6 years on from the GFC, what have we learnt?

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By Catherine Cashmore, a market analyst, journalist, and policy thinker, with extensive industry experience in all aspects relating to property. Follow Catherine on Twitter or via her Blog.

Five years on since the US recession ‘officially’ ended in June 2009, urban land prices are rising, the pattern of history is repeating, and this time, the players on the chessboard have changed.

But our Governments are turning a blind eye.

They have yet to acknowledge why the crisis happened, or put policies in place to prevent it happening again.

Expensive welfare systems, elaborate tax and transfer policies, and the financial ‘cures’ following the previous land induced crash in the early-1990s, did nothing to prevent the swiftest and sharpest synchronised global downturn in human history.

Taxpayers were punished, bankers got a “get out of jail free” card, and the largest real estate investment trusts spent $50 billion purchasing 386,000 foreclosed homes, to rent out to previous owners who believed and acted on the lie that “there is no bubble.”

The IMF, and policy makers are now twisting themselves in economic knots trying to pin down a ‘cure’ for the dangers of excessive house price inflation, which they readily admit lead to most banking crises, with Australia featuring in the top five of each of their highlighted risk assessments:

“……our research indicates that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises…..” IMF “Era of Benign Neglect of House Price Booms is Over” June 11 2014

The IMF claims the ‘neglect of house price booms is over’, but as the OECD ‘Post Mortem’ of the 2008 crises reveals, these economists can’t see.

They ignore the role that rent (unearned income,) debt and the financial sector play in shaping the economy.

They have a colourful history of recurrent boom-bust land cycles, all replete with rampant speculation and easy credit, spanning in excess of 300 years from which to study … and yet:

“The macroeconomic models available at the time of the crisis typically ignored the banking system…” (OECD Forecasts During And After The Financial Crisis: A Post Mortem – February 2014)

In other words, based on the aesthetic qualities of their equations, the 2006/7 bubble couldn’t exist. A story we hear repeated every year as prices continue to defy gravity and economist try and explain it away with ‘sound fundamentals.’

Neo-liberal policy made matters worst.

Less government interference protecting labour or redistributing wealth through taxing the rich, deregulation of capital markets, lowering trade barriers, reducing state influence though privatization and fiscal austerity – was termed by American scholar Robert Waterman McChesney as “Capitalism with the gloves off.”

It promised to lead to efficient markets and lower unemployment.

But at the onset of the GFC, unemployment in developed nations rose above any previous recession of the past three decades, whilst wages, as a share of GDP plummeted to their lowest point since the Second World War.

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“This should be a wake-up call…” concluded the UN in their annual Trade and Development report that revealed the findings:

“There must be something fundamentally wrong with an economic theory, that justifies the rise of inequality mainly in terms of the need to tackle persistent unemployment.” Annual report by the UN Conference on Trade and Development 2012, Ch 11. Section C (analysing the effects of “labour market flexibility.”)

In the UK, the Bank of England has imposed a 4.5 times loan to income cap on 85% of mortgages, along with various ‘stress tests’ to please the regulators.

But the Council of Mortgage lenders show only 19% of recent London mortgages are at or above this ratio, whilst the national figure is a mere 9%.

By volume, London accounts for around a quarter of loans nationally, (Q1) so the 85% cap will do little to nothing, except perhaps eliminate home ownership for low-income groups.

But stemming inflation or deterring speculative activity is not, and never will be, Central Bank policy:

Carney – “These actions should not restrain current market housing activity … these actions will have minimal impact in the future if the housing market evolves in line with the Bank’s central view,” (i.e. up)
Guardian – “Bank of England will not act on house prices yet” 27 June 2014

In the U.S.A just five megabanks and their holding companies control a derivatives market worth hundreds of trillions of dollars. In Australia, the ‘Big Four’ command 80% of the market and 88% of residential mortgages.

‘These are the men who have the most economic power in the world’ wrote British philosopher, mathematician and historian, Bertrand Russell, one of the 20th century’s leading logicians; “..and they derive it from land, minerals, and credit, in combination.”

