Great Crash of 2008
by Mason Gaffney
For Groundswell, July/August 2008
This crash is The Big One; it has the signs of becoming a Category
5. How do we know? We’ve “been there and done that” so many times before,
roughly every 18 years over the last 800 or more. Major wars and, rarely, plagues
have broken the rhythm, along with the little ice age, reformation and counter-reformation,
political revolutions and reactions, the rise of nation-states, the enclosure
movement, the age of exploration, massive European imports of stolen American
gold, the scientific and industrial revolutions, the Crusades, Mongol and Turkish
invasions, and other upheavals. Yet, the endogenous cycle keeps returning,
as soon as we find peace, and economic life returns to its even tenors. What
President Warren Harding famously called “normalcy” soon evolved
into another boom and a shocking bust, as so often before. Calm and routine
prosperity has never been man’s lot for long: it somehow leads to its
own downfall, cycle after cycle.
Homer Hoyt published his classic 100 Years of Land Values in Chicago, 1833-1933, in
December, 1933. He covered in fine detail the 5 major cycles that crested and
crashed in 1837, 1857, 1873, 1893, and 1926-29. At the end he generalized “The
Chicago Real Estate Cycle”, a regular rhythm of boom and bust with the
same features in the same sequence. The boom sets us up for the bust. He could
have omitted the limiting word “ Chicago”, its cycles were synchronized
with national waves recorded by other scholars like Arthur H. Cole, Philip
Cornick, Lewis Maverick, Frederick Lewis Allen, Harry Scherman, Carter Goodrich,
Ernest Fisher, Homer Vanderblue, Herbert Simpson, and others – surprisingly
few others, in fact. Alexander Field has recently reviewed much of this literature,
but held back from seeing cycles in the present or future.
It is uncanny how the latest boom tracks the events that Hoyt recorded
and generalized. There was “an increase in rents, building ..., and subdivision
..., each of which was carried in turn to speculative excess, and each of which
interacted upon the others and upon land values to generate and maintain the
boom psychology”. The cycle, Hoyt continued, is “the composite
effect ... of a series of forces that ... communicate impulses to each other
in a time sequence, ... in a definite order” (p. 369).
He breaks the major events down into 20 elements (pp. 373-403). We can consolidate
a few to simplify, but the cycle is not so simple: if it were, mankind would
have mastered it long ago, instead of constantly repeating it. Rather, I add
a few events that others than Hoyt have noted – an asterisk (*) precedes
each of these non-Hoyt elements, below.
Building rents rise
Values of standing buildings rise
New building rises
Easy credit comes forth to builders, land buyers, and subdividers
Nationally, people moving to new areas raise total need for
buildings, because migrants leave their old homes behind them
*Construction itself makes jobs, with demand for more buildings
*Outside money flows into growth areas, taking as security
liens on new buildings and on lands. As to the local balance
of payments, this has the same temporary effect as exporting
the buildings and lands: unearned increments become part of the
local economic base. However, this is a trap: it evolves into
debt service, an out flow of funds that, over time, exceeds the
original in flow
Easy credit evolves into “shoestring financing” (the
1933 expression for today’s “subprime lending”)
New buildings absorb vacant land; land prices boom and spread
Governments spend freely, on bor rowed money, for street improvements
and public works to boost land sales
Population growth rate slows, but “authoritative” forecasts
come forth of more population growth – today’s “irrational
exuberance”, which Hoyt calls a “mania”
*“Builders’ Illusion” sets in, where builders
conflate the rise of land prices with a return on their building
investment, boosting the incentive to build above what the actual
return on building per se would justify. This is because building,
however legitimate, entails buying and selling land, a form of “flipping”.
Unearned increment becomes, for some parties, part of the incentive
to build. Ditto for “flipper-remodelers”: it’s
fun to remodel or just redecorate on a rising market. This
illusion may be most extreme in large, self-contained, integrated
developments, where each building is expected, even in a steady
market, to pay for itself in part by raising the value of adjoining
parcels. The big developer, being human, may credit himself
for the rising tide of the market in general. Such illusions,
widely shared, can result in overproduction of new buildings
relative to the basic demand.
Land subdivision and development (or partial development)
for urban use goes to greater excess than any other variable
in the cycle. The quantity of land is fixed, but people spread
out over more and more land. Call it bringing more land into
the market, or bringing the market to more land, the effect is
the same: a growing overhang of ripening land.
*”Expert” appraisals of land are based on sales
of comparables, and upward price trends. These sales, in turn,
were influenced by appraisers who based their opinions on earlier
comparables and upward trends, and so on. This is because there
is no cost of production to check excesses. Thus a herd mentality
can take over, divorcing prices from reality: “Irrational
*Rising debt service overtakes in flow of new capital
*Corruption and graft that inevitably accompany easy money
come to light, eroding and then cracking confidence in markets
and banks and the “high, wide, and handsome” libertine
boomtime philosophy that has papered over coven and fraud.
