Thesis Number: #5 (Page 6 of 9)
Preserving the Business cycle
Thus did land-driven boom/busts emerge as the defining characteristic of the business cycle. Land speculation prescribed a periodicity that averaged 18 years (Harrison 1984, 2005). The money-men pitched in to take their share of the spoils. That set the scene for the financial chicanery that was seeded in the 1990s. Heinous crimes exposed a culture of cynicism that leaves one speechless. The most tragic of deceptions was the sub-prime mortgage. This teased the victims of the economics of apartheid into believing that they had made it out of the trap of dependency. Bankers knew what they were doing, and they sought to shift the risk of default by packaging the toxic mortgages into “collateralised debt obligations”. These complex financial instruments were sold to unwary investors such as local governments, setting the scene for the crisis of 2008. Result: hundreds of billions of dollars, euros and pounds were poured into insolvent banks to protect the shareholders. Banks saddled themselves with large fines and costs as a result of the sub-prime mortgage débâcle. In November 2013, US banks alone faced costs of up to an additional $104bn to resolve the legal issues (Alloway et al., 2013). Ultimately, however, the pay-outs were from monies handed to them by US taxpayers. Taken together, bank bonuses and dividends did not suffer.
Politicians set up commissions of enquiry. The policy emphasis was on re-regulating banks, not removing the incentives that nurtured corrupt behaviour. No government made any attempt to address the way in which the pursuit of capital gains from land was the primary incentive that caused the crisis. The futility of the proposal to split big banks (separating deposit taking from investment making) can be inferred from two notorious cases.
- In Britain, Northern Rock suffered a 19th century-type “run on the bank”, yet it had no investment banking facility.
- In the US, Lehmann Brothers imploded, yet it did not have a retail banking division.
“Tough” regulations will not prevent banks from fuelling the next land-led boom/bust. Market economies have suffered from cyclical disruptions
- in periods when banks were not regulated (from the 18th century through to the depression of the 1930s),
- when they were tightly regulated (between the 1940s and 1980s), and
- when they were loosely regulated (from Reagan/Thatcher to 2008).
Box 3
Democratising the Money Supply
James Robertson (2012: 112-113) explains how, in the UK, changing the way money is created and circulated would result in an annual saving to all citizens of about £75bn, and a one-off benefit to the public purse totalling £1.5bn over a three-year transition period. This would be achieved by-
(1) eliminating the hidden tax that we all pay to commercial banks as interest on the bank account money in circulation; and
(2) profiting from the one-off increase in public revenue resulting from converting the money supply created by commercial banks as debt into money created free of debt by the Bank of England. New money would be additional to public revenue, and used to reduce taxes or spent into circulation by funding public projects.
The regulatory regime is not part of either the cause or the cure of the financial sector’s contribution to booms and busts. Instead of democratising the monetary system (Box 3), governments launched the next land-led boom/bust. The West is back on track for the land-driven cycle that will terminate in a fatal depression in 2028.