Russell understood only too well, that all productive gains, every improvement in society and the economy, would be capitalised into rising land values, enriching those who owned the assets but more so, those who created the credit and traded on the debt.

Milton Friedman meanwhile tutored that societies are structured on greed.

But greed means taking something from another, grasping for a larger slice of the pie. (see pareto efficiency.)

Greed is not a natural feature of a well functioning community; rather it’s a feature of a dysfunctional economy that allows a country’s wealth to gravitate into an elite nucleus of financially strong hands.

It remains that the economy is fueled by what is termed the FIRE sector – Finance, Insurance, and Real Estate.

The FIRE Economy is dependent on rising asset prices – on you and me buying houses – so it can extract economic rent.

The three sectors work together – they’re intrinsically linked.

The banking sector pumps a colossal amount of credit into the system by way of a home loan. Real estate businesses sell the products – some trading as REITs – insurance companies underwrite the owners debt, property, and income, and as the interest payments compound – doubling and doubling again – the debt is recycled into more lending, more borrowing, higher house prices – making those who trade on the debt in an obscure concentrated market of derivatives, increasingly wealthy.

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See Bubble Economics: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos

The Government, many members of which come directly from the industry itself, receive substantial payments from the FIRE sector.

For example, between 1998 and 2008 the banking industry spent $3.4 billion lobbying the US government.

In Australia, the ICAC investigations into illegal donations from developers and “wealthy property tycoons” reveal tens of thousands of dollars have been used to influence decisions by local, state and federal governments.

It should, therefore, be of no surprise that ‘affordable housing policy’ always seems to work in reverse.

Generous subsidies are handed over to investors – all of which are capitalised into land prices.

Restraints on supply are imposed, ‘rich neighbourhoods’ are protected from over development, land on the fringes is no longer dirt cheap, acreages are banked, exempt from State Land Tax until subdivision at the owner’s pleasure.

To survive, the FIRE sector must effectively sell the illusion that the economy can grow on rooftops, that we can all take part in an orgy of economic rent.

“Only the little people pay taxes” (i.e. work for a living) – we can all become wealthy through property investment, dining out and trading on leveraged gains, perhaps donating a little to charity, or taking part in some publicity-generating event to raise funds for homelessness along the way – as our politicians are fond of doing.

Of course, first homebuyers suffering alarm at rapidly escalating costs are necessary oxygen for the system.

So their judgement is manipulated as housing affordability is now reclassified as mortgage serviceability – how far the pay cheque can stretch each month rather than highlighting the upfront cost, while young buyers are encouraged to enter the market as speculators, living off their parents, until they gain a ‘foothold’ from leveraging the equity.

Banks assist with an array of financial products – offset accounts, honeymoon rates, shared equity schemes – mortgages treated like credit card payments, where all that’s required is the interest and should the market collapse with money still outstanding, they’ll collect the house too.

The result is land is now used for greed rather than need, pushing city boundaries outwards, requiring an excessive use of durable capital, which eventually leads to a shortage of loanable funds.

You will never be told the system can fail.

Instead you will hear that house prices can maintain a ‘high plateau’ – stagnate for a while until we all ‘catch up.’

However, the increase in the annual rate of growth is now part of the income that buyers pay for and lenders rely upon.

This is how real estate is sold – investors gravitate to areas that advertise ‘good capital gains,’ calculating the land’s value based on both the rent a tenant will pay plus the projected annual increase (land rent.)

Buyers live in fear of land values collapsing, yet, while prices trend higher, expectations over shoot the mark by no small degree. Landowners treat their unearned increment as income, raising consumption, lowering saving, putting to upward pressure on inflation, which eventually results in interest rates rising.

Never, throughout the course of history, has such a process been economically sustainable.

At some point the productive capacity of the economy can no longer support the boom – and as Australia’s history of land induced financial crises reveal, the end is not always as kind as experienced in 2008 (see Bubble Economics: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos).

