Negative Gearing 92% Ineffective

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Negative Gearing 92% Ineffective from Real Estate 4 Ransom on Vimeo.

Renegade Economists Podcast 257

As broadcast on 3CR, Wed Oct 3rd.

The Name of the Game: Philip Soos answers questions from the floor at the Negative Gearing report release. Karl talks about economics as if location matters.

Listen here

From Philip’s report:

In 1993-94 there were 980,471 investors, with just (51%) negatively geared. The number of investors increased to 1,751,679 in 2009-10, a significant rise of 79%, with 640,757 positively geared and 1,110,922 negatively geared. This is a remarkable increase of negatively geared investors compared to those who are positively geared. The number of negatively geared investors increased by 122% over this period, while those positively geared increased only 33%. The trend shows that negative gearing is becoming central to residential property investment.

The report was written up on News

Philip also had a piece at The Conversation – It’s Time to Abolish Negative Gearing

Also mentioned:
Council rating survey

Lehmann’s Case: Banker’s Duty of Care

Karl FitzgeraldMultimediaLeave a Comment

Renegade Economists podcast 255

Subscribe to the weekly 3CR podcast or listen live 5.30pm on 855AM (on the dial) or stream via here (top left hand side)

Justice for the People, Not Banksters: Mayor Ken Keith (Shire of Parkes) & Prof Justin O’Brien from the Centre for Law, Markets & Regulation at UNSW discuss the Federal Court ruling that financial advisors have a duty of care when promoting derivatives to their clients. A world leading case.

Listen to the show

Professor O’Brien’s article Understanding the Federal Court’s Landmark Ruling Against Lehmann Brothers included this quote:

In December 2007, four months after the problems in the US securitisation market became apparent, the business (Grange Securities) was rebranded as Lehman Brothers Australia and Lehman Brothers Asset Management respectively.

The incoming chief executive was Jim Ballentine. He was acutely aware of the risks associated with complex derivatives. He was interviewed for a BusinessWeek article as early as 2005 on the risk associated with credit defaults and defective modelling in credit derivatives.

In 2005, Ballentine, as head of structured credit, was partly responsible for Lehman receiving the Euromoney Award for Excellence as “best derivatives house” — an award that the magazine claimed was based on the fact that “Lehman Brothers has been one of the more conservative credit derivatives houses … It has protected the bank from the reputational risk that the likes of Barclays Capital and Bank of America have run selling structured credit products”. It was a reputation that was not to last in either the United States or in Australia. Not only was Lehman to spectacularly blow up, the wave of litigation has now brought into question how government itself can protect itself from financial engineers.

photo by: Mr. T in DC

Michael Hudson on Set up to Fail

Karl FitzgeraldCommentary1 Comment

Renegade Economists Fifth Birthday – episode 252

Prof Michael Hudson discusses the state of modern economic warfare in a geo-political context. Is democracy dead? A special treat for our fifth birthday.

Renegade Economists interview 05.09.2012
Interview with Professor Michael Hudson by Karl Fitzgerald
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KF: We welcome to the show Professor Michael Hudson, Distinguished Research Professor at the University of Missouri-Kansas City, the leading Post-Keynesian university in America. It’s been fantastic to see, Michael, that the public profile of UMKC has really taken off with Randall Wray, yourself and Stephanie Kelton being quoted quite widely these days. Can you explain what Post-Keynesianism is?

MH: The fact that we all have a very similar approach is what has enabled us to challenge the neoliberal Chicago School. Our approach is heterodox – we see that money is created, basically, on computer keyboards. When a bank lends money, they create a deposit by writing a loan. You sign an IOU, the bank has a promissory note from you to pay them interest and they open a deposit in your name. The Federal Reserve does the same thing, as does any central bank, except for Europe’s. On their keyboards, they can simply do what a commercial bank does, namely, create money by creating a bank deposit for the banks to draw on. That is basically how the Bank of England, the Federal Reserve Bank of New York, the national banks of China, Russia and other civilized countries create a finance of government deficit. That is why government debt in almost every country has gone up and up and up every year for the last few centuries. And as the government spends money into the economy, this is the money and the spending and the income that enables economies to grow.

So if you don’t create money – if the central bank doesn’t monetize the government deficit by just printing money electronically and spending it into the economy – then people have a choice: either there is no growth in money and the economy shrinks or people have to do what they did during the Clinton Administration of the United States when we actually didn’t run a deficit and that is if you’re not getting rising wages, but your expenses go up and education prices go up and health insurance goes up, then you have to borrow from the banks, which is like running a credit card up. When you run a credit card there’s no money but you owe more – that’s what has happened to economies throughout the world and it’s especially what has happened in Europe because the banks in Europe have taken control of the governments and said “don’t have a central bank that does what central banks in other countries do – don’t finance the deficit, sacrifice the economies to the banks and make sure that all of the growth and income we have goes to us the banks – not to labour, not to industry. We want labour’s wages to go down so labour will buy less, so our industries will shrink, so we can take over companies and bankrupt them and bankrupt entire countries. And when the countries go bankrupt from shrinking, then we can tell them: privatise your real estate, your off-shore resources, your subsoil, natural resources, privatise your telephone systems and others; sell them all to us so that then we can create monopolies and take the money for ourselves, and do all this because we don’t want you to do what civilised countries do and that is create your own money to run a government deficit.”

