Prosper Australia

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At least Timothy Geithner is showing a little spunk with his new shared equity plan. The government puts in effectively 93%, and the lucky bankers chosen put in just 7%. How does it work? Both the government and the bankers put in 7% equity, then the government lends the other 86%.

When the price of housing starts to rise, the properties can be sold off with the government reaping a 5 to 1 profit over the banks.

This might prick up a few reader’s ears. The government sharing in land based profits?

One of the biggest challenges to this plan is that the US has 800,000 homeless (Jan 08, not 09) but 19 million vacant houses. Admittedly, there are many many families taking up medium-term accommodation in motels throughout America, the so-called hidden homeless. But there is still an insufficient demand to buy these properties off the government, despite the tour buses of Chinese buying up $900 properties in good locations.

Now that the speculative splurge is over and Mr Ponzi has well and truly left the building, the time for the land market to correct itself could be years. This is especially so as Obama’s other priority is to pump prime the economy with infrastructure projects. This will act to increase the value of land, countering the need for mortgage payments to drop back to average trends.
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Dr Michael Hudson tells it as it is on KPFA’s Guns and Butter!

Make yourself a cup of tea and kick back to the real story!

photo credit: bortescristian

The Bank of England now admits that the UK government failed to provide it with the tools needed to deal with boom/bust, according to an interview tonight on BBC’s Panorama programme. The missing tool was tax policy.

“That’s why we can say that the global recession did not originate in the US and was not caused by bankers or sub-prime lending” says Fernando Scornik Gerstein – heading up an international organisation of leading economic reformers. The group argues government policy in this global economic crisis is barking up the wrong tree.

“The real culprit”, says Scornik Gerstein, “is how our property rules deliver windfall gains to property owners and encourage a culture of speculation on our homes and resources”. Scornik Gerstein is president of the IU, an international union of organisations that advocate a radically different approach to the current economic crisis.

The IU is concerned that current strategies for addressing the systemic crisis – far from placing a floor on the downturn – will exacerbate the instabilities that characterise markets around the world and set the scene for the next major recession.

In a BBC interview tonight, deputy governor of the Bank of England, Sir John Gieve, tells Robert Peston: “We need to develop something which… directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand.” (1)

“There’s only one way to do that” says Scornik Gerstein. “A strategy does exist that could moderate the downturn while laying the foundations for sustained growth in the future. But that policy is not being applied. Instead” – he says – “governments are applying shallow bail-out/pump priming measures that are futile at best, and dangerous at worst.”

The IU argues it is property markets, in particular land markets, that cause boom/bust and that brought the financial sector to its knees in 2008 and will bring the real economy to its knees in 2009. The heart of the problem, it argues, is a system where homeowners, in a flourishing economy, are able to cash in on the increasing value of their locations. “The problem is now the same all over the world”, says Scornik Gerstein: “gambling on house prices has gone global.”

The remedy advocated by the IU is a radical review of how governments raise their taxes. “The right way to raise public revenue is to collect the values actually created by society and nature” says Scornik Gerstein – “that’s much preferable to taxing work, savings and enterprise”. The new green tax agenda like pollution charging is an example of the approach, he says: “it’s the idea of taxing bads, not goods”. But above all the IU advocates the abandoning – or at least the reducing – of traditional taxes like income tax, and the introduction of land value taxation. “LVT takes out the speculative element from the housing market” says Scornik Gerstein: “and it’s now, with values collapsing, that’s the time to act. Land value taxation is the single policy move capable of rescuing the global economy from what will otherwise be the worst recession since the Depression of the 1930s”.

photo credit: Poppyseed Bandits

When: 7pm, Thursday Dec 11th
Where: Prosper Australia, Frank Halkyard Library, Level 1/ 27 Hardware Lane, Melbourne
Why: Because the US style bailout is heading our way
Who: Fred Foldvary is the Senior Editor of the highly regarded Progress Report.

Fred Foldvary (USA) will provide an explanation of the real estate and business cycles, and their fiscal and monetary causes and remedies. Especially for daring minds, he will explain how to stop the current recession.

Hear Fred’s speech

With auction clearance rates in Melbourne again in the mid 50’s over the weekend (55% this week, re-iterating the trend of the last 2 months), there is a growing backlog of properties waiting to be sold. What is not widely publicised is that there are 30% less properties on the market than this time last year. This implies that beyond the low clearance rate and the mounting number of properties passed in, there is in all likelihood a growing number that are being withheld from the market until prices re-bound.

This is akin to late 2006/ early 2007 in the US housing market when there was a stand off between sellers demanding certain prices and buyers who were unwilling to enter the market. Six months later the mexican standoff was over and a cascade of properties hit the market, pushing down prices and triggering the sub-prime crisis.

Fred is one of our brightest minds. We hope you can attend this important lecture.

