The Panic of 2008

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This week, finan­cial mar­kets truly suc­cumbed to The Panic. The US Dow Jones and S&P500 Indices lost 21%; Australia’s All Ordi­nar­ies fell 16%. “Buy and Hold” gave way to “Get Out At All Costs”.

When we look back with the eyes of his­tory, the ninth day of the tenth month of 2008 will be the Black Thurs­day on which the world’s biggest ever spec­u­la­tive bub­ble finally burst.

The Stock Market Crash of 2008

The Stock Mar­ket Crash of 2008

 Friday’s wild gyra­tions on Wall Street–which saw the Dow down as much as 700 points and up as much as 140, before clos­ing down 128 points for another 1.5% loss on the day–are after­shocks from a finan­cial earth­quake dri­ven by tec­tonic shifts that have a long, long way to go.

The US mar­kets are down 21% for this week alone, and 45% from their peak; the Aus­tralian mar­ket has fallen 16% this week, and 42% from its peak. The only other stock mar­ket crash that com­pares with this is, of course, 1929.

Comparing the Crash of 2008--thus far--to 1929

Com­par­ing the Crash of 2008–thus far–to 1929

The fall in 1929 itself was much more sudden–the fall from the mar­ket peak of 381 to Black Tuesday’s plunge to 230 points took just over a month, ver­sus over a year this time. But the long grind to the bot­tom in the 1930s took three years (and the mar­ket didn’t revisit its 1929 peak until 1957). We may well face as long a wait before a new world finan­cial order is estab­lished.

If we can gain our senses this time, we may be able to estab­lish a finan­cial sys­tem that serves cap­i­tal­ism rather than sub­verts it. We need, as Hyman Min­sky argued, a good finan­cial soci­ety in which the ten­dency of mar­kets to indulge in spec­u­la­tive behav­ior is con­strained.

It is obvi­ous now that this will not be a dereg­u­lated mar­ket. But can it merely be a reg­u­lated one? Will reg­u­la­tions alone–bans on short sell­ing, “Chi­nese Walls” between invest­ment and mer­chant bank­ing, quan­ti­ta­tive reg­u­la­tion of lenders, etc.–be enough?

Clearly they were not this time round. That is the world con­structed after the Great Depres­sion (and its polit­i­cal after­math, the Sec­ond World War) when Keynes ruled eco­nom­ics. It fell apart over time because, as Min­sky put it, “sta­bil­ity is desta­bi­liz­ing”. A period of eco­nomic tran­quil­ity ush­ered in by dras­tic reduc­tions in debt lev­els and firm reg­u­la­tion of finan­cial mar­kets leads us to for­get the tragedies of The Bust, and to believe that mar­kets are inher­ently sta­ble.

This delu­sion was aided and abet­ted by the eco­nom­ics pro­fes­sion, which reacted to Keynes’s argu­ments about the inher­ent insta­bil­ity of mar­kets like an immune sys­tem repelling a virus

Eco­nom­ics dreamt up such absurd notions as the “Effi­cient Mar­kets Hypoth­e­sis” (which assumes that mar­kets accu­rately pre­dict future earn­ings and value shares on that basis), the Modigliani-Miller Hypoth­e­sis (that the most ratio­nal fund­ing model for firms is 100% debt if inter­est pay­ments are tax-deductible), and Ratio­nal Expec­ta­tions (mar­kets are always in long run gen­eral equi­lib­rium, and gov­ern­ment is impo­tent to affect real eco­nomic activ­ity), and even invented asset mar­ket val­u­a­tion con­cepts (such as the Black-Scholes Options Pric­ing Model) that were inte­gral to the devel­op­ment of the deriv­a­tives mar­ket, the most desta­bil­is­ing force of all in mod­ern cap­i­tal­ism.