So what you have in Europe and other neoliberal countries is madness, economic shrinkage, emigration, shortening lifespans, falling family formation and marriage rates, rising disease rates and rising suicide rates. This is the neoliberal Chicago plan that’s called “free markets”.

KF: You’re describing modern monetary theory, could I drag you back to this Post-Keynesian angle, though. How has Keynesianism been reinvented within this new brand?

MH: It has not really been reinvented. Keynes had this idea that when there is unemployment, somehow the government spending has to come in and revive employment. That’s called Keynesianism. There are a lot of simple Keynesians – even Paul Krugman is that kind of Keynesian. Post Keynesians go beyond that – basically, if there is anyone we look to be beyond Keynes it’s Hyman Minsky, but also Randall Wray and myself. And we say that government normally has to not only run a deficit in order to revive the economy, it has to aim at raising living standards and wage levels, not increasing the economy just by printing money and giving it to the banks, which is what the Federal Reserve in America does and what the European Central Bank does. So, we put the real economy first, not the financial sector and the banks.

KF: So within Keynesianism there is this belief of the multiplier effect, that one dollar injected into the economy will trigger greater transactions down the line and from that employment will take place.

MH: I don’t think that any serious person believes that any more. That was a disaster of an idea. He is right in the sense that, for Keynes, the multiplier effect is basically the bank credit creation multiplier or the reserve ratio – if a bank has to keep one fifth of its deposits on reserve, then it can lend out five dollars for every dollar it has. So all the multiplier was was a credit creation multiplier. That’s the old Keynesianism. But what we say at Kansas City is don’t leave this multiplier to the banks to create the credit because when a bank creates credit, it creates debt, and what Keynes left out of account in the 1930s (unlike what he wrote in the 1920s) was that bank credit was debt – and that debt is the problem that we have today. And you don’t solve a problem of debt deflation and a bubble economy by creating yet more debt. You can’t borrow yourself out of debt – that’s crazy.

KF: Recently the US congress conducted an audit of the Federal Reserve and found that some $16 trillion had been printed and distributed amongst the companies and central banks around the world.

MH: Yes, although a lot of those were repayments – you make the loan, you get repaid and you make the loan again, so $16 trillion was more than the net. The total volume of transactions was $16 trillion but there were a lot of repayments and new loans, so the net was nowhere near as large. The Federal Reserve and the Treasury actually only added $13 trillion to the federal debt as a giveaway to the banks. The $16 trillion was just a measure of all of the transactions including the repayments and the new loans, so it’s somewhat of a misleading figure compared to the $13 trillion, which was the net figure.

KF: So the point with all this money creation is that usually it would create some spur in the economy but it seems that much of this money was being used for the carry trade and speculative activities to flush up bank balance sheets again.

MH: That’s exactly the point: there are many ways of creating money. In the past, the financial sector pretended that when banks create money, that’s a loan to build factories and employ people. Banks don’t make loans to build factories and employ people. They make loans for corporate raiders to buy factories, fire the labour source, downsize it, outsource it to non-unionized labour, send it abroad, break it up and shrink the economy. So it’s not like they lend money like that.

Last year the Federal Reserve had an $800 billion quantitative easing. At one-quarter of one per cent interest, the Federal Reserve lent – gave – this money to the banks. The banks used part of this money just to leave on deposit with the Federal Reserve and get interest, but actually an amount equal to $800 billion was lent abroad in foreign currency speculation (mainly to the BRIC countries) and arbitrage.

In other words, they take this quarter-per cent money, they buy Brazilian bonds that were yielding 11%, they pocket 10.75% difference, and they not only get the 10.75% difference, but all this Federal Reserve money, spilling out of the US economy into the Brazilian economy forced up Brazil’s currency and gave the banks a foreign exchange free ride over and above the interest free ride. So giving more money to the financial sector merely gives banks enough money to buy even more congressmen to buy control of the political process and privatise the government and have nothing to do with the real economy at all. In fact, it enabled the banks to load the economy with even more debt and actually shrunk the economy because of the perverse way in which the Obama administration had a new chapter in class warfare.

