Review of the Book:
2010 The Inquest
Warning: Politics Dictates Economic Outcomes to the
Advantage of the Few and the Harm of the Many
by Fred Harrison
Edward J. Dodson
[Reprinted from
GroundSwell, March-April 2010]
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.