Cap­i­tal­ism will sur­vive this cri­sis, as it sur­vived 1929; and it will be reformed, as was the sober post-WWII sys­tem after its prof­li­gate pre­de­ces­sor of the Roar­ing Twen­ties. But with spec­u­la­tion on assets still a poten­tial path to indi­vid­ual riches–and with a dras­ti­cally lower level of gear­ing, as the Great Depres­sion level of debt unwound from its 215% of GDP peak in 1932 to a mere 45% at the start of 1945–the seeds for today’s repeat of the tragedy of spec­u­la­tion were sown.

We need instead to con­sider redesign­ing the finan­cial sys­tem so that the cur­rently inher­ent prof­itabil­ity of lever­aged spec­u­la­tion on asset prices (when debt lev­els are low) is con­strained.

I pro­pose three such reforms, in full knowl­edge that they have Buckley’s of being imple­mented now–but hope­fully they will be con­sid­ered more seri­ously when this cri­sis reaches its sec­ond or third birth­day.

These are:

  1. To rede­fine shares so that, as do cor­po­rate bonds, they have a defined expiry date at which time the issu­ing com­pany repur­chases them at their issue price;
  2. To impose “caveat emp­tor” on mort­gage agree­ments, so that the lender’s secu­rity is lim­ited if poor credit eval­u­a­tions were done of the borrower’s capac­ity to meet the pay­ment com­mit­ments in the con­tract (this will be fur­ther explained below); and
  3. To base house price val­u­a­tions on a mul­ti­ple of the imputed yearly rental of a prop­erty, rather than its poten­tial resale price.

The inten­tion of the first rede­f­i­n­i­tion of cap­i­tal assets (this is much more than a mere reform) is to put some effec­tive ceil­ing on how high a share price can be expected to go, and to there­fore force val­u­a­tions to be based more on soberly esti­mated future earn­ings (of the sort War­ren Buf­fett now does) than on the prospects of sell­ing a share to a Greater Fool–which is the real basis of mod­ern-day val­u­a­tions.

The inten­tion of the sec­ond, which may look para­dox­i­cal, is to impose the risk of reck­less lend­ing on the lender. Note that a sale of a house by the lender is called a Mort­gagEE sale–where the suf­fix indi­cates that the BUYER is sell­ing the house. The bor­rower, on the other hand, is known as the MortgagOR–where the suf­fix indi­cates that the bor­rower is the SELLER.

What’s going on? Sim­ple: in a mort­gage con­tract, the lender BUYS a promise by the bor­rower to pro­vide a stream of pay­ments in the future in return for a sum of money now. The lender is the buyer.

What if the lender didn’t prop­erly check the capac­ity of the bor­rower to meet this com­mit­ment? If we imposed the old Com­mon Law prin­ci­ple of caveat emptor–“Buyer Beware”–the con­se­quences would fall on the buyer. At the moment, lenders avoid the con­se­quences of poor research into a borrower’s capac­ity to meet the pay­ments by get­ting absolute secu­rity over the asset the bor­rower sub­se­quently pur­chased with the lender’s pay­ment.

Were caveat emp­tor imposed by the courts, I think that lenders would be rather less will­ing to indulge in the frenzy of irre­spon­si­ble lend­ing that has marked the end of this long spec­u­la­tive bub­ble.

The inten­tion of the third reform is to base lend­ing for house pur­chases on the income-gen­er­at­ing capac­ity of the asset being bought, rather than as now on the resale price poten­tial. If a mul­ti­ple of, for exam­ple, ten times annual imputed rental income were the basis of val­u­a­tion, then it would be more than pos­si­ble for a land­lord to bor­row money to buy a prop­erty, and rent that prop­erty out at a profit.

This would estab­lish a firm link between the val­u­a­tion of a house, its rental income, and the max­i­mum loan one could secure to buy it. It would forge a link between an assets val­u­a­tion and its income earn­ing potential–a link that is so frag­ile in today’s spec­u­la­tion dri­ven mar­ket. It would also estab­lish a class of wealthy agents–landlords–who have  vested inter­est in keep­ing house prices and loan lev­els low.

With such reforms, there is at least some prospect that I will not have a suc­ces­sor writ­ing of the fol­lies of the Stock Mar­ket and Hous­ing Mar­ket Bub­bles of 2060. With­out them or sim­i­larly effec­tive struc­tural alter­ations, with merely reg­u­la­tions as were imposed after the Great Depres­sion, we will be here again some time in the future.