“House prices don’t always go up” warned the Governor of the RBA, Glenn Stevens at a recent speech in Hobart, just as he did in March – a message he has repeatedly reiterated since appearing on Seven Network’s Sunrise in 2010.

But Australian investors aren’t listening to Glenn – they’re reading the media headlines, covering the latest findings in the BRW Rich 200, which shows property to be the ‘single biggest source of wealth,’ and entrepreneurs “piling into property faster than ever.”

Banks remain disturbingly under-capitalised.

“I’ve had land that has doubled in value in the past 12 months,” said Harry Triguboff … (BRW Rich 200: Fatter profits for property barons – 27th June 2014)

But while Triguboff paid a lot for his land, he did not make his cheque payable to the local school, park, rail network, or the array of public and community services that yield his land a healthy source of locational revenue that grants such windfall gains.

His payment went direct to the previous owner of the land, who pocketed the profit, while the funding needed for maintaining the facilities and attracting workers to the city, come from an elaborate network of taxes, which fall primarily on income and productivity – ‘the little people.’

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This is the kind of rent seeking most of us have some experience of, a process that effectively punishes and disheartens the priced-out sectors of the community, whilst encouraging the hoarding of land as the road that leads to riches – thereby ignoring the social and ethical problems that result from the process.

The effect is to turn us into a nation of speculators where moral judgement is subverted by the unearned yields one can receive.

Investigate most societal problems, wages, housing, health, poverty, the loss of jobs to off shore markets, and this will be found at the root.

No one is born into poverty or inequality – these things are not by-products of nature – in a modern society the extremes we experience that lead to protests and riots over cuts in expenditure to welfare (a requirement exacerbated by the process outlined above) are due to policy and political ignorance.

When the Henry Tax Review in 2008 concluded “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases”, it was onto something important.

Lifting taxes off labour and restructuring our tax and supply policies is a good start, but alone it won’t do. Removing the power embedded in the banking industry to create credit based on their own vested interests is equally important. It would free up the creative capacity of the community and move instead toward a society and culture that is able to provide for all.

However, it remains that every effort in history to effect the changes suggested above have been fought by the establishment. In this respect, change can never come from the top down. It requires a system that can return democracy to the people through a slow process of re-education, and it’s a system we need to advocate if social and economic justice is the goal.

But until such a time, it’s business as usual – and we have a way to go yet, but be well aware, the date for the next global financial crisis has been set.

Unconventional Economist
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  1. Wow.
    The author has put a great deal of thought into this piece.
    What a great article… everything brought together beautifully.

    I can remember at the time of the Japanese crash in the sharemarket in 1989 with consequent insolvent banks which were then allowed to carry on as if nothing had happened, and Japan has suffered ever since.
    Economists in the West told the Japanese that they were crazy not to allow these banks to fail, draw a line under the problem and start again…”that’s the way we do things…that’s how capitalism works”.
    Then for some strange reason the West decided to copy the Japanese Solution after all… And here we are.

    Great article… should be presented on every TV station in the land on the same night instead of the news… To make sure that not one person misses it.

    • It should be stapled on the forehead of every one of our fine representatives in Canberra!

    • As Japan didn’t have a choice, neither does the west. The problem with capitalism and economics as we now it is that it many of the rules and theories about it were developed in the last century. Especially the second half of the last century.

      Moreover, as the theories became increasingly complicated, the concepts becomes increasingly abstract and we get to the point where the system/market are beasts of their own, or supposedly so.

      Growth, for a long time was supported by population increases. People just assumed this is the way it is and always will be. When it wasn’t, Japan in 1990 and the US a bit later on, the debt bubble was unleashed. Why? Well the whole financial system depends on it….

      To give you an idea,have a look at this graph:


      The US has on average 2% real GDP growth per capita since 1950. I would really like to see this data with a proper inflation adjuster….

