Prepare for the Dead Certainty: The Next Boom/Bust
We’ve seen how Barack Obama has failed to change the rules governing America’s banks- it’s back to business-as-usual on Wall Street. And now, Britain’s government is confessing failure. In its White Paper on financial regulation, the Treasury reveals its unwillingness to legislate. Instead it offers a raft of proposals for discussion.
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 17th 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.
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So that’s it? Depression is over, we have a new business cycle starting in 2010?
I expected the fall to be bigger and depression to last till 2020. Good news from Fred in this article!
Fantastic article. The Governments will never change the system because they make so much money from the boom and bust cycles.
In the U.K the politics have been found out for using the property bubble to make a lot of money on second and third homes paid for by the tax payer.
It is a very sick system of abuse we live in but if we are educated to the facts at least we can steer ourselves around this mess and not be to burnt by there wrong doings.
Keep up the good work of educating us on whats happening out there.
I have produced a blog about government and political failures, if people would like to take a look and leave some feed back that would be great.
http://www.governmentpolitics.blogspot.com
Sorry to disappoint you, Free Drive Ro, but although the new CYCLE starts at the end of next year, the ECONOMIC CONDITIONS of the next few years will drag out into a decade-long depression (or, as I prefer to call it, a period of “arrested growth”). Recall the terrible pattern of events of the last depression. The crises of 1929-1933, and the Depression of that decade, did not prevent the property boom in the mid-1930s (especially in England’s South-East, with the construction of suburban housing estates around the new Tube stations). The house price peak would have been followed by a recession in 1938. This did not happen, for one bad reason: European governments expanded their investments in munitions (and Hitler built autobahns, the better to shift his armies around), and they hired people off the dole queues in readiness for a world war. The outcome was a heavy price to pay for the “counter-cyclical” measures that prevented the bust of 1938.
Fred Harrison
An economist is someone who will tell you tomorrow why what he predicted yesterday did not happen today.
– Laurence J. Peter ( the inventor of the Peter Principle )
Economy, n. Purchasing the barrel of whiskey that you do not need for the price of the cow that you cannot afford.
– Ambrose Bierce, The Devil’s Dictionary.
Reading your excellent book ‘Boom Bust’ I thought that the four down years of property were to be 08, 09, 10, 11; have you revised this to end in 2010?
Also I think you predicted a drop of around 22% but it sems to be slightly more savage than that – possibly 30%+.
Unfortunately, pro-cyclical forces pervade market structures. The bankers that pumped the bubble with SIVs and various investment vehicles, are also primary dealers and market makers. They knew they were peddling junk, and so were in the perfect position to short the markets, using high frequency computer trading and fictitious shares/fails to deliver. The markets are highly controlled, and not free. The rules that are intended to level the playing field, do not apply to market makers. I believe we have witnessed the most hostile take over in history, with out military assistance.
The boom bust cycle is a certainty, in part because market structures allowing almost perfect manipulation have been created by the bubble makers, so that they make the bubble and pop it at will. From their point of view, something went terribly right.