*Lenders’ loan turnover has to slow down as they turn
from short-term trade credit or commercial loans to long-term
loans based on land collateral. A bank that is all loaned out,
no matter how sound its balance sheet, can not make new loans
much faster than its debtors pay back the old ones. Today’s
loan originators can appear to escape from this constraint
by packaging and securitizing bad loans for passage on to others,
and finally to Fannie Mae and Freddie Mac, but that just blows
dust over the iron rule that some lender, or the taxpayer,
is left at the end of the line holding the bag. Our complex
modern apparatus that seems so sophisticated is at bottom just
a variation on how Andrew Jackson subsidized wildcat banks
by accepting their notes for sales of public land. The more
elaborate the deception, the greater the final letdown, as
Treasury Secretary Henry Paulson is now learning. On July 26
the National Australia Bank shocked investors by saying it
may lose as much as 90% of the value of its US mortgage-backed
investments - worth more than $1 billion - and warning that
the battered US housing market is poised to deteriorate further.
*A rise of land prices cannot simply flatten out at a high
plateau, because the increment has become part of the expected
return that buyers are paying for, and lenders are relying on.
So prices that cannot rise further have to drop: there is no
equilibrium level. (I expand on this point a few paragraphs below.)
At the crest, asking prices almost always drop slower than
bid prices. This makes sales (deeds recorded) drop sharply, even
as recorded prices hold steady.
“Shoestring” bor rowers face foreclosure; their
distress sales force prices down, in a cumulative spiral
Banks, whose capital and surplus is always a small fraction
of their liabilities, lose much of their capital and surplus
when many debtors default. They are always vulnerable, since
they borrow short and lend long, so they have to stop making
new loans. Some or many fail. Depositors may panic.
*Lending slows faster than recorded interest rates rise,
because banks cut off sub-prime bor rowers. (Professor Ben
Bernanke, in calmer days, developed this thesis for the 1930’s.)
*Self-financed firms fare better than bank customers, but
their capital returns slower than before, or not at all, cutting
their rate of reinvesting
*Building stops; workers starve or emigrate; chaos reigns,
we hit bottom
*Governments and leading gurus blame the crash on falling
land values, bend their efforts to bailing out big banks and
sustaining land values, prolonging the depression. In the process
most actors lose sight of the original cause, speculation in
rising land values, and the stage is set to begin the next cycle.
Hoyt carried his research back to 1833, the birth of Chicago,
but that was not the birth of history. The Second Bank of the United
States, founded in 1816, helped along the “peace-dividend” boom
that crashed in 1819 during James Monroe’s “Era of
Good Feeling”. This, too, was a land boom: Cole’s history
of public land sales shows them peaking sharply 1817-19, only to
drop like a stone. Twenty-one years earlier, 1798 saw a serious
crash of land sales and prices, over which the First Bank of the
United States presided. Among other results this sent several rich
Americans to debtors’ prisons, discredited founder Alexander
Hamilton and ruined his Federalist Party, and cost Andrew Jackson
his first big plantation. Jackson’s ensuing hatred of central
bankers smoldered until it erupted in his erratic handling of the
Second Bank of the U.S. when he was President, 1829-37, and this
Second Bank was presiding over the great Canal Boom that busted
History did not begin in 1798, either. Records grow murkier as
we look further back, but some colorful events stand out. One was
the Mississippi Bubble of 1720, to which Andrew Jackson compared
his debacle of 1798. It saw the founding of New Orleans, but was
part of a worldwide event, centered in Paris and in London (where
it was “The South Sea Bubble”). Scottish banker John
Law sold himself and his paper-money ideas to the Duc d’Orleans,
Regent of France, took over the Bank of France, and engineered
one of history’s more famous speculative manias – mostly
based on the insecure security of land titles in the Mississippi
Valley. Across the Channel, sober Englishmen and their famously
conservative bankers built castles in air in southeast Asia – their “south
seas” – and mighty was the fall thereof. After the
Fall, of course, credit tightened for everyone.
Before London, Amsterdam was the financial kingpin of the world. In the 1630’s
it suffered something known to history as “The Tulip Bubble”. Recent
research by Maastricht Professor Piet Eichholtz, endorsed by our own Robert
Shiller, discloses that this had more to do with real estate than tulips per
se. They find that housing prices dropped 50%, 1634-36, along the Herengracht, an
upper crust residential district. London scholar Anne Goldgar dissociates this
from the more famous Tulip Bubble that crashed in 1639; we leave this detail
for the specialists to settle. Our point is that there WAS a land bubble that
burst, even back then. Shiller has also traced such a bubble in Norwegian history.
Back in New England, our first land bubble burst about the same time, 1640.
This is when “The Great Migration” of Puritans stopped and reversed
itself. This happened just after Captain John Mason’s massacre of the
Pequods (1637) opened up the whole Connecticut and Thames Valleys to English
settlers. It seems, though, that speculators got there first, deflecting English
settlement to the rocky soils and harsh climate and precarious land titles
of New Hampshire, which boomed then while Connecticut languished. We will see
this pattern of continental sprawl repeated throughout American history. Indeed,
it was repeated next door in New York State where Dutch speculators, called “patroons”,
tied up the Hudson Valley while settlers poured from northern New England into
the Mohawk Valley.