    • I concur, but the overall agenda should also be discussed, that of the global banking cartel’s push to have every country sign on to the WTO’s Financial Services Agreement, which contains the Fifth Protocol, allowing for foreign ownership of a country’s banks and their acceptance of credit derivatives as valid financial instruments (instead of the Ponzi fantasy finance weapons they really are).

  2. Let’s be realistic. Most people will never know what is going on. It’s always been that way and always will. There is always a ruling, governing or directing group who see what is, and how they can benefit. It’s no different this very day. The option those of us who read articles and blogs like this have is “What do I do?”. For some that will be “More of the same! It works, and will for some time to come” . For others it’s “Get ready for what will be the worst economic disaster the world has recently known”. The date may indeed have been set. But no one knows where it is on the calendar. What is certain, though, is that we are all 6 years older, and ageing. That factor alone will likely determine what the date is. For some, it will be after they are dead. For others it will be too late. And for most? Well, they’ll just be financially dead. A very few will have had the courage to be in the right place at the right time. And that….will be as much a matter of luck as wise planning.

    • Billybob McBob

      Very well put. Timing is almost impossible with this. I’ve been waiting for this all to pop ever since I moved here over 4 yrs ago – still waiting, and actively considering stopping the wait. Great article from CC though, yet again hitting the nail on the head.

    • This has been my thinking lately too – getting a few years older, prices have shot up massively beyond the pre GFC highs and you get sweet FA for the price (debt). But what to do? Suck it up and be another bubble contributor by buying at these prices? Wait more years for mean reversion? Frankly all choices suck.

      Great article CC, your classical music training plays through your writing style.

      • Absolutely, I finish reading this article feeling like I do at the end of a concert given by a maestro. This should be a milestone classic in our long battle between reason and unreason on this subject.

    • You are spot on, but there are subtle changes, regardless that they receive so little publicity: the majority of American voters today now call themselves independent, with only minority numbers recognizing the D or R parties as valid.

      The middle class is so depleted that the latest Census Bureau stats indicate one out of every two Americans as poor.

      People, or sheeple, do ever so slowly appear to be awakening, whether in time to make any significant change, of course, will be the story.

  3. Is The Message getting through at last?!
    The arborist came as I was writing my first post on here, and after an hour of hacking and chopping with a chainsaw , you know – real work!, he gave me an invoice and said “You used to be in finance didn’t you? Can I ask – My accountant says I should be buying another investment property to cut my tax bill, and I’m getting a bit nervous about the size of my mortgages. What do you think?”. So, thanks Catherine. I gave him a copy of your article, and saved myself the dilemma of ‘should I give it to him straight’.

    • migtronixMEMBER

      Ha!! Also good to know it’s not just us IT geeks that get bailed up “you’re in It? Can you just take a look, my computer isn’t working….”

  4. A very emotive article, and one that I think makes no fundamental distinction between the drivers of the cycle leading up to the GCF and this cycle.

    But the real message I get from this is we should regress from the world of a free economy to something more akin to a dictatorship. I know what I prefer.

    • Good point. What we are getting is a dictatorship of capital.

      There aint nothing free about the economy if you dont have access to capital.

      Indeed as someone who has lived in the odd dictatorship I would observe that many Australians probably wouldnt notice the difference.

      The market would arguably pay less attention to the thoughts views and concerns of the mug punter than most dictators.

    • No, Bull Market; the shining city on the hill in all this is the dozens of cities in Southern and Heartland USA where it is absolutely impossible for the rentiers to gouge as Catherine described. I think Catherine would agree.

      The reason, put in crude cultural terms, is that any bureaucrat coming along to some exurban spot where a few people are proceeding to bulldoze a bit of turf in preparation to build a bit of stuff on it, to tell them “you mustn’t do that”, will be run out of the State with the seat of his pants full of buckshot.

    • “But the real message I get from this is we should regress from the world of a free economy to something more akin to a dictatorship.”

      Perhaps you should read it again because the article says pretty much the opposite of that.

  5. The heading of this article reminded me of one of my favourite rants of all time, from Jesse Colombo of bubblebubble.com.

