According to the World Bank, world-wide wealth to the tune of $34 trillion has now been wiped out in the latest phase of destruction. This means that, if you believe its chief economist, Justin Lin, we have some way to go before the orgy ends.

Twelve months ago, in the summer of 2008, in a Renegade Economist documentary – http://www.youtube.com/watch?v=1nttuh8oHYw&feature=channel_page – We forecast that the wipeout of wealth would reach $45 trillion.

Carry on Crushing

According to Lin, the World Bank’s first Chinese official to serve as chief economist, the West should accelerate the destruction of its capital base.

 ”Excess capacity has built up and unless this issue is addressed, we will face a deflationary spiral,” he warns. The West, apparently, should demolish more factories, adjusting the industrial base to accommodate economic reality.

But here’s the problem: if China continues to invest in capital formation (which it is doing), and if China’s labour costs remain lower than the wages paid to western workers, the trade balance between East and West will continue to be lopsided in favour of Mr Lin’s homeland. So how do we stop the downward spiral?

China has an advantage over the West: its command control in Beijing is determined to boost growth even as the West continues its toboggan ride into depression. At the last count, China was growing at an annual rate of 7.9%, and rising.

Eastern Promise

What if the West accepts Mr Lin’s advice, and demolishes more of its manufacturing capacity? Disgruntled French workers apparently find this strategy appealing, as a negotiating tactic: workforces are now rigging factories with gas canisters, to blow up the capital equipment if they do not receive improved redundancy pay-offs.

But if we carry on crushing the West’s industrial base, the ratio between the West and the East’s capacity would have to be adjusted on a continuous basis, until everything that we consumed was Made in China.

Do we have to allow the Chinese to specify the terms for the next business cycle? No! The appropriate tax reform would reduce western labour costs (without reducing living standards), while raising incentives to invest in the innovative firms that could lead the West out of depression. Instead, conventional economic wisdom urges us to accelerate the destruction of capital. It seems that our forecast – the wipeout of $45 trillion worth of wealth – will be realised in 2010.

 Was that a laugh, I heard, as I last strolled past Marx’s mausoleum in Hampstead?

Monetary policy, the regulatory agencies concede, is insufficient to prevent asset price bubbles. So a second tool is needed. But what should that be? Don’t ask the Treasury, because they don’t know. If they did, we wouldn’t be enduring the worst economic crisis since the Depression of the 1930s.

How About an Inquest?

 Following the massacre in the markets, the bodies are strewn all around as evidence that something went terribly wrong. Economists failed to alert governments of the impending collapse in the financial sector. And yet, curiously, there has been no forensic examination of the tools employed by forecasters to explain their failure.

In the US, 13,000 people apparently earn their living “doing” economics. That’s according to Professor Robert Samuelson, son of the Nobel prize winner Paul A. Samuelson. He finds it “intriguing” that most economists failed to predict the financial crisis. There is no compelling explanation for this failure, writes Samuelson in The Washington Post (July 6). Because “economists have not engaged in rigorous self criticism to explain their lapse”.

There is nothing mysterious about the unwillingness to scrutinise their failure. The answer is simple. Economics is not practiced as a science. Rather, it is a pretentious way to covertly promote political prejudices. The last thing that economists need is an inquest. But that leaves the UK Treasury mute about the “macro-prudential” tools needed to prevent the next property boom/bust.

They Protest Too Much

Economists love shouting about the failures of others to disguise what they don’t know. Take the case of Paul Krugman, whose competence is such as to apparently warrant a Nobel prize. In a New York Times column (July 3) he admonishes the Obama administration for an inadequate fiscal stimulus programme to cope with a shortfall in jobs of about 8.5m.

Krugman does confess that “as an economist, I’d add that many members of my profession are playing a distinctly unhelpful role. It has been a rude shock to see so many economists with good reputations recycling old fallacies”.

But can we trust Krugman to add up simple numbers? He takes exception to the manipulation of employment figures, but his over-priced textbook on economics claims that the rent of land in the US is just 1% of national income.  Since it’s probably more like 33%, we need to treat the pronouncements of people like Krugman with a pinch of salt.

Camouflaging the Root Cause

No government in the world has shown the slightest inclination to highlight the root cause of the financial crisis. The incentives to create credit on a reckless scale are located in the land market. Ever since the early 17^th century, governments have held enquiries into financial crises following savage bouts of land speculation . Despite all the agonising, however, not once did they remove the rewards to prevent such episodes recurring.

This time, the rush over the financial precipice started in the US. There, bankers had found yet another way to milk the land market. They targeted low income black neighbourhoods with  high-cost/high-risk mortgages, knowing (so clever were they) that they would not bear the risk. Those risks would be sold to mugs like pensioners whose funds would buy the securitised mortgages.