All that is, of course, for the future. The imme­di­ate prob­lem is what to do now, if, as so many more expect than once did, this mar­ket crash is the pre­lude to the world’s sec­ond Great Depres­sion.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Bull­turned­bear

    Another option over term deposits is to buy com­mon­wealth bonds. As offi­cial rates fall the yield will fall and the value of the bonds will rise.

    Also as fear and risk aver­sion rises the value/demand for the bonds will rise as well.

    I have strug­gled to think of any assets that are out­side the finan­cial sys­tem or that will not fall as defla­tion takes hold.

    Cap­i­tal preser­va­tion is very dif­fi­cult in this cli­mate.

  • kika

    i believe that we need a new tax sys­tem which does not tax income, sav­ing or enter­prise, but raises all pub­lic rev­enue through the rental of land and finite resources (i am not refer­ring to the exist­ing land tax). No loop­holes to avoid this form of tax or site-rental are pos­si­ble — you can­not hide a piece of land in a tax haven. 

    Can­cel GST, pay­roll, stamp duty and all other taxes. Get rid of the whole tax collecting/policing sys­tem with its huge cost of com­pli­ance.

    local gov­ern­ments already col­lect rates and we have an excel­lent sys­tem of land val­u­a­tion already in place in aus­tralia. Rev­enue col­lected in this way is returned to the com­mu­nity, not to the deep pock­ets of developers/speculators with the exist­ing sys­tem of huge con­ces­sions and sub­si­dies for prop­erty investors. 

    This sys­tem is very well etab­lished and proven to work. before you crit­i­cise, please have a look at

  • Ken

    boma, I expect that real estate prices will fall for at least 2 years but prob­a­bly longer, and will then be fairly sta­ble for a long time. So lock­ing the money away shouldn’t be a prob­lem. What has sur­prised me is how rapidly every­thing is mov­ing, which means we’ll be soon be see­ing 1–2% a month price decrease.

  • Stitchy of Bris­bane
    this is a highly sim­plis­tic com­i­cal video from appar­ently 2006 that ‘pre­dicts’ a major crash

  • Bull­turned­bear said, 

    One guy sug­gested that all debts will need to be for­given. Dream on! Don’t for­get that some­one lent that money in the first place and they want it back.

    That was me. I don’t know which part of “the debt can never be repaid” you don’t under­stand.

    The debt, and the inter­est on it, can only ever be repaid by cre­at­ing more wealth/money out of thin air. That cre­ation is called eco­nomic growth,

    Eco­nomic growth is dead. We have finally run up against the LIMITS TO GROWTH wall that was pre­dicted in 1970, from here on the pro­duc­tion of oil will go down hill, soon fol­lowed by gas, and soon fol­lowed by coal.

    There is no way we can have any growth with declin­ing energy avail­abil­ity.

    There­fore the debts can never be repaid.

    So we either for­give them, or repos­sess every­thing and throw every­one out on the streets.

    You work it out.….

  • Bull­turned­bear

    Great to engage Mike.

    Debts for­given as in jubilee is very dif­fer­ent to debts not being repaid. The debts will not be for­given.

    I agree with you stren­u­ously that there will not be fur­ther growth from this point. No! The lender will take what they can. Both the bor­rower and the lender will suf­fer heavy loss.

    The bib­li­cal model of Jubilee didn’t work then and it won’t work now.

    If any­one out there is in debt (even your home loan). Get out now. When the global com­pa­nies start falling and the CDS risk starts unwind­ing (or some other unknown trig­ger) the crunch on main street will be much harder than the crunch on the share mar­ket. When the lenders/depositors panic, every­thing gets liq­ui­dated and sur­prise sur­prise there are no buy­ers. Houses are very illiq­uid and will suf­fer unprece­dented falls in value. Because of Australia’s obses­sion with home own­er­ship the falls will be even greater.

  • Ever heard of REVOLUTION?