    He said:

    “It is simply mind-boggling that the world is back to blowing massive property bubbles so soon after the U.S. and peripheral European housing bubbles popped and caused such incredible economic carnage. The Western and Northern European housing bubble is proof that we are living in the era of The Bubble Bubble (a bubble of bubbles) as well as an era characterized by the most outrageous arrogance and hubris that humanity has ever experienced. The 2008 global financial crisis should have taught everyone their lesson once and for all, but we are clearly living in a world filled with excruciatingly slow-learners. More punishment is coming our way and will keep coming until we finally learn from our mistakes. Sadly, by the time we learn from our mistakes, it will likely be too late.”

    • Hmm….housing bubble, was that the problem?

      When AIG sells $460 billion worth of credit default swaps (and mostly naked swaps) with a potential payout of $20 trillion to over $40 trillion, that is insurance fraud of epic proportions.

      Likewise, when the private equity/leveraged buyout firm destroys a company (really companies to the max) while buying naked swaps against their debt, for a super-payout, is that anything other than colossal insurance fraud?

      When 96% of Magnetar Capital’s deals went bad, but the principals walk away with billions, from taking out those credit default swaps, is that anything other than gargantuan insurance fraud?

      When Goldman Sachs does a deal with John Paulson’s hedge fund (with Alan Greenspan as a Paulson advisor), churning out a junk CDO called the Abacus CDO, with Paulson taking out naked swaps at $1.4 million per CDS with a payout of $100 million, and buying a bundle of those to receive billions in payout, is that anything other than biblical insurance fraud?

      (Plus the Timberwolf CDO, the Point Pleasant CDO, etc., etc., etc.)

      Securitizations, re-securitizations, re-re-re-securitizations, credit derivatives, rehypothecation, hedge fund speculation in all areas, but especially oil/energy and across the healthcare sector, private equity/leveraged buyouts across all areas, but especiall oil/energy and across the healthcare sector, virtual naked shorting thanks to the DTCC’s Stock Borrow Program plus the internalization business of the top banks and hedge funds, and everything in HFT mode.

  6. What a great article, CC has found her calling,.
    It’ll be interesting to see what reward the MSM delivers for this work. I’ve got a strange feeling that an inverse relationship might develop between articles like this and her total remuneration package,
    I suspect what she needs to do is to find a way to weave this narrative into the next episode of “The Block” or better still Matererchef since after all we’re talking about cooking Australia’s economic books.

    • i agree, The Block should have a health warning screened before airing, just the ads make me want to immigrate to another country.

      • Mining BoganMEMBER

        Didn’t they lose money on every property they sold a year or so ago? Nobody cared for longer than a minute. The punters are blinded. CC’s message would be lost in the noise made by the besotted and their power tools.

  7. Two quotes from Georg Wilhelm Friedrich Hegel come to my mind:

    “The only thing we learn from history is that we learn nothing from history.”

    “What experience and history teaches us is that people and governments have never learned anything from history, or acted on principles deduced from it.”

    • What does “learning from history” have to do with not jailing or executing the greedhead sociopaths who continue to do the same crimes over and over and over again?

      Nothing having to do with learning cycles, only people’s militant ignorance not to understand the causes and sources.

  8. Six years on, what have we learned?

    That we’re fortunate: post GFC – no property market collapse, booming exports, strong currency, solid employment, generous benefits. Few other nations have enjoyed the good times we have had.

    It might all end tomorrow – better get the budget in order.

    • “…better get the budget in order.”

      Except that the current government is proposing to do the opposite of that if you read it honestly.

    • It would be fine if it was just 3d here who had learned nothing, it is a bit scarier to think that this statement closely reflects the Lib’s policy rationale.

    • I would have preferred us suffer along with everyone else than to have wasted the last 6 years gathering more debt.

      Our fall will be all that much greater 3d1k.

    • “It might all end tomorrow” – Yep

      “better get the budget in order.” – So it’s time for another election then?

  9. Ronin8317MEMBER

    Great article. I hope some of the PUP senators will read this, and then go on to shake up the system!!