Twisting and turning the bank regulations after this last episode will not prevent the bankers inventing new ways to milk the land market towards the end of the next business cycle that begins in 2010. That’s why the UK’s White Paper on financial regulation isn’t worth the paper on which it is written.

According to Andy Haldane, the Bank of England’s financial stability director, there remain many “unanswered questions”. That’s the clever economist’s way of distracting us from the fact that the coroner has yet to ask the right questions.

And so, cleverly manipulating the politicians, the banks are disposing of their victims – the suckers who took on mortgages they couldn’t afford – and shifting worthless assets on to a new batch of suckers (taxpayers). Prognosis: a new, lean banking machine ready to cash in on the glorious opportunities over the next business cycle.

This is not the authorised version, of course, but the ability to control the way the public perceives the problem is part of the crisis management skills that are fostered by what we might call the logic of our economic system.

Spilling the Beans

Sometimes, the beans are spilt, of course, like the revelations by Mark Patterson. He is chairman of the company that is supposed to be pioneering the joint public-private bank rescues in America. Because he was speaking to a forum of investors in a far-flung corner of the Persian Gulf, Patterson thought it safe to offer the insider’s account of the US government’s strategy. But someone recorded his words and this is how they were reported in the Daily Telegraph (May 14):

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40% of the money but get little of the equity upside. It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn of the $700bn Troubled Asset Relief Programme [TARP] funds.”

Much the same rip-off is operating in London, of course, where the authorities are pumping in money to rescue banks by protecting the financiers and socialising the losses. A few sacrificial lambs are offered, of course, but the golden handshakes handed out do much to soften the blows. Meanwhile, the money-printing pump-priming operation run by the Bank of England is enabling banks to rebuild their capital base, leaving the inflationary consequences (like the erosion of the buying power of wages) to somebody else.

Playing by the Rules

There is nothing illegal about these scams. Governments and the bankers are playing by the rules. Those rules were calculated to produce the boom, the busts and the managed recovery back to business-as-usual. So milking the taxpayer to protect the financial sector is not corrupt: it’s the name of the game.

Britain’s parliamentarians affirmed this logic over the past two weeks. They used their so-called expenses to lavishly appoint their homes and, in some cases, to make capital gains out of the sale of properties which they bought in part with the money received from taxpayers. It was all done according to the rules. Some MPs were reimbursed for the interest payments on mortgages that did not exist.

Let’s be honest. Members of the public who are outraged at the way their MPs milked their expenses to enhance the value of their properties were happy to pocket the something-for-nothing value that miraculously attached itself to their homes over the past 10 years. Few questioned the ethics of this way of getting rich. It all came out of “the rules”.

Digging up the Foundations

What passes for diagnosis – explaining the global economic crisis – is no more than navel-gazing. Discussions around “the future of capitalism” carefully avoid challenging the rules that direct people into ethically corrupt behaviour. Just about everyone now has a vested interest in protecting the system – meaning, the rules of the game.

Economics lacks the forensic archaeologists who are needed to excavate the foundations for a critical look at what, exactly, is corroding the social super-structure. Given the geo-political realities now in place, this can mean one thing only – violent times ahead.

The Bank of England is up to the same game. It is cultivating a climate of opinion to persuade people that action is being taken to prevent future financial crises. Senior economists at the Bank point to Spain, commending that country’s regulatory system. Again – where are the embarrassing questions?

The Spanish property bubble did not inflate on the back of 100% mortgages – or 125% loans, as in the case of Northern Rock. In that country, borrowers routinely had to put down 25% deposits. And yet, that did not stop a bubble inflating that was every bit as dangerous as Britain’s. So why does Gordon Brown think that a cap on loans in Britain will stop the next bubble?

Regulating till the cows come home

It’s true that the Spanish have a tougher regulatory regime for their banks. But, again, that did not stop their construction industry expanding all the way to a precipice – before tail-spinning into one of the worst contractions in Europe. So why does the Bank of England now tout the Spanish financial model as worth importing into Britain?

These initiatives are the huffs-and-puffs of people in power who do not want radical reforms that would prevent financial crises. Their tactic is to shape the public debate by chanting slogans that distract people from root causes.

Unhappily, the media is allowing people like Brown, and Bank of England Governor Mervyn King, to get away with it. Journalists are not asking the questions that pinpoint the source of the problem. There is a weakness in the market economy whose roots go straight back to the Treasury and the taxes that are applied to raise revenue.

We are not Simpletons

The 24-hour news cycle does not encourage the debate that is needed, to peel back the answers to relevant questions. But millions of people are now frightened for their futures. They are not Simpletons. They are waiting to read and hear the interrogations that explain why the western economy was run in a slipshod way.