  • Gary

    the basic cause of the hous­ing bub­ble not addressed by you and your fan club is TAX.
    Tax is the root of all finan­cial and polit­i­cal evil.
    The Great Depres­sion was made infinet­ley worse by the high lev­els of tax­a­tion com­pound­ing other eco­nomic mis­man­age­ment such as credit restric­tion etc. Hoover raised tax from 25% to 60% to cope with expand­ing gov­ern­ment deficits, only to cause fur­ther eco­nomic con­trac­tion result­ing in a fur­ther drop in tax rev­enue. Roo­sevelt con­tin­ued this pol­icy, and it was a major fac­tor in the 1937 reces­sion. Dur­ing WW2, mar­ginal tax rate reached 90%. Obama is going to bring in top mar­ginal tax rates of 60%+ — those who don’t learn from history—.(
    The high rates of mar­ginal tax rates that kick in at rel­a­tively low income rates ensure that Aus­tralia will have a tax avoid­ance obses­sion, and that “neg­a­tive gear­ing’ will be pur­sued by all and sundry. I per­son­ally know of nurses who have sev­eral ‘neg­a­tively geared’ prop­er­ties that are under water, but because of the “tax deductablity of inter­est and main­te­nance”, have delayed the inevitable day of reck­on­ing, “because prop­erty always comes good”- ho hum. In the mean­time, their sav­ings, gar­nered often from excess over­time go down the finan­cial drain — no won­der Aussie banks are so ‘stable’and profitable.(thanks Kevie) Removal of the cap­i­tal gain excemp­tion for any short term invest­ment would dis­cour­age all forms of tax dri­ven spec­u­la­tive invest­ments, and low­er­ing mar­ginal tax rates com­bined with abo­li­tion of all tax deduc­tions (which only dis­tort ratio­nal eco­nomic deci­sions — ie.‘no free lunches’)would elim­i­nate the per­ceived need for tax dri­ven invest­ments. Lower tax rates result in higher eco­nomic activ­ity and lower tax avoid­ance which results in higher tax receipts. Leg­is­late for a per­ma­nent bud­get sur­plus, so politi­cians can’t steal from future gen­er­a­tions, and prob­lem solved.
    In a coun­try where 40% of fam­i­lies pay no net tax (recent report in The Aus­tralian) and 20%+ are on pen­sions, and free Medicare and unfunded gov­ern­ment pen­sions remain a future grow­ing lia­bil­ity, a more ratio­nal tax sys­tem, which is fair rea­son­able, trans­par­ent, ade­quate and low cost to admin­is­ter and results in more pro­duc­tive invest­ments than “McMan­sions” is long over­due.
    PS any­one who doesn’t believe that cli­mate change is a seri­ous risk to human exis­tance, that at least needs seri­ous insur­ance cover, is a com­plete—— AND, Fail­ure to deal with the Peak Oil(Energy)challenge will result in the Great Great Great Depres­sion.
    Cheers, Gary

  • Gary said,
    the basic cause of the hous­ing bub­ble not addressed by you and your fan club is TAX.

    No it isn’t. It’s greed.

    It doesn’t mat­ter how good peo­ple have it, they want more.

    In the case of hous­ing, they want more bath­rooms, more toi­lets, more liv­ing rooms, more and big­ger TVs, more and big­ger refrig­er­a­tors, swim­ming pools, air­con­di­tion­ing, big­ger McMan­sions.…

    It’s called liv­ing beyond your means.

    I have almost fin­ished (and am liv­ing in) a 145 m2 house I designed with one bath­room and one toi­let. It’s an envi­ron­men­tal award win­ning house. We vir­tu­ally own it out­right, and it costs noth­ing to run, our last power bill was $29.55, and $25 of that was ambu­lance levy.

    The econ­omy can col­lapse as far as we are con­cerned, we saw this com­ing a long time ago.

    So when I men­tion for­giv­ing debts, I’m not at all con­cerned about ours.

    I built the house for $95,000 BTW. It’s all solar pow­ered, all costs included.

