On 4 November, 1997, I wrote two letters to 10 Downing Street. One was to Prime Minister Tony Blair. The other was to his media guru, Alastair Campbell. I explained that their New Labour government had exactly 10 years to save Britain from a global housing crisis that would end in a depression. They took no notice. Ten years later, on 9 August, 2007, a French bank froze withdrawals from some of its money market funds. A month later Northern Rock was humiliated by the first run on a British bank since the 19th century.
Today, we are 10 years older, but none the wiser. Commentators are analysing the financial crisis of 2008 by focusing on causes that are wide of the mark. They note that, over the previous decade, the warning signs were there to be seen. What signs? Well, there were bubbles that were “rooted deep in human nature”, as one columnist put it in the Financial Times.
Added to the frailties of the individual was the disruptive impact of new technologies. In the past, this resulted in the boom/busts with the onset of the canal era; the railway era; the automobile era, and now the internet era. And let’s not forget how easy credit fuelled asset prices. None of these observations explain why the crisis of 2007 could be forecast with precision, 10 years before it happened.
Economists and commentators do refer to the sub-prime mortgage debacle, but as a symptom, not a cause. And, in one sense, it was, indeed, just a symptom.
The root cause of recurring boom/busts is the tax system. Governments have structured their revenue raisers in such a way as to maximise the financial incentives that encourage people to misbehave.
Taxes penalise people who work, save and invest. At the same time, the tax regime rewards people who speculate in rent-generating assets, such as the rents generated out of urban locations. But the recession in the middle of the last 18-year cycle, at the turn into the new millennium, was triggered by the boom in the dot.com companies. Their value was inflated by the failure of governments to collect the rents of the electro magnetic spectrum.
Wrecking the Social Galaxy
Today, corporations like Apple and Amazon count their value in terms of tens if not hundreds of billions of dollars, for one reason only: governments allow them an almost free ride on the use of radio spectrum, without which their “business models” would be almost worthless.
At the beginning of the Industrial Revolution, the wrecking of our planet’s health began when governments allowed landowners to market their coal without paying for the social costs of the damage caused by the emission of carbon waste.
Today, at the dawn of the digital age, the wrecking of our social galaxy is proceeding apace because governments are allowing the IT whiz-kids to market their algorithms without paying for the social disruption which their innovations are causing.
In both these technological turning points, what ought to have been a boon for humanity became a disaster for many people. But it need not have been so. If governments had collected the ensuing rents, the incentive structure would have encouraged responsible innovation.
Example: charging rent for using the absorption capacity of the heavens as a dumping ground for carbon would have encouraged the engineers to devise methods for recycling the waste generated by their new technologies. The unleashed combustion power, which reduced the cost of doing business, would have been to everyone’s benefit.
Today, if governments collected the rents flowing from the increase in productivity made possible by digital power, resources would be available to retrain people who lost their jobs. And governments would not have to seek refuge in “austerity” policies.
They Refuse to Learn…
The story of the 1997-2007 debacle is not a state secret. It is recounted in 2010 The Inquest. It’s the narrative of what really drives the capitalist economy. Governments and their expert advisers choose to ignore the real explanation for booms and busts, because it points the accusing finger at the abuse of power.
Wilful blindness is leading the world into the next depression. The commentariat believe that, come the next financial crisis, governments are better equipped to deal with the fall-out. They are wrong. The outcome will be even worse than what was experienced in 2008.
Now in the making is the convergence of disruptive planetary forces with the social forces that are wrecking people’s lives. And we now have less than 10 years to reform government tax policies, if we wish to forestall the Crash of 2026.
Download The Inquest PDF here.