Before Amsterdam were Augsburg and Antwerp, and before them was Florence, premier
banking center of the 15 th Century. In 1454 the Peace of Lodi ended 20 years
of costly warfare and left Florence with a great peace dividend, a secure,
peaceful position. As has happened so often since, this led to prosperity,
luxury, conspicuous consumption, a land boom and a bust in the late 1460’s,
when several banks folded. Florence rebounded for another cycle led by Lorenzo
di Medici. Popular history remembers Lorenzo as The Magnificent, a patron of
the arts, but as a banker he preferred “lazy loans” (political,
long-term, and land-secured) (Michael Veseth, 1990, and G.F. Young, 1930).
He blew on art and other luxuries the money that Cosimo had made by hard work,
serious banking, and a communal attitude toward fellow Florentines. Politically,
Lorenzo appeared strong and effective, but in 1494 the Medici bank failed,
Florentines sacked the Medici art collection, and flocked to Savanarola, who
ended an era with his Bonfire of the Vanities.
The French scholar M.E. Levasseur went back even further in history, publishing
data on the price of land in France from 1200 A.D. to 1799, its ups and downs
in war and peace, prosperity and depression, territorial expansion and contraction,
good kings and bad. Suffice it here that land cycles have a long history. None
of it, to my knowledge, differs in substance from Hoyt’s findings from
Why must there always be an upper turning point? Why cannot the good times
go on forever? Let us expand here on a previous point that I oversimplified
for brevity. I alleged that the “Rise of land prices cannot simply flatten
out at a high plateau, because the increment has become part of the expected
return that buyers are paying for, and lenders are relying on. So prices that
cannot rise further have to drop: there is no equilibrium level.”
In abstract algebra, land prices could rise forever, unlikely as that seems,
provided market agents expect rents to rise forever, interest rates not to
rise, and exhaustible resources not to rise. The algebra is fairly simple.
a = current annual land rent
i = interest rate expressed as a decimal
g = annual expected growth of “a”, expressed as a
V = value of land, derived as a discounted cash flow
Then, by summing an infinite series of rising rents starting from “a”,
each one discounted to the present, the rate of progression is (1+g)/(1+i),
and we have:
V = a/(i-g) (1)
V = [a + Vg]/i (2)
Rearranging terms once more:
V/a = 1/(i-g) (3)
V/a is what Brits call the “years’ purchase” of land. In
the stock market it is the “price/earnings ratio”. We will return
to it; it is a handy way to summarize matters.
Equation (1) is more “elegant” than (2), but the two equations
are equivalent, and (2) is the way most market agents see the matter, and salesmen
present it. Vg is the annual rise of land price this year, and it grows every
year as V rises.
For values, V, to level off, “g” must fall to zero. However, when “g” falls
to zero, V falls. In fact, when “g” falls at all, as from 3% to
2%, V falls. Once values are based on, say, g=3%, they cannot level off without
first taking a great tumble. The pioneer mathematical economist Professor Irving
Fisher of Yale notoriously declared in 1929 that stock prices had reached a “permanent
high plateau”. There cannot be a “permanent high plateau” of
land or stock prices, if “high” means based on high values of “g”.
Equation (3) shows that high values of “g” mean high ratios of
V/a, always a warning flag, as Professors Shiller and Case have reminded us
more than once. To be permanent or stable, a plateau must be moderate. The
current revival of Fisher’s reputation suggests that some modern economists,
too, have blinded themselves to the simple relations shown in Equations (1),
(2), and (3).
To save space I am not supplying numerical examples of the points above. I
urge readers who are blocked by or rusty on algebra to work out examples on
their own. It is easy, and makes matters much clearer.
It is an algebraic possibility that rents could conceivably keep on rising,
if not to infinity, at least to the trillions, centuries in the future. Land
prices could then follow along without a hitch. Common sense and experience,
however, tell us that does not happen. There are several reasons why not.
We do press on the limits of exhaustible resources, as is
so evident today
Landowners treat unearned increments as current income, raising
their consumption and lowering their real saving (in the manner
of Lorenzo the Magnificent), thereby raising interest rates
In practice, in boom times, lemming psychology causes the “Vg” of
Equation (2) to get ahead of a realistic forecast of future rents.
Many buyers don’t even know where it came from; others
are speculating on the “greater fool” theory. The
V/a ratio of Equation (3) has periodically risen well above
People and capital spread out over more land, as we discuss
Galloping settlement sprawl, such as that of the last 16 years,
has set us up for The Great Crash of 2008. To repeat, we may call
it bringing more land into the market, or bringing the market to
more land, the effect is the same. There are both urban sprawl,
and continental sprawl. Let’s start with a modest case of
In Milwaukee County, WI, there are 17 municipalities,. Only two of these are
fully built-out: Shorewood and Whitefish Bay, north of the City along the lake.
Each houses about 10,000 people per square mile in the green comfort of detached
houses on tree-lined streets. The others are full of vacant and derelict land.
The central City itself has hollowed out badly, while also annexing the northwest
corner of the County in 1960, still unfilled after 48 years.
At the density of these upper middle-class suburbs, the population of the U.S.,
300 millions, would require 30,000 square miles. That is the area of a circle
whose radius is 98 miles. Or, if we divide the needed area among 50 states,
it is the area of 50 circles of radius 13.8 miles each. Either way you cut
it, or any other way, it is lost in the vastness of the U.S.A.