    The addiction to ‘cheap money’ is the same as other addictions, so our government behaves like a drug addict who refuses to acknowledge the addiction problem. Put aside the current account and look only at the flow of goods. Resources and manufactured goods originates from poor countries to be consumed in the West. In exchange, all the poor country get is a bank statement with some numbers on it. This is better than slavery!! However, the ‘free’ good create problems by itself. Beyond over consumption, the ‘free’ import destroys the country’s own manufacturing base. The West therefore must create more ‘imaginary numbers’ to maintain the flow of goods, most of which is done through increasing real estate prices. The ‘wealth effect’, originally proposed by Greenspan, describes how people inflate their balance sheet to buy more useless stuff. This also applies to a country. The Western governments turns a blind eye to the banking sector, because the banks are crucial in keeping this scheme running. Our cheap iPhones and flat screen TV are paid for via inflated house prices. We’ll be better off if the flat screen TV costs more, but house prices cost less.

    To borrow from Herbert Stein : “If something cannot go on forever, it will stop”. The hollowing of local manufacturing have geopolitical consequences, as ‘real’ wealth is only created through manufacturing and processing. For example, the boots for our ‘Diggers’ wears will soon be made by a Chinese firm. If we ever get into a conflict with China, they will have to fight barefooted. Not that I expect it will happen, unless the US saves us, or our government will offer unconditional surrender immediately.

    • darklydrawlMEMBER

      For years, I have have been curious / concerned about what Australia’s position would be if the US and China went into conflict.

      I still don’t have a good answer, and I suspect the Government of the day doesn’t either.

      There are no good options that I can determine.

      • I think we all worry about that darklydrawl.

        But look how quickly Tony Abbott pledged our troops to go back into Iraq with our wonderkind in the Oval Office.

      • But if the USA and China do go into conflict (China being where the bulk of US jobs, technology and investment has been directed) it will be by design, so not to worry.

  10. ……….”Investigate most societal problems, wages, housing, health, poverty, the loss of jobs to off shore markets, and this will be found at the root.”……


  11. Catherine Cashmore is a truthsayer and one of our best spokesman battling for change. Go Catherine, keep spreading the truth and you will go down in history alongside the Steve Keens of this world. Well done to all of you.

  12. In the first year I learned that:
    1. Past performance is not an indicator of future performance
    2. Financial planners are commission based salesmen, not advisers like an accountant or lawyer
    3. Just because they work for Commonwealth Bank doesn’t mean you can trust their judgement and now we’ve learnt that maybe some of them are even forgers.

  13. Along with everyone else I also join in the chorus of great article and the calls for Catherine to enter politics. Never as the time been more ripe for someone of her calibre and understanding of the true picture.

    I fear that our bubble is too big now to pop. The bubble should have popped years ago, but we can now see that the government will really do whatever it takes to keep it inflated. And the cost doesn’t matter. If it means pumping more funds into negative gearing then that’s what we have to do. If it takes funds from productive aspects of the economy then again, that’s what we have to do. In fact, that’s what we’ve already done and we see the economy worsening every day as businesses close and jobs are cut back. And those who do plunge into a mortgage become debt slaves for most of their working lives. Heaven help them if they lose their jobs! But on the bright side – the magic pudding keeps rising. And those who are getting richer by the day are happy.

    So if it means we all have to squeeze in a whole lot more while hordes of immigrants flood our cities, then that cost must be borne. If a generation can’t buy a home and has to live with their parents or has to subsist in a dogbox, then we’ll do it for the sake of the bubble. And if it means that we sell the whole country to foreign investors then it’s a no-brainer – no cost is too large when it comes to propping up our housing bubble.

    And after all that, we are lectured daily by the press that there is no bubble. If we continue on this way, they say, then there might be the tiniest chance of a bubble at some time in the future, but for now the b word is taboo.

    So what I’ve learned since the a GFC is that the bubble has no ceiling. And the government, banks and real estate industry will make sure of that.