(March-April 2010 GroundSwell)
2010 THE INQUEST
Warning: Politics Dictates Economic Outcomes to the
Advantage of the Few and the Harm of the Many,
by Fred Harrison (DA Horizons, London, 2010)
Reviewed by Edward J. Dodson, Cherry Hill, NJ
For the last six years, I have
closely followed the insights on the global economy developed by British
economic analyst Fred Harrison in several books, documentary films, speeches
and interviews. My own independent research confirmed what he was telling us;
namely, that overstressed property and credit markets driven by destructive
public policies were bringing the world's national economies to their knees.
Regrettably, there was no one
here in the United States who agreed with Fred's analysis and who also possessed
the same ability to attract a significant public hearing. Day after day the
mainstream media followed the lead by economic analysts and government
officials who clamored for renewed regulation of the world's huge financial
institutions as though this will stimulate the creation of jobs for the
millions who are unemployed, losing their homes to foreclosure and falling
deeper and deeper into debt. Not really understanding or acknowledging the
origins of the crisis, we were being assured it could be prevented from
happening again. Such assurances to anyone familiar with Fred Harrison's body
of work are recognized as disingenuous.
Now, in his latest book, 2010
The Inquest, Fred Harrison details his repeated efforts to warn officials in
the United Kingdom of the coming economic crisis in time to implement changes
in public policy that could have softened, if not prevented, the downturn.
This soft cover book is
definitely written to be read by the general public. Its 273 pages fit easily
into one's briefcase, coat pocket or bag. However, the book's content would be
more immediately apparent if the cover had included images of, say, Tony Blair,
Gordon Brown, and some sort of economic chart showing the rise and crash of
property prices in the United Kingdom.
What greets the reader is a
story with which many proponents of structural reforms will identify. Feeling
we have grasped important truths, we reach out to those who are in a position
to act in the common good and are repeatedly ignored and frustrated. For Fred
Harrison, his own campaign began during the late 1960s, another period when the
Western social democracies were stressed to respond to both internal and
external pressures. In an article he wrote for Land & Liberty, Fred warned:
"The politicians and commentators
who mould public attitudes and values would be obliged to defend their
positions, to discard the hypocrisy and double-talk. But for the present they
are spared the intellectual effort, for the educational system is resisting the
radical questioning of students, and education must continue to serve the
function of a hot house for battery hens, valued purely for the efficiency with
which it trains people for their place in the system."
Forty years later, the
idealistic young have for the most part made peace with the entrenched social
order. Fred Harrison never did. He recalls:
"I had lived through three
recessions, beginning with Barber boom/bust of 1972-74. That was when I
embarked on my autopsy: I wanted to know why the people of Britain were forced
to suffer these repeated bouts of mass unemployment."
His first book on the economic
problem, The Power in the Land, was the result, published in 1983, in which he
documented the evidence for an 18-year cycle in land markets at the core of the
so-called business cycle. What he came to see during the next two decades was
that the integration of the world's financial and property markets intensified
and deepened the power of land markets. As he examined the evidence he warned
of "a freefall in the global economy of depression proportions." This
became the theme of his 2005 book (to which I provided a modest level of
research support on the United States), Boom Bust - House Prices, Banking and
the Depression of 2010.
Fred did not rely on the reading
public to generate a growing demand for the reforms he advocated. Boom Bust
brought his message to the national stage. Still, this would be no more than an
academic exercise unless he could stimulate serious discussion and debate
within the halls of government. As early as 1997 he sent letters-of-warning to
all of the key New Labour politicians, and delivered a copy of his book, The
Chaos Maskers, to Alistair Campbell, the Downing Street press guru. Near the
end of 2005, he prepared detailed letters addressed to Gordon Brown (Chancellor
of the Exchequer) and to Tony Blair (the Prime Minister), and to Alistair
Campbell (who, until 2003, had served as Blair's press secretary, and had
voiced some interested in Fred Harrison's analyses). He followed these letters
up with a communication to Alistiar Darling (Treasury Secretary at the time and
today Chancellor of the Exchequer) and others he hoped might take his warnings
seriously. Neither Gordon Brown nor Tony Blair paid attention, with disastrous
results. Fred Harrison's book provides the evidence and places the
responsibility squarely on the shoulders of Gordon Brown.
When land markets throughout the
United Kingdom reached their inevitable stress point on the overall economy and
came crashing down, the new Prime Minister took no responsibility. Fred
Harrison turns the Prime Minister's own words back on him, reminding Gordon
Brown of his pledge as Chancellor of the Exchequer "that as a country we
never return to the instability, speculation and negative equity that
characterized the housing market in the 1980s and 1990s." Harrison knew
the policies of New Labour would do nothing of the sort and repeatedly issued
warnings.
Also strongly criticized for
wrongheadedness is Bank of England Governor, Mervyn King, who followed textbook
anti-inflationary measures even as residential foreclosures mounted, incomes
fell and unemployment skyrocketed. Harrison charges King with "dereliction
in his duty to protect [the] welfare" of the British public, by refusing
to study the history of business cycles and putting all the blame on the
excesses of bankers.