Yet, while the City of Milwaukee hollows out, and the inner suburbs remain
unfinished, Milwaukeeans spread into the neighboring counties, where growth
is faster: Ozaukee to the north, Washington to the northwest, Waukesha to the
west, and Racine to the south. In addition, some substantial fraction of factory
jobs, during times of peak need, go to residents of small outlying towns or
farms far away, who move in temporarily when opportunity knocks.
Milwaukee is not growing dynamically, so its sprawl is modest. For immodest,
spread-eagle, classic American sprawl look to new and upstart cities in much
of Florida, Texas, Anchorage, AK, or Las Vegas, NV. Some older cities like
Albuquerque, NM, or Oklahoma City manage to sprawl without even being dynamic.
In California, “From the redwood forests to the Gulf (of California)” urban
sprawl inflates the price demanded for nearly every square foot of this land
that “belongs to you and me” – or would, if we could afford
it. As Woody Guthrie also sang, “Believe it or not you won’t find
it so hot if you ain’t got that do-re-mi”.
Then there is continental sprawl. Old cities and regions stagnate or shrivel,
while new ones balloon out of nowhere. Some once-leading cities, and their
population ranks in 1890, are St. Louis, #4; Pittsburgh, #7; Buffalo, #9; Cincinnati,
#11; Newark, #14; Jersey City, #15; Louisville, #17; and Rochester, #19. These
shrinking cities are all in the quadrant northeast from St. Louis, fairly close
together, along with surviving but diminished giants like New York, Boston,
Philadelphia, Chicago, Detroit, Cleveland, Baltimore, and a dozen middling
cities and most of the U.S. population, as of 1890. People and goods could
get from one place to another within fairly short distances, by rail.
Some new big cities today that were not even on the radar screen in 1890 are
Los Angeles, Houston, Dallas, San Diego, Phoenix, San Antonio, Honolulu, San
Jose, Seattle, Washington (D.C.), Portland, Atlanta, Miami, Charlotte, Las
Vegas, Salt Lake, and Jacksonville. These are all outside the northeast quadrant,
as the U.S. center of population moves steadily southwestward, from southeast
Indiana in 1890 to south central Missouri in 2000. It’s not just the
center that counts, though: it’s the dispersion. Populations south and
west of the center are widely scattered.
Each of these new cities represents the transfer of an entire subset of the
economy. Cities grow, as Jane Jacobs showed so brilliantly, by import substitution.
They and their regions grow more and more self-sufficient as they add people.
Repair shops evolve into parts makers, and they into assemblers and manufacturers,
some with national and world markets.
At the same time, to tie us together we have the Interstate Highway System,
and many state highway systems. Interchanges create hundreds of new commercial
nodes. In the short run these may seem to bring urban values to old farmland;
in the long run and in the aggregate they create an artificial abundance of
urbanesque land, an overhang that presages the crash phase of the cycle. They
also create an overhang of deferred maintenance and replacement, for highways
must in effect be rebuilt every 30 years or so, but at higher prices for cement.
Worst of all they create a permanent commitment to wasting energy. These contingent
liabilities have been hidden during years of euphoria. Today, as gasoline prices
soar and tax revenues falter, they are all too visible. Too much land accessed,
and rising costs of accessing it, combine to lower land prices.
We also have our inflated air transport system. The U.S. has 15,000 civilian
airports, more by far than any other nation or group of nations. The vastest
of these, Denver International, takes 34,000 acres, or 53 square miles. Other
oversized ports are mostly in the south and west: Dallas, Orlando, Kansas City,
Atlanta, LAX, Seatac, and Miami, for example. Some eastern ports are much smaller:
Washington National is 1,000 acres; busy LaGuardia is only 600. Many general
aviation ports are smaller yet, down to under 100 acres. Estimating the mean
civilian airport area at 400 acres, (military airports, not included here,
average much bigger), 15,000 airports would require six million acres, or 9400
square miles, about the area of New Hampshire.
While surface area is only one of the resources that air travel consumes, it
is symptomatic of the daunting resource requirements of spreading people from
Nome to Key West, from Eastport to Kauai, throwing in American Samoa and Puerto
Rico and The Virgin Islands, protecting them all with military airports and
bases and their logistics, and linking them as tightly as Baltimore and Philadelphia.
The soaring costs, led now by jet fuel, and security aggravations, and falling
comforts of air travel are beginning to drive home these rising demands on
limited resources. Meantime, though, this nationwide transportation network
has brought vast new areas inside the urban ambit. A rich Montana rancher and
his wife can wing it into Denver or Vegas in their private plane for a night
on the town; but how long can this dream of city-country affluence last?
To highways and airlanes let us add the power grid; huge interregional water
transfers and systems; several new kinds of radio communication grids in bewildering
novelty and abundance; the postal service grid; UPS and FEDEX grids; natural
gas lines; the telephone grid; the banking network; the list goes on, and on.
Most of these bring service not just to the end-points, but to most of the
included interstitial lands.
How can land rents and values fall from oversupply, when land supply is fixed?
This fixity feeds the delusion that land rents and values can only rise with
population and capital formation. However, people and capital can spread out
to encompass and fructify more land. That is sprawl, urban and continental
(and worldwide, not covered here).