KF: From abroad here in Australia, it seems like America has literally thousands of banks, some of them tiny one town banks. But for this too-big-to-fail meme to dominate American policy, it seems a little bit of a stretch. Can you explain why too big to fail really came to play?

MH: Because of lobbying. In order to become head of a committee in congress, a banking committee, if you’re a Democrat, you have to raise a million dollars from your campaign contributors and give it to the Democratic Party. So the Wall Street banks are the largest campaign contributors and they back people who are useful idiots or people who are just plain corrupt, which isn’t hard to find in the political process here or in Australia or anywhere else. And they will buy people whose first loyalty is to the banks. And the [politicians] say, “OK, Citibank and Merrill Lynch and others have given us so much money that we guarantee that you won’t lose a penny.” And Mr Obama has said, “My job as president – I’m really your lawyer, your advocate, I’m not really a president. My job is to deliver my constituency, Democratic Party voters, to my campaign contributors on Wall Street. And we promise that no matter how much fraud you do, no matter how much you steal, no matter how much you shrink the economy, no bankers is going to go to jail.

And we further promise that you won’t lose any money. No matter how many gambles you make, we will make you whole at taxpayer expense because the economy will go broke if you guys have to lose a penny. We’d rather have the 99% lose half of their money. We’d rather have the economy go into poverty than you losing a single penny. That’s my promise to you. Will you please give more money to the Democratic Party so that we can serve you better?”

KF: It just seems that economic theory, while being so dominating of public policy on one front can be so easily ignored. And with all of these banks in America, surely, if some were allowed to fail, it would have been better for the market system rather than socializing the losses with a lifetime of debt for the public to pay off.

MH: The market system here is that the banks are supposed to run the economy. That’s what the market system basically means. Of course it would be better for the real economy, but the governments are not supporting the real economy, they’re supporting the bankers and the bankers’ gain is the real economy’s loss.

KF: So much of the money required for political lobbying is to pay for advertising on what was once known as the public airwaves. Is there any discussion in the reform community for free airtime to be provided to the political parties, as they do in New Zealand for elections?

MH: No. None, whatsoever. The Democrats and Republicans have identical policies. They have all agreed that no matter what, they’re going to work for their campaign contributors, and they have the same contributors – different people but it’s all Wall Street, basically. If you had free expression of ideas, you’d violate the Chicago School definition of a free market.

In order to have a “free market”, defined as central planning by the banks, you have to prevent any alternative to your ideas. Remember Margaret Thatcher’s phrase, “there is no alternative”. In order to make sure there is no alternative, you have to make sure that you have a totalitarian control of the media and of the political system. Without totalitarian control, you can’t have a free market, Chicago-style. That’s why when the Chicago boys went into Chile, they closed every university and took over the radio stations and imposed a dictatorship. That’s the free market, neoliberal-style.

KF: So if companies are too big to fail, it seems that according to your most recent article “Wall Street’s War Against the Cities”, that governments are actually being set up to fail.

MH: I don’t agree with you at all! The governments are not failing when they’re serving their constituency, the bankers. The governments are succeeding! President Obama’s campaign manager, Rahm Emanuel, said “this crisis is too good to go to waste”. And one of the crises is the state and local crisis here in America. So to balance the budget, Washington is not giving federal grants and aid to the states and municipalities. That forces them into a budget crisis and they have to sell off their sidewalks, their roads, their real estate, and anything in the public domain at fire-sale prices, very much like what’s happening in Greece, to the financial sector. The government isn’t failing by destroying the economy. The government is succeeding in destroying the economy! That’s what it’s all about.

KF: Well we’re economists here and you well know that the economic system, the public finance system, has essentially been set up to fail. That’s the point I’m making.
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photo by: Esther Gibbons

Michel Bauwens on Peer 2 Peer’s Mutual Alignment

Karl FitzgeraldMultimedia1 Comment

Renegade Economists Podcast 253

As broadcast on 3CR, Wed Sept 12th
Subscribe to the weekly podcast.

Michel Bauwens from the Peer 2 Peer Foundation discusses the ongoing revolution in open source activity. He presents evidence showing that peer 2 peer networking delivers the lowest cost format for information sharing and production.

Listen in on this extended podcast edition.

We discuss Michel’s work in coordinating the paper Synthetic overview of the collaborative economy.

Notes from this important paper:

A challenge to the traditional means of control in production, distribution and interaction. A synthesis of networks.

Akin to the self regulation of markets, where perfect information exists to some extent, where self interest is reflected in the common interest, tho differs by its non hierarchical nature.

… the open content and open source economy has already been estimated to be one sixth of U.S. GDP, and certain practices, like grouped buying in China, may have a strong local weight in some national economies.

the horizontalisation of human productive relationships in peer production, when confronted with the more ‘vertical’ (centralized, hierarchical) players of the market economy, will lead to a wide variety of ‘diagonal’ adaptations.