In the third chapter, Fred
writes about the enormous amount of financial asset values lost as a result of
the collapse of property markets, residential and commercial property
foreclosures, falling business profits and declining share values. This part of
the story is a bit difficult to follow. Here in the United States, the policies
that added fuel to an already dysfunctional land market began with creation of
the first money market funds in the 1970s, offering returns to investors that
redirected individual savings from neighborhood thrifts, thousands of which
were forced to close during the 1980s. A long process of dismantling of
restrictions on banking activities eventually brought Wall Street firms into
the secondary mortgage market, offering mortgage-backed securities with high
nominal yields to investors who looked no further than the AAA bond ratings
attached to these securities. With this small added explanation, Fred Harrison's
conclusion stands, that "the catastrophe that struck banks on both sides
of the Atlantic was not caused by the sub-prime scam."
As
property prices increased annually at double-digit rates during the mid-1990s
and after, investors sought to acquire and flip properties after a few years to
capture the rise in land prices. Investors paid less and less attention to the
actual cash flows generated by leasing buildings to tenants. Fred points
readers to the research and analysis performed by economist Michael Hudson,
confirming that with each year that passed the banks were lending more and more
on land values and less and less on building values, while paying insufficient
attention to the borrowers' ability to service debt out of income and liquid
assets. It should be said, however, that when borrowers default on these loans,
the originating banks may or may not actually experience losses. The financial
instrument is likely to have some type of pool insurance and other performance
guarantees that limit exposure and counterparty risk. Fred briefly summarizes
the workings of the secondary market, concluding that "risk was
intentionally shifted on to others." However, telling that part of the
story is even more complex and might cause the average reader to cry out in
exasperation. Investment in financial assets are always priced for risk, and
the market does a good job of accurately pricing for that risk when the true
facts are disclosed. The real problem with these new instruments was the extent
to which fraud was permitted to occur.
What
occurred, argues Fred Harrison, was wholesale institutional and regulatory
failure to protect the public from fraud - and from the activities of land
speculators. "I allege," writes Harrison, "that governments and
their advisors fail to hold penetrating inquests to reveal why the economy
crashed." Examining the Irish property markets in advance of a March 2008
speech in Dublin, Harrison discovered there were no statistics to be had on
land prices.* The same is true in most other countries, and Fred Harrison sees
this as a deliberate effort to keep light from the land market. He notes,
ironically, that "Japan has the best land price stats., but fails to use
them properly." We should recall that skyrocketing land prices and their
collapse pulled the Japanese economy into a deep recession from which the
nation has never fully recovered.
The second half of 2010 The Inquest explains how government
programs and policies consistently benefit the landowning class, providing them
with "windfall gains," at the expense of the general public, who are
taxed and taxed heavily to make up for the subsidies channeled to landowners.
Where the United States is concerned, the Federal Reserve Banks under Alan
Greenspan deserved special recognition by Fred Harrison, for Greenspan's
ignorance of how the real world economy actually works. "The 'guru' did
not have a clue what was going to happen," writes Harrison. "Instead,
he continued to pontificate about the health of the economy." Harrison's
discussions with Rachel Lomax at the Bank of England revealed the British
authorities were equally in the dark.
To the uninitiated reader, all
this is both sobering and frightening. Fred Harrison declares "[w]e need a
new social contract," but there is in his story a sense of desperation of
the kind long ago given voice by Thomas Paine in Common Sense, The Rights of
Man and Agrarian Justice. The British people, after all, continue to embrace a
system of inherited wealth and political power that makes a mockery of
participatory democracy. The British are not alone. For all intents and
purposes, only the very wealthy (or those willing to follow the dictates of
wealthy contributors) rise to high political office in the United States. Paine
saw this coming but found some comfort with Thomas Jefferson in the White
House. Tragically, Jeffersonian Democracy proved to be but a brief interlude to
the dismantling of a nation of freeholder farmers in favor of a people
dominated by agrarian and industrial landlordism and monopolies. Fred Harrison
understands this history better than most. He calls for "a new kind of
society" because, he reasons, "[c]apitalism is a bankrupt paradigm
[that] cannot be reformed." And so, he asks a great deal of the reader who
follows his reasoning, concurs with his findings and sees the need to do
something. He provides his blueprint and calls upon "all of us to work for
change."
The unanswered question, of
course, is how centuries of entrenched institutional privilege can be
effectively challenged in the political arena. New leaders must emerge who are
principled and committed to real justice. It seems unlikely that such leaders
will come from within the mainstream political parties, but perhaps Fred
Harrison's writings and speeches will have an effect on as yet unheralded
political leaders in the same way Henry George's writings and speeches affected
the thinking of the young Winston Churchill and other Liberals early in the
twentieth century.
The future is, of course, not
yet written. If the lessons provided by Fred Harrison in this book and his
other writers are understood by enough of us, perhaps real progress toward
peace and widespread prosperity will be possible.
___
*
Some years ago I pointed out to the research group at Fannie Mae (where I
worked as a market analyst and business manager) that our ability to track
trends in property values could be dramatically improved by adding one additional data element -
site value -- to the information submitted by mortgage loan originators. The total
appraised value was already captured, and the site value amount was reported on
the appraisal report. All that was required was a change in reporting required
under the Home Mortgage Disclosure Act.
(Editor's note: Ed Dodson may be emailed at ejdodson@comcast.net. He is the director of The School of Cooperative Individualism.<<