Professor Robert Murray Haig theorized in 1926 that if transportation costs
fell to zero, there would be no urban land values: one location would be as
good as another. That can’t happen, of course, but lower transportation
costs, as by an abundance of Ford’s Model T’s, would lower land
rents and values. He presented this just as a cautious academic speculation
(QJE, February 1926), but did he see something coming? Seen or not,
it did come right after he published.
To Henry George, “land speculation” meant holding land off the
market waiting for a rise. He likened it to an unconscious “combination” (a
cartel) of landowners creating an artificial scarcity. George missed the next
trick, however. He attributed industrial depressions to inexorably rising rents
and land prices that progressively squeezed labor and investors off the land
and into the unemployment lines. It was too simple. A good explanation must
account for land value collapses, like today’s, playing a key role in
the crash itself. In George’s scenario, lower land prices enable the
later recovery, which they do, ultimately. What about the timing, though, the
sequence of events? Urban land prices peaked in 1926; stocks crashed in 1929;
unemployment peaked even later.
Like all cartels, the unconscious combination of land speculators creates a “price
umbrella” under which new resources enter the market. Students of cartels
recognize a “price-umbrella syndrome”. Cartels create an artificial
scarcity of a resource or product and an artificially high “price umbrella” to
shelter new competitors who come from outside the cartel. Previously marginal
or untapped resources enter the market, often irreversibly. In urban growth,
the cycle periodically thus creates an artificial surplus of half-developed
land (graded, perhaps, roaded, platted, but lacking buildings). Other new land
is even less than half-developed: accessed by new freeways, state highways,
or county roads, but not even subdivided. At the same time, the lavish use
of durable capital to bring settlers to all this marginal land creates a shortage
of liquid capital, a shortage of loanable and investible funds, a rise of interest
rates and a tightening of credit. The writer has analyzed elsewhere this lavish,
irreversible misallocation of capital (Gaffney, 1976).
Austrian cycle theorists have dwelt on this tilting of what they call “the
structure of production”, with too much capital getting sunk irrecoverably
in what they call “higher order” goods. Well and good, they are
onto something big and vital. Unfortunately, though, they find its cause solely
in “forced saving” from bank expansion, with no reference at all
to its “geo-economic” roots, and the role of inflated land collateral
enabling bank expansion. Worst of all, they see no remedy except forcing down
Forces of containment, notably including George’s land speculation, have
imposed uneconomic scatter and sprawl on settlement. They have held back the
logical areas for continuous settlement and forced the pioneers to move around
and beyond them. If you examine a map of population density in the United States
at any time in history, you see that urban scatter and sprawl have their counterparts
in national patterns of land use, and they always have had, in spite of the
Indian menace. (A series of such maps to 1865 is in John D. Hicks, The
By 1890 the Census gave up trying to draw a "frontier line". The
Director wrote, "the unsettled area has been so broken into by isolated
bodies of settlement that there can hardly be said to be a frontier line" — a
passage that Frederick J. Turner misread, I think, as he launched from it into
his classic "Frontier in American History." It was not the frontier
that was passing, but the last vestige of orderly advance into it. The center
of population continued to march west-south-westward, as settlements grew ever
more scattered. In 1893 another boom ended, evoking the populist plaint, “In
God we trusted; in Kansas we busted”.
George himself did not, to my knowledge, call the crash of 1893, or explain
its causes to his readers. It might have enhanced his reputation among later
economists, and justified the subtitle of Progress and Poverty, “An
Inquiry into the Cause of Industrial Depressions”. By 1893,
however, he knew he had only few years left, and was preoccupied advancing
the cause in other ways that he considered important. Perhaps he was right;
many readers highly value his later works. Perhaps, also, he perceived that
the facts did not exactly fit the simple scenario sketched so briefly in Progress
and Poverty, and he lacked time to revise his model, in which by then
he was heavily invested.
Georgists of the 1920’s did poorly calling the real estate slump that
began in 1926, and the stock market crash of 1929. As late as 1932, at the
very nadir of The Great Depression, Harry Gunnison Brown, leading Georgist
economist of the times, dismissed the wreckage around him as “a period
of slack business” (The Economic Basis of Tax Reform). Albert
J. Nock and Frank Chodorov preoccupied themselves with carping at Keynes and
FDR and labor unions, preaching free markets as though they had discovered
them, and as though the system had not crashed after 1929. They opposed all
totalitarians in principle, but in practice they aimed most of their shots
at FDR and The Allies, alienating a generation of earnest activist reformers
Career-minded professionals have to pause before issuing pessimistic forecasts
about land and securities markets, where confidence hangs by a thread. Senator
Charles Schumer warned of the IndyMac Bank collapse, and right away foes jumped
him for causing it. Homer Hoyt could publish his masterpiece in the deepest
trough of depression, when anyone with eyes or ears knew the system had crashed,
and revolution was in the air. 20 years later Hoyt had gone into real estate
consulting and land speculation, and declined to see any revival of his own
cycle. Many have put down even Robert Shiller for puncturing the euphoria:
Michael Mandel, Chief Economics Editor of Business Week, recently
published Rational Exuberance, whose title telegraphs its message,
while the views of his sunny senior columnist Jim Cooper remain reliably upbeat,
week after week, as we sink deeper into the mire. In 2006 David Lereah published Why
the Housing Boom will not Bust, and How You can Profit from it. Lereah,
often cited by the WashingtonPost, is Chief Economist, National Association
of Realtors. No one will fault Mandel or Cooper or Lereah for pricking the
bubble of “confidence”; but today in summer 2008 they look like
Robert Shiller has been warning, targeting mainly investors, that residential
real estate might be overvalued, but did not link this to a general depression
in the forthright manner of the four Georgists to be cited below, nor with
the same certitude. John Talbott deserves credit, too, although he may have
called an earlier crash that did not occur. Alexander Field has declined to
relate to current events his thoroughgoing history of the literature on older
I do not know of a single Nobel Laureate in Economics who forecast the present
crash, or any other. Two of them, Chicago-Schoolers Robert Merton and Myron
Scholes, founded Long Term Capital Management to demonstrate the brilliance
of their investment theories. It went down in flames in 1997, saved only by
a Federal bailout. Nothing daunted, media and public speakers seeking confirmation
lean hard on Nobel Laureates whom they can cite. The media might better consider
others with better track records.