    So much for Car­bon trad­ing cost­ing the earth!

  • I should have added that we live so cheaply, I have given up work (I’m 56) and haven’t paid any taxes for at least seven years. My wife who is a Nurse works two or some­times three days a week (more to do with staff short­ages than our need or want for more money!)

  • BrightSpark

    One other fac­tor rarely men­tioned is the Cur­rent Account Deficit. For many years now the CAD has exceeded, eco­nomic “growth” and this means we have been earn­ing less and mak­ing up for this by bor­row­ing from other coun­tries. The banks have been help­ing this process by cre­ative dis­tri­b­u­tion of the inter­est pay­ment bur­den amongst home buy­ers and spec­u­la­tors not to men­tion peo­ple who have been “sucked into” other Ponzi type geared “invest­ment” schemes on the advice of “finan­cial advi­sors”.

    We and the US have been oper­at­ing the world’s first cargo cult. We would not need “growth” to repay the debt we just need to be much less greedy. We also need to be be organ­ised by the gov­ern­ment in such a way that we can “trade” on the global inter­face and not just buy on credit. We need free trade not free cargo. Our line of credit is col­laps­ing leav­ing us with a $700­bil­lion debt and all the opo­si­tion leader could com­ment on tonight was that he was con­cerned that the gov­er­ment would kill the (fis­cal) sur­plus.

    Also beware our quoted unem­ploy­ment level of aroung (4.5%) it is a lie and pol­lies say this is “his­tor­i­caly low”! This is for a very short “his­tor­i­cal” period as back in the 1960’s unem­ploy­ment was at a low of 2% real or 1% using the cur­rent sham­bolic met­ric. If this unused labour was being and had been used, we would have a much smoother future with lit­tle debt but now the “Greater Depres­sion” looms.

    We have been bludg­ing on other coun­tries (the Amer­i­cans would say “mooching”).

  • Now read this.…. sorry to ruin your day!

    On July 30 Hans Redeker, head of for­eign exchange strat­egy at BNP
    Paribas, Europe’s biggest invest­ment bank, pre­dicted: “The Aussie is
    going down, big time.”

    Back then — it already seems like a long time ago — the Aus­tralian
    dol­lar was sit­ting majes­ti­cally at 97 cents to the US dol­lar, which
    was tak­ing a bat­ter­ing. But the Aussie did, indeed, go down, big
    time. Within three months it had crashed by 33 per cent to US65.5
    cents. Now Redeker has issued another warn­ing to Aus­tralia. We’ll get
    to that. But first, let’s look at his track record.

    Decem­ber 2006: Redeker pre­dicted a sharp reces­sion in the United
    States, say­ing the con­di­tion of its hous­ing mar­ket was worse than the
    experts were stat­ing and the flow-on effects would be much worse than
    pre­dicted. That was almost two years ago. He was right.

    Jan­u­ary 2008: He pre­dicted the Aussie dol­lar was fac­ing two years of
    decline, and expected to see it fall to 66 cents. He was right. He
    also pre­dicted a rise in finan­cial mar­ket volatil­ity, higher
    infla­tion world­wide, higher inter­est rates in Asia, weak­en­ing demand
    for Australia’s min­er­als exports from China, and a weaker share­mar­ket
    in China, all of which would drive down the Aus­tralian dol­lar. Since
    then, the Shang­hai share­mar­ket has crashed 50 per cent from its peak.

    Octo­ber 2008: Two weeks ago Redeker repeated his claim that abun­dant
    for­eign money had been avail­able to Aus­tralia and too much of it had
    been spent on real estate, cre­at­ing a spec­u­la­tive bub­ble: “The easy
    money went straight into real estate ?c Aus­tralia will now have to
    gen­er­ate 4 per cent of GDP to meet pay­ments to for­eign hold­ers of its
    assets. This is twice as high as the bur­den faced by the US.”

