflation” and “in the current deflationary environment” the next adjustment of Australian interest rates would more properly be down.”  

The RBA chose to ignore the warnings provided by this index though.  Also ignoring the looming price drop, it ratcheted interest rates up 1.75% over the next three years (seven times by 25 basis points). Now the RBA’s “seeing is believing” approach has witnessed it move into panic mode to lower interest rates by 3.00% in just three months! Surely this hopelessly dilatory action is the real ‘astonishing’ event, Mr Macfarlane?  It is a damning indictment of the very body whose raison d’etre is to maintain full employment and to protect Australians and their currency. By whom has the RBA been advised? Did the Bank take any cognisance at all of the Australian real estate bubble that we defined and quantified for it? No, it used its ‘experts’.

The Land Values Research Group (LVRG) hereby challenges any commercial economic forecaster, analyst or credit rating agency to match our economic forecasts. Alan Kohler noted in Secrets and Lies” on 2 December that Goldman Sachs admits to tailoring the truth a little in delivering it’s economic prognostications, because it is a commercial organisation, and, well …. it just has to! The LVRG isn’t a commercial organisation and we and our colleagues at Prosper Australia don’t have to ‘doctor’ any of our studies – so we’ll stick to telling people the truth about what they reveal.

OK, so Ian Macfarlane seems to agree with Christopher Joye and other bubble-deniers that people like us and Steve Keen are incorrect – that even though our real estate bubble may be bigger than all the others, ours isn’t about to burst next year.  Want a bet?

There are workable solutions to this horrible financial implosion.

Bryan Kavanagh
Land Values Research Group
Melbourne

photo credit: GFX69

Prosper Australia’s long time Executive member Bryan Kavanagh had this excellent article published yesterday in The Age

NOTHING changes. In the 1970s, the collapse of Mainline Corporation and Cambridge Credit heralded a recession after the 1973 real estate bust. In the early 1990s it was Pyramid Building Society, Tricontinental and the State Savings Bank of Victoria after the 1989 real estate bust.

We will no doubt learn shortly which building developer or bank will come to be seen as the harbinger of this particular financial collapse.

Why don’t we simply end these damaging real estate bubbles? As recent US experience confirms, bubble-affected mortgages offer lenders no real security, so why didn’t the Australian Prudential Regulation Authority and the Reserve Bank act to protect Australians and their banks?

Read More

Now you’ve seen Steve Keen deliver a damaging analysis on the 7.30 report, listen to
Professor Mason Gaffney call a Great Depression (on yesterday’s Renegade Economists) and why current economic policy will only prolong the negative outlook.

Dr. Michael Hudson was Chief Economic Policy Adviser for the Kucinich for President campaign in 2007. He gave a compelling interview recently well worth your attention:
Michael Hudson are rising property prices a good thing?
Hudson pt2 – Houses as a tax shelter