Modern Georgists enter this period of danger and opportunity in relatively
good shape. Several have outstanding scorecards calling the current crash.
These include Fred Foldvary (2007, The Depression of 2008); Fred Harrison
(2005, Boom/Bust); Michael Hudson (2006, “Guide to the Coming
Real Estate Collapse”, Harper’s, May); and Bryan Kavanagh
(2007, Unlocking the Riches of Oz). Each has a slightly different
take on it, but they all saw it coming and stuck their necks out, far out,
to forecast it in print. One of their distinctive commonalities is their recognizing
that land rent and values are many times higher than most economists realize,
and so play a major role in macro-economic ups and downs.
Bear with me in thinking that these Georgists who foretold this crash deserve
a hearing, in preference to those who failed, and certainly to those who still
deny it. What solutions would they offer? I do not speak for them, and they
are not of one mind. There are a hundred more specifics than can even be outlined
here, but the following elements seem reasonable and likely, knowing these
One, of course, is to raise more public revenue from taxes on property in general
and land in particular. These include property taxes, and in addition a host
of other kinds of revenues. No less than sixteen of these are detailed in this
writer’s “Hidden Revenue Capacity of Land”, forthcoming in
the summer issue of the International Journal of Social Economics.
One of them, which Michael Hudson has explained in several articles, is to
reform the personal income tax (if we must have one) to bear heavier on property
income and lighter on wage income.
Another is always to base land assessments on current market value, and update
them annually. Earlier I criticized private fee appraisers for using current
comparables to value owner-occupied homes, as follows:
“‘Expert’ appraisals of land are based on sales of comparables,
and upward price trends. These sales, in turn, were influenced by appraisers
who based their opinions on earlier comparables and upward trends, and so on.
This is because there is no cost of production to check excesses. Thus a herd
mentality can take over, divorcing prices from reality: ‘Irrational Exuberance’.”
Why, then, would I ask public assessors to join the misguided herd? Because
the public assessor is the one valuer whose overvaluation stops the herd. The
Assessor by law is supposed to follow a bull market, not outguess it. When
the “exuberance” appears in his wisdom to be “irrational”,
his job is still to go along, not judge. When private fee-appraisers go along
they confirm and reinforce a boom, but when the tax Assessor goes along (and
the tax rate isn’t lowered) he douses a boom with cold water: higher
taxes (Gaffney, 1985, pp. 91-109). It was the lack of such an automatic remedy
that let the farmland boom of the 1970’s soar so high above reality,
then the urban bubble of the late 1980’s, and now of 2001-2007.
The present income-tax treatment of “capital” gains, which nearly
forces the elderly to cling to their lands until they die, should be changed
to a tax on annual accrual of value, as proposed by our same Professor Haig
in the 1920’s. The “Hidden Capacity” article explains practical
ways of doing this.
Banks should be regulated away from lending on land collateral. Following the
South Sea Bubble there was such a movement in England. The emergence of the
industrial revolution, flawed as it was, suggests the results were not all
bad. I have not researched the history enough to say much more, but logically
there is a powerful reason to regulate banks of deposit. This is because they
are always technically insolvent, never able to meet their short-term liabilities
from their long-term assets. A related reform might be to treat notes secured
by mortgages as part of the property tax base. The counterpart is to tax the
indebted landowner (“mortgagor”) only on his equity, thus recognizing
that the creditor (“mortgagee”) is, de facto, part owner of the
land. This idea is so radical and upheaving that I only hint at it here, its
pros and cons would call for a book or two.
Public debt has often been a more stable asset for banks than mortgages. Ever
since FDR, banks have avoided the total dependency on mortgage loans that led
so many to fail from 1929-33. Should we then limit banks to holding public
debt? The problem is, it only takes one wild administration to bankrupt a nation
by making a virtue of spending more and taxing less, egged on by certain extremist
schools of economic theory. We have sometimes had provident Federal administrations,
but even they do not guarantee public thrift because there are 50 states, and
thousands of local governments. When Andrew Mellon, Treasury Secretary from
1921-32, ran a Federal surplus, local governments and improvement districts
ran wild with debt. In the 1830’s President Andrew Jackson lowered the
national debt to zero, and subsidized the states besides, but several of them
went bankrupt anyway. There is no simple mechanical substitute for sober judgment
based on sound theory, and history, and selfless public spirit.