So why don’t journalists take time out to reflect on what they’re all missing? Right now, the best story in town is the one that pins the guilt on the individuals, and agencies, that sought the power to shape our futures.

Politicians say that the global crisis is so critical that they don’t have the time to look for scapegoats. That’s another tactic to avoid personal responsibility.

I am not suggesting that we turn the lunch mobs loose.  But if we fail to demand a full account of why the lawmakers and regulators were asleep at their wheels, we will allow them to tout the snake-oil remedies that will nourish the next land-led boom/bust. And if we allow them to get away with it, this time, we will only have ourselves to blame.

Depression, he says, “will not happen on my watch”. Remember his 10-year refrain when he was Chancellor of the Exchequer? “No more boom/busts.” This is evidence, as if we needed any, of how much reliance we can place on his promises.

Britain has had the biggest housing bubble in its history, and is now enduring the consequences – a sustained downturn into a bust that would have happened even if the US mortgage lenders had been as prudent as Mother Theresa.

Re-writing History

The Prime Minister lives in a virtual world in which he re-writes the rules of the economic landscape when it suits his political agenda. He has abandoned his 10-year prognosis – that the economy always goes into recession after a sustained bout of property speculation. Now, we live in a new economy of his imagination.

Apparently we are living in a “new global age” – in fact, Britain led the world into a globalised economy in the 19th century. This was interrupted early in the 20th century for the same reason that global trade has been interrupted in the 21st century –you guessed it – land-led property boom/busts.

The magnitude of the current crisis, which actually began in the real estate sector in countries around the world, is magnified because all these property cycles were synchronised by the first global business cycle.

Not on My Watch

But the economics of today’s boom/bust is no more than a mundane repetition of the postwar boom/bust on which Brown claims to be an authority. The result, warns Brown in his speech on January 12, will be “rises in unemployment becoming permanent…whole communities written off…lasting damage in our economy and a bigger bill to pay in the future”.

All of which he claims “will not happen on my watch”. Just like there wasn’t going to be a property boom/bust on his watch at the Treasury.

Myth 1: When it comes to solutions, there is “no single silver bullet,” writes David Smith in the Sunday Times (September 14, 2008). How would he know? He failed to prepare his readers for the crash, which suggests we can’t place much value on his pronouncements.

Commentators like Smith love mind-bending jargon like “quantitative easing”. What on earth does it mean? Not “printing money,” insists Smith. No; it means something grander. But torture the language this way or that, it does boil down to scheming governments expanding aggregate demand by increasing spending power. Theirs!

It’s all a matter of logic

Myth 2: We have to spend our way out of recession, writes Roger Bootle of Capital Economics. This, he insists, is the logical strategy (Daily Telegraph, January 13). “The recession is about a shortage of aggregate demand.”

Funny, but I thought the recession came about because people spent too much money – on property they couldn’t afford; by over-dosing on products consumed by going into debt. The recession did not originate because of a shortage of aggregate demand, and we won’t get out of it by spending more money.

But governments don’t want people to do cold turkey, so they are dusting off the clichés from John Maynard Keynes. He prescribed government spending to “pump-prime” an economy out of recession. Politicians love it!

But what about that “silver bullet”?

To curtail the depression and build our way into stable growth, it’s necessary to eliminate the points of friction in the enterprise economy. We know the location of the problem: real estate. We know the dynamics of reckless lending: the pursuit of capital gains. We know where to find the solution: fiscal policy.

Just one silver bullet, and we bag just about all the pathological problems in the capitalist economy. But have economic commentators like David Smith turned the vitriol in their pens against those who have grown rich because of the perversities of the property market. No!

Does Roger Bootle apply his logic to the problem, to help governments order their policy priorities? No!

So sit tight, watch the Keynesian pump boost the money supply, and observe the busy-bees buzzing around all the solutions under the sun, except that one silver bullet that will remain locked away in the magazine.

Deputy Governor Sir John Gieve, in his Christmas message to anyone listening, makes it plain that the Bank approached the home-grown economic crisis with one hand tied behind its back. It didn’t have the tools for dealing with an asset price bubble. And who defined the policies that could be used? Gordon Brown in 1997.

When the new Chancellor of the Exchequer made the Bank “independent”, with responsibility for economic stability, he was universally acclaimed for a smart decision. In fact, it was a fraudulent move to shift responsibility away from where it belonged – the laps of democratically accountable politicians.

What “new tools”?

Moving interest rates up or down was not appropriate for dealing with house prices, Sir John told the BBC. “We need to develop some new instruments which sit somewhere between interest rates….and individual supervision and regulation of individual banks.”