RSVP appreciated, gold coin donations to cover nibbles, drinks

photo credit: Joel Bedford

Mason Gaffney

October 25, 2008
In a follow up to Professor Gaffney’s The Great Crash of 2008, he now delves into how credit can be freed from the current crisis. The Great Reckoning awaits…

1. Introduction

Working capital is the bloodstream of economic life. It is physical capital, the fast turning inventory of goods in process and finished goods that supplies materials to the worker, and feeds and clothes her or his family. Short term commercial loans and trade credit buy it, but the capital is “real” — a fact often forgotten in the paper and virtual worlds of high finance whence come the highest inner circles of government.

The bloodstream metaphor harks back to François Quesnay, an 18th century French physician turned economist. Quesnay drew on William Harvey’s (1578-1657) earlier discovery of how blood circulates. Adam Smith and other classical economists followed Quesnay, distinguishing “circulating capital” from “fixed capital,” the kind that is stuck in the ground or otherwise lasts for many years. Today we call the bloodstream metaphor “macroeconomics”, elaborated but not always improved from Quesnay’s insights.
Now the economic blood is drained down, and what’s left is slushy. We need to restore and thaw it, and get it circulating, right away as well as over time. To understand how, let’s see what drained it away in the first place.
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Karl Fitzgerald

Project Coordinator and Web Editor
the Saturday Age – Business section, p2, Oct 25th.

FREE market principles are being put to the test like never before. With share prices collapsing, policymakers are scrambling to keep up with the loss of confidence in the market.

Prime Minister Kevin Rudd has stepped into the breach with gusto. A $1.5 billion injection into the property market via the first-home owners grant will keep the banks and property lobby happy. And yes, the ubiquitous financial analyst will support this, too. But what about single people?

The 1% cut in interest rates will save the property investor $200 a month. One can rest assured this will not be passed on to renters. Single renters will also miss out on the $1000 Christmas bonus.

With the market benefiting from this additional buying power, these economic forces will push housing prices even higher, strangling Rudd’s affordable housing credentials.

Pensioners must understand that these same forces will soak up their handout, too.

The planned infrastructure projects will also make prime locations more valuable. Meanwhile, property prices are dropping dramatically in sprawling suburbs.

The monopoly power inherent in land deems economic growth irrelevant. All social developments are captured in higher land prices.

Rising property prices are only good for banks and speculators. The IMF’s Boom-Bust Phases in Asset Prices and Fiscal Policy Behaviour report reveals that economic downturns are more pronounced when following a housing price bubble.
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Thurs Nov 6th, 6.45 pm
featuring Dr Gavin Putland
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Which politician will use the ‘recession we could have avoided’ line? Rest assured Paul Keating will be invited.

Dr Putland will discuss why asset price bubbles always end in tears. What trends have made such busts more prominent? What can be done to avoid such train wreck recessions?

Why is economic growth irrelevant for the majority of Australians?

You will be staggered to learn just how much extra we could all be earning with a more efficient way of business.

Level 1, 27 Hardware Lane, Melbourne
Gold coin donation to cover drinks and nibbles.

photo credit: trackrecord

Jeffery Sachs was heard sniggering on local radio this morning at the extent to which Greenspan admitted fault.

Greenspan has shocked the world by admitting his world-view was incorrect.

Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”

He confirmed yet again that housing prices must be allowed to fall:

Indeed, a necessary condition for this crisis to end is a stabilization of home prices in the U.S. They will stabilize and clarify the level of equity in U.S. homes, the ultimate collateral support for the value of much of the world’s mortgage-backed securities.

However, he still failed to critique the speculative lure that government allows in land. By permitting the economic rent inherent in land price appreciation to be privately captured, the easy profits in land speculation have attracted every man and his dog. This has been the driving force behind asset price bubbles over the last 30 – 100 years, leading to larger and larger debts. Such speculative activity has been encouraged by governments as a supposed incentive to increasing home ownership.

If the speculation was deterred with a holding charge on land then the credit histories of sub-primer’s would no doubt be under less pressure. CDO’s may not have eventuated.

The policy priorities revealed in actions such as Australia’s FHOG and the 1% cutting of interest rates will keep property prices higher. The recession will be longer and deeper because of this. Failure by neo-cons such as Greenspan to incorporate the third dimension in economics, the land rent component in the factors of production, will see a backlash towards over-regulation.

Will Australia’s future generations accept paying 50% of their income on housing? That seems to be the policy objective of leaders worldwide.

Renegade Economist Press Conference

photo credit: amirjina

Can someone please write in their diary June 2024? Because that’s when we are going to start warning about the next big bailout for bankers. If we do not learn from the horrors of this downturn and collect the economic rent that accrues to land, then the next 18 year cycle will be chugging along by 2024 and another asset boom-bust will be underway.

It is almost beyond belief that the $870 billion bailout equates to the entire spending of the US Department of Defence, Education, Health and Human Services. With rumours surrounding Goldman Sachs as the next to go bust, one wonders if the revolving door between Goldman and Treasury, where US Treasury Secretary Paulson worked until 2006, will see another bailout for insiders.

Of greatest concern with the $870bn bailout is whether the thousands of mortgages acquired by the government will be drip fed to the market. This will put the government in direct opposition to the community. A market system would see these banks fail and the price of land fall back to levels that can be realistically earnt off the site via the average wage in the area.
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