Meantime, where is hope? Cleaning up the mess left from the last few manic
years will cost sweat and tears and some fortunes, whoever undertakes it. Lower
rents and land prices will finally let us recover, but the process of getting
from here to there entails a fall from illusion to reality, from high to low,
that will agonize many. New administrations will prolong the agony by trying
to defer it. They will bail out a few of the victims and many of the culprits
by raising the national debt and inflating the currency to validate bad debts
and sustain land values.
Hope lies in observing how many cities and nations have risen from disasters
to new prosperity. John Stuart Mill stressed in his Principles (1848) “ the
great rapidity with which countries recover from a state of devastation; the
disappearance, in a short time, of all traces of the mischiefs done by earthquakes,
floods, hurricanes, and the ravages of war .”
Born-again San Francisco, 1907-30, makes a case study in fast recovery after
it burned to the ground in 1906. What can it teach us? It had no State or Federal
aids to speak of; no oil or gas royalties; no power to tax sales or incomes
or payrolls; no lock on Sierra water to sell its neighbors, as now; no finished
Panama Canal, as now; no regional monopoly; no semitropical climate; and little
flat land. Its great bridges were unbuilt – it was more island than peninsula.
It had eccentrics, drunken sailors, tong wars, labor strife, race riots, vice,
vigilantism, civic scandals, and boatloads of illegal immigrants whose records
were lost in the fire. It had a mountain wall to the east, fog above ground,
and the San Andreas Fault below. These will never go away. Statewide, mining
was fading; irrigation barely beginning. Lumbering was far north, wine around
Napa, decidous fruit around San Jose, citrus and sunny beaches down south.
Berkeley had the State University, Sacramento the Capitol, Palo Alto had Stanford,
Oakland and Alameda had the major U.S. Naval supply center.
How did a City with so few assets raise funds to repair its broken infrastructure
and rise from its ashes? It had only the local property tax, and much of this
tax base was burned to the ground. The secret is that it taxed the ground itself,
raising money while also kindling a new kind of fire under landowners to get
on with it, or get out of the way. Developments are interdependent, so each
owner could improve his land in the knowledge that other owners were subject
to the same pressures, so needed complements would arise in sync with his own
In 1907 the City Committee on Assessment, Revenue, and Taxation reported that
revenues were still adequate, because before the quake and fire razed the city,
75% of its real estate tax base was already land value (S.F. Municipal
Reports, FY 1906 and 1907, p. 777). The coterminous County and School
District used the same tax base. San Francisco and Henry George were more in
tune than perhaps either one realized. They did not rely just on jawboning
and cheerleading. Civic spirit counts, but mainly they had a substantive program
This firm tax base also sustained San Francisco’s credit to finance the
great burst of civic works that was to follow. People flocked there to open
businesses, and find jobs and homes. The City bounced back so fast its population
grew by 22%, 1900-10, in the very wake of its destruction; another 22%, 1910-20;
and another 25%, 1920-30. It did this without expanding its land area, and
while providing wide parks and public spaces. It even pulled back from the
treacherous filled-in level lands that had given way in the quake. On its hills
and dales it housed, and linked with mass transit, a denser population than
any major city except the Manhattan Borough of New York. For a sense of its
gradients, see the chase scenes from the films Bullitt or Foul
Play. It is these people and their works that made San Francisco so livable,
the cynosure of so many eyes, and the commercial, financial, cultural, tourism,
and light manufacturing center of the Pacific coast.
The whole U.S. can follow this model today, but on a grander scale and adapted
to modern technology and values. Skeptics will wonder how we can take more
taxes from rents when they are falling. Here is the key: the effect of untaxing
trade, enterprise, work, and production is to raise and sustain land and resource
rents as a tax base. This does not work through raising asking and holdout
prices, but rather by raising bid prices, activating the market. Today we recognize
a great variety of new ways these rents manifest themselves to be tapped for
public revenues (Gaffney, 2008). We can seize these opportunities, old and
new, and pull ourselves out of the funk left by the great crash of 2008.
Bibliography, The Great Crash of 2008
Adams, James Truslow, 1921. The Founding of New England. Boston: The
Atlantic Monthly Press
Allen, Frederick Lewis, 1957 (orig. 1931). Only Yesterday.
New York: Harper and Rowe
Angly, Edward (ed.), 1931. Oh Yeah? NY: The Viking Press
Brown, Harry Gunnison, 1932. The Economic Basis of Tax Reform.
Columbia MO: Lucas Bros.
Christman, Henry, 1978 (Orig. 1945). Tin Horns and Calico.
Cornwallville, NY: Hope Farm Press
Cole, Arthur H., 1927. "Cyclical and Sectional Variations
in the Sale of Public Lands, 1816-60." RES 9:41-53,
rpt. in Carstensen, Vernon (ed.) 1962. The Public Lands.