The instruments that would actually work will not be identified, let alone adopted, by a Brown government. That’s why people need to calculate the risks to their jobs/homes/savings in terms of what governments do not do, as much as what may happen in the markets.

What we now face over the next business cycle is a lifestyle-threatening game of chess. Players who want to survive need to know how to anticipate the moves that decision-makers like Gordon Brown will not execute. The Renegade Economist team lays out the rules of this game at its conference on January 24.

But Halifax and Nationwide are not alone. Liberal Democrat Vince Cable is the only politician to come out of the economic crisis with reputation enhanced. Though we mustn’t forget that, back in 2003, he predicted “the housing market is about to crash”. It didn’t, and couldn’t.

In 2002, the Centre for Economics and Business Research announced that the price of the average house would triple by 2020. They won’t, and can’t.

Why do they all get it wrong? According to Parkash Loungani, a top IMF economist: “One theory is that the information needed is lacking: forecasters either do not have access to real-time information or lack reliable models for translating information into predictions of a recession”.

Looking In The Right Places

The information is not lacking – it is all there, but forecasters need to know what they are looking for. A reliable theory does exist to make sense of the property market. Vitally, it tells us about turning points in the economy at large and has worked brilliantly over the last two business cycles.

The Renegade Economist team spells out that theory at our Workshop on January 24. Our forecast will be offered to those who really want to understand what’s going to happen.

When Halifax and Nationwide muster the pluck to re-emerge, will their models have changed significantly enough to offer knowledgeable insight? My bet is that they continue to rely on educated guesstimates.

Andrew Sentence ruminated on whether Britain’s bust was preceded by a boom. We have to puzzle over why he felt obliged to put a question mark after the title: The Current Downturn – A Bust Without a Boom?

Most of us have no doubt that the UK suffered a boom. So why the question mark? The answer is to be teased out of the insight he offered into state of economic thought. Speaking on 9 December, he said: “We need to understand better the two-way interactions between the financial system and the macro-economy which have become clear as this crisis has unfolded.”.

Selective Amnesia

The Bank of England was established in 1694. So, despite 300 years of trading in the markets, the economists in the Bank apparently do not have a clear understanding of the way the money system affects the way we produce goods and services and share-out the nation’s income.

Given the wealth of evidence stashed away in the Bank’s archives, we have to conclude that, for some reason, the ignorance is wilful. Could it be that, if the Bank’s economists don’t have a grip on the connection between high finance and the real economy, it’s because they don’t want to know the full facts?

We are left to speculate about why the Bank is obliged to claim that more research is needed. One good reason is that the Bank keeps failing in its duty to predict turning points in the business cycle. It is supposed to keep the economy on an even keel. When it fails to do so – the way to avoid responsibility is to allege that there is a void in knowledge.

All rather pathetic, when you consider the vast resources on which the Bank can draw to ensure that it operates efficiently. In private enterprise, the managers who made such serious errors would be sacked. There is one notable exception to this rule, however, as we have discovered as a result of the way in which the managers of the world’s biggest banks have driven their institutions into bankruptcy. Instead of sacking them, they are rewarded with money out of the taxpayers’ pockets.

Economists live in a parallel universe to the one we occupy. It’s not a completely virtual world but it’s not far off fictitious world inhabited by avatars. Most economic theories are located in a spaceless vacuum, which is why they consistently fail when they bump up against the pragmatic truth of the real world.

Joseph Stiglitz’s Theorem

Joseph Stiglitz is a poignant example of the way in which economists fail to deliver the full potential of their discipline. He coined the term “Henry George Theorem” to characterise a theory, which actually embraces the physical world. Put simply, the theory highlights the significance of the rent of land as the efficient way to pay for the public services we share in common.

Stiglitz employs simplistic assumptions to arrive at a conclusion that has reflected the real world ever since the first civilisation. But why doesn’t Stiglitz use his insights when analysing contemporary problems?

He is an influential commentator, and one of the “good guys” willing to challenge the powers-that-be. His authority as a Nobel Prize winner is needed to help governments grope past the global economic crisis yet his observations point politicians in completely the wrong policy direction.

Blaming it on Bush

Knocking George W. Bush has become a sport, but to blame the global crisis on the Iraqi war and his tax cuts for the rich is pure nonsense. Unfortunately that’s the explanation that Stiglitz offers. He does refer to real estate bubbles, but they are treated subordinate issues.

The global crisis is a pure manifestation of perverse policies of public finance. These policies have allowed privileged groups to exploit the real world. Despite his deep learning and sympathies, Stiglitz failed to comprehend the full reality of what was happening on the ground. The origins of all economists perpetual intellectual tragedy are spelt out in Documentary # 2

Messing with our Minds on…

http://uk.youtube.com/RenegadeEconomist