    After the Aus­tralian Reserve Bank slashed key inter­est rates by 1 per
    cent, Redeker also told London’s Tele­graph that he was con­cerned
    about what the Aus­tralian Gov­ern­ment may do: “Yes, Aus­tralia has a
    fis­cal sur­plus, but that does not offer as much pro­tec­tion as peo­ple
    think. If the Gov­ern­ment boosts spend­ing fur­ther, the cur­rent account
    deficit will spi­ral out of con­trol.”
    And what has the Rudd Gov­ern­ment just done? Boost spend­ing.

    There was cer­tainly no dis­cus­sion of the cur­rent account deficit
    spin­ning out of con­trol, or Australia’s exces­sive debt, when the
    Prime Min­is­ter, Kevin Rudd, launched his $10 bil­lion eco­nomic
    stim­u­lus pack­age last week, nor any from the Oppo­si­tion Leader,
    Mal­colm Turn­bull, who offered in-prin­ci­ple bipar­ti­san sup­port. It
    gets worse. Redeker con­tin­ued: “There is a risk, how­ever remote, that
    Aus­tralia could face some of the for­eign fund­ing dif­fi­cul­ties we have
    seen in Ice­land.”

    Ice­land! Ice­land was the most lever­aged econ­omy in the devel­oped
    world when it became the first econ­omy to be bank­rupted by the credit
    cri­sis. You do not want to be men­tioned in the same sen­tence as
    Ice­land unless the dis­cus­sion is fish­ing or blondes.

    After quot­ing Redeker, the Telegraph’s global busi­ness colum­nist,
    Ambrose Evans-Pritchard, weighed in with his own com­men­tary: “The
    imme­di­ate prob­lem for Australia’s banks is that they gorged on
    off­shore US dol­lar mar­kets to fund expan­sion because the inter­est
    costs were lower. They were play­ing on a huge scale with lever­age.
    Euro­pean banks face much the same prob­lem as dol­lar lia­bil­i­ties come
    back to haunt, but Aus­tralian lenders have pushed their luck even

    Gabriel Stein, of Lom­bard Street Research, weighed in with this,
    after not­ing that Aus­tralian house­hold debt had reached 177 per cent
    of gross domes­tic prod­uct, almost a world record: “It is amaz­ing that
    in the midst of the biggest com­mod­ity boom ever seen they have still
    been unable to get a cur­rent account sur­plus. They have been liv­ing
    beyond their means for 10 years. What wor­ries me is that pro­duc­tiv­ity
    growth has been very low: they have been coast­ing after their reforms
    in the 1990s.”

    The global finan­cial world is watch­ing the Aus­tralian dol­lar because
    it holds a key to the great unan­swered ques­tion of this uncer­tain
    era: will the global mar­ket pun­ish a cur­rency for its declin­ing
    inter­est yield? Or will it reward a cur­rency because of the sound­ness
    of its econ­omy? Cen­tral banks are acutely inter­ested in the answer.

    Evans-Pritchard thinks the early signs are hope­ful that the answer is
    the good one, that nations will be rewarded for hav­ing sound
    economies. But he does not believe Aus­tralia can escape the
    con­se­quences of excess: “Aus­tralia has allowed its net for­eign
    lia­bil­i­ties to reach 60 per cent of GDP dur­ing a decade-long boom,
    twice the level of the US. The coun­try will, in effect, have to pay 4
    per cent of GDP in the form of rents to for­eign asset-hold­ers as the
    bill for such extrav­a­gance falls due.”

    The bill is falling due. Ear­lier in the year Aus­tralians trav­el­ling
    in Europe would have paid about $1.50 for every euro spent. Today
    they need $2.10. The Aussie dol­lar is weak again, despite all the
    luck of the China boom. This raises a num­ber of awk­ward ques­tions.
    Did the lucky coun­try became the greedy coun­try? Did it fail to
    suf­fi­ciently embark on a pro­gram of nation-build­ing dur­ing the
    resources boom?