Madison: University of Wisconsin Press, pp. 229-52
Cornick, Philip, 1938. Premature Subdivision and its Consequences.
New York: Institute of Public Administration
de Neufville, Richard, and Amedeo Odoni, 2003. Airport Systems:
Planning, Design, and Management. New York: McGraw-Hill
Eichholtz, Piet. See Leonhardt, 2005
Ellis, David, 1946. Landlords and Tenants in the Hudson-Mohawk
Region, 1790-1850. Ithaca: Cornell University Press
Field, Alexander, 1992. "Uncontrolled Land Development and
the Duration of Depressions." Proceedings, AEA Meetings
of Winter 1991, N. Orleans
Fisher, Ernest, 1933. “Speculation in Suburban Lands”.
AER Supplement, pp. 152-62
Foldvary, Fred, 2007. The Depression of 2008. Berkeley:
Gaffney, Mason, 1976. "Toward Full Employment with Limited
Land and Capital." In Arthur Lynn, Jr. (ed.), Property
Taxation, Land Use and Public Policy. Madison: Univ. of Wisconsin
Press, pp. 99-166.
Gaffney, Mason, 1985, “ Why Research Farm Land Ownership
and Values?” In Majchrowitz, T.A., and R.R. Almy (eds.), Property
Tax Assessment. Chicago: International Association of Assessing
Officers and The Farm Foundation, 1985, pp. 91-109.
Gaffney, Mason, 2008, “The Hidden Revenue Potential of
Land”. International J. of Social Economics, Summer,
George, Henry, 1879. Progress and Poverty. New York:
Goldgar, Anne, 2007. Tulipmania: Money, Honor, and Knowledge
in the Dutch Golden Age . Chicago: University of Chicago
Goodrich, Carter, 1960. Government Promotion of American
Canals and Railroads. New York: Columbia University Press
Haig, Robert Murray, 1926. “Toward an Understanding of
the Metropolis”. QJE, February, pp. 402-34
Haig, Robert Murray, 1921. “The Concept of Income.” In
Haig, R.M. (ed.), The Federal Income Tax. New York: Columbia
Harrison , Fred, 2005. Boom Bust. London: Shepheard-Walwyn
Harrison , Fred, 2008. The Silver Bullet. London: The
Hicks, John D., 1931. The Populist Revolt. Minneapolis:
The University of Minnesota Press
Hicks, John D., 1952. The Federal Union. Cambridge:
The Riverside Press
Hicks, John D., 1960. Republican Ascendancy. NY: Harper
and Bros., Publishers
Hofstadter, Richard, 1955. The Age of Reform. NY: A.A.
Hoyt, Homer, 100 Years of Land Values in Chicago, 1833-1933.
Chicago: University of Chicago Press
Hudson , Michael, 2006, “Guide to the Coming Real Estate
Collapse”, Harper’s, May
Kavanagh, Bryan, 2007. Unlocking the Riches of Oz. Melbourne:
Land Values Research Group
Leonhardt, David. "Be Warned: Mr. Bubble's Worried Again," The
New York Times, August 21, 2005, Section 3; p. 1
Lereah, David, 2006. Why the Real Estate Boom will not Bust,
and How you can Profit from it. NY: Random House
Levasseur, M.E., 1892. Les Prix. Aperçu de l'Histoire Économique
de la Valeur et du Revenue de la Terre en France. 13th-18th
cents. Extrait des Mémoires de la Société Nationale
d'Agriculture de France . Tome 135, 1893. Paris: Typographie
Chamerot et Renouard, 1893.
Mandel, Michael, 2004. Rational Exuberance: Silencing the
Enemies of Growth and Why the Future is Better than you think.
NY: HarperCollins Publishers, Inc.
Maverick, Louis, 1932. “Cycles in Real Estate Activity”. J.
of Land and Public Utility Economics 8:191-99
Mill, John Stuart, 1872 (orig. 1848). Principles of Political
Economy. Boston: Lee and Shepard
Perkins, James B. 1892. France under the Regency.
Boston: Houghton Mifflin Co.
San Francisco Municipal Reports , FY 1906 and
Scherman, Harry, 1938. The Promises Men Live By. New
York: Random House
Shiller, Robert, 2000. Irrational Exuberance. Princeton:
Princeton University Press
Shiller, Robert, 2005. See Leonhardt, 2005
Simpson, Herbert, 1933. “Real Estate Speculation and the
Depression”, AER Supplement, pp. 163-71
Simpson, Herbert, and E.R. Burton, 1931. The Valuation of
Vacant Land in Suburban Areas”. Evanston: Northwestern
Soule, George, 1968. Prosperity Decade. NY: Harper and
Talbott, John R., 2003. The Coming Crash in the Housing Market.
Talbott, John R., 2006. Sell Now! The End of the Housing
Bubble. Saint Martin’s Press
Vanderblue, Homer, 1927. “The Florida Land Boom”. J.
of Land and Public Utility Economics 3:113-31 and 252-69
Veseth, Michael, 1990. Mountains of Debt. NY: Oxford
Wells, Alexander, and Seth Young, 2003, Airport Planning
and Management. NY: McGraw-Hill
Young, G.N., 1930 (orig. 1910). The Medici. NY: The