    Was most of the bonus redis­trib­uted as tax cuts, which were spent
    chas­ing big­ger mort­gages, big­ger homes, new cars and gen­eral
    con­sump­tion, stim­u­lat­ing short-term eco­nomic growth but not enough on
    long-term pro­duc­tiv­ity and higher sav­ings? Dur­ing 17 years of
    unbro­ken eco­nomic expan­sion and a 10-year com­modi­ties boom, it took a
    lot of peo­ple, bor­row­ing a lot of money, tak­ing a lot of unpro­duc­tive
    risk, to get to where we are today: a nation with exces­sive debt and
    exces­sive vul­ner­a­bil­ity to exter­nal cir­cum­stances barely within our

  • mettw

    I don’t see how your three pro­pos­als would stop a tulip bub­ble. You seem to assume that shares and real estate are the only assets that hyper­in­flate, but if these were removed then oth­ers would come to the fore. The art mar­ket which is in an absurd bub­ble at the moment is a prime can­di­date.

    It seems to me that a bet­ter option would be to allow the RBA to increase the rate of CGT or the time it has to be held for a dis­count for par­tic­u­lar assets types. By apply­ing CGT increases to par­tic­u­lar assets the RBA could deflate an indi­vid­ual asset bub­ble with­out clob­ber­ing the entire econ­omy like they do with inter­est rates.

  • bar

    The asset bub­ble resulted because real estate prices went too high. Other things being equal, the cost of real estate is inversely pro­por­tional to the land tax. So when land taxes are high, (e.g. 7% of val­u­a­tion) then real estate will be cheap. Ergo, no bub­bles.

    The gov­ern­ment prints the money, (M0) but after that, the var­i­ous forms of money (M1, M2, M3) are in the hands of pri­vate enter­prise. The gov­ern­ment has recently found it nec­es­sary to guar­an­tee M1 so that busi­ness trans­ac­tions can be made with­out suit­cases of cash. I sug­gest the gov­ern­ment should issue online M0 (zero inter­est) or online M1 (inter­est say 4%) accounts. Access could be through the ATM net­work. Then (with appro­pri­ate safe­guards) remove the guar­an­tee to APRA over­seen insti­tu­tions.

    Do not con­fuse cap­i­tal­ism with free enter­prise (aka las­saiz faire).

    Once upon a time, free enter­prise was a man with a horse and cart. Then came cap­i­tal­ism exem­pli­fied as a goods train. The mod­ern ver­sion of free enter­prise is a truckie.

    Tech­nol­ogy turned free enter­prise into cap­i­tal­ism. Now the wheel has turned, and cap­i­tal­ism is in the process of being sup­planted by small free enter­prise busi­nesses.

    I sup­port the Henry George sug­ges­tion that gov­ern­ment income should mostly be derived from land tax. To sup­ple­ment that income I would add the rental income from nat­ural monop­o­lies (e.g. Air­ports, min­eral wealth, elec­tro­mag­netic spec­trum, trans­port cor­ri­dors). The income from those monop­o­lies would directly flow to gov­ern­ment, while var­i­ous “teams” would quote for their man­age­ment.

    To sum­ma­rize:

    1) Cap­i­tal­ism (stock mar­ket) is with­er­ing away as did feu­dal­ism before it.
    2) Consequently,there are far fewer places to invest money, because most large cor­po­ra­tions have no place in the econ­omy of the future.
    3) Banks should be cut free from gov­ern­ment guar­an­tees. Instead the gov­ern­ment should offer guar­an­teed M0/M1 accounts to every­one.
    4) Gov­ern­ment should leg­is­late to derive it’s income from land & monop­oly taxes, and most of that money returned to the peo­ple as neg­a­tive income tax. (not as free hos­pi­tals & schools). Since each child would get a neg­a­tive income of about $12,000, some of that money could be given to the par­ents as a cheque that could be cash­able at any school.

    Much of the above is inevitable (e.g. that is why the stock mar­ket is col­laps­ing).

    Gov­ern­ment will prob­a­bly enact leg­is­la­tion in a vain attempt to pro­tect the big cor­po­ra­tions (because the big cor­po­ra­tions pay taxes and hire union­ists and PAYE tax­pay­ers).

    Gov­ern­ments gen­er­ally do not like small busi­nesses, because it is so hard to tax them.

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