When is For Profit Collaborative Production NOT peer production? Here are important indications:
• If the production is directed to the market, not the use value
• If the resources are allocated by the corporation, not the community’s social logic
• If participation is constrained by the controlling corporation
• If the corporations controls the common product

Ch4

It is important to see the value inversion that occurs in peer production. Though it is integrated in the
dominant economic model and embedded in the strategies of business firms, there are numerous
inversions in the logic of value and production:

• Beyond Exchange: commons-based peer production is not about exchange. Giving and taking are not coupled with each other.
• Beyond Scarcity: peer production is marked by anti-rivalry (sharing does not produce a loss, but a gain), i.e. because the knowledge, code or designs are shareable they can be used, copied and modified by everyone.
• Beyond Commodity: because the result of the production is shareable and anti-rival, and there is no tension between supply and demand, there are not produced for exchange value directly, but for use value.
• Beyond Money: money is only one of the possible drivers for the contributions, many other motivations become productive factors.
• Beyond Property: peer production uses licenses that make the contributions available to all possible users, creating a new form of universal common property; this means that there are no direct returns for property.
• Beyond Labor: because of the multiplicity of motivation, and production for need and use, peer production is not marked by labor for gain.
• Beyond Classes: contributions become agnostic to whether waged labour is involved; traditional division of labour and the command and control exerciced by the firm is secondary; new meritocratic and ad hoc hierarchies replace them (cfr. supra returns on property are inoperable).
• Beyond Exclusion: peer production systems are designed to enable the maximum number of contributions with the lowest possible threshold of participation.
• Anti-Credentialism: refers to the inclusiveness of peer production. What matters is the ability to carry out a particular task, not any formal a priori credential ( ≠ credentialism).
• Anti-Rivalry: sharing the created goods does not diminish the value of the good, but actually enhances it ( ≠ rivalry).
• Communal Validation: the quality control is not a ‘a priori’ condition of participation, but a post-hoc control process, usually community-driven ( ≠ hierarchical control).
• Distribution of Tasks: there are no roles and jobs to be performed, only specific tasks to be carried out ( ≠ division of labor).
• Equipotentiality: people are judged on the particular aspects of their being that is involved in the execution of a particular task ( ≠ people ranking).
• For Benefit: (Benefit Sharing; Benefit-Driven Production). The production aims to create use value or ‘benefits’ for its user community, not profits for shareholders ( ≠ for-profit).
• Forking: the freedom to copy and modify includes the possibility to take the project into a different direction ( ≠ one authorized version).
• Granularity: refers to the effort to create the smallest possible modules (see Modularity infra), so that the threshold of participation for carrying out tasks is lowered to the lowest possible extent.
• Holoptism; transparency is the default state of information about the project; all additions can be seen and verified and are sourced ( ≠ panoptism).
• Modularity: tasks, products and services are organized as modules, that fit with other modules in a puzzle that is continuously re-assembled; anybody can contribute to any module.
Negotiated Coordination: conflicts are resolved through an ongoing and mediated dialogue, not by fiat and top-down decisions ( ≠ centralized and hierarchical decision-making).
• Permissionlessness: one does not need permission to contribute to the commons ( ≠ permission culture).
• Produsage: there is no strict separation between production and consumption, and users can produce solutions ( ≠ production for consumption).
• Stigmergy: there is a signalling language that permits system needs to be broadcast and matched to contributions

According to Yochai Benkler, in his classic exposition, The Wealth of Networks, peer production’s emergence is directly related to technologically driven lowering of transaction, communication and coordination costs. That lowers the capital requirements of information production …

… participants in open design communities do not have an incentive for including planned obsolesence in their design practices.

If the price of machinery drops, and the organizational tools to coordinate cooperation develop in tandem, it is easy to imagine the development of a much more localized organization of production.

Photo courtesy of Jonas Tana

Housing shortage questioned again

Karl FitzgeraldCampaigns, CommentaryLeave a Comment

With recent doubts on Census data winding in the mainstream opinion on housing shortages (down from 228,000 to now just 23,000) we were pleased to have our 5th Speculative Vacancies report written up by Chris Vedelago on Fairfax’s Domain blog:

A study by Earthsharing Australia estimates there are 90,730 vacant properties around the city, enough homes to provide housing for 35,000 families.

It amounts to a vacancy rate of nearly 6 per cent, challenging industry claims the city is facing a housing shortage.

It must be noted the report did not include land banks that have unmetered water mains. 47,000 hectares have been re-zoned to residential here in Melbourne but yet some such developments have an unemployment rate for land of 99.94% ie Lend Lease’s Atherstone development.

So why is it happening?

Earthsharing Australia, which is affiliated with tax reform group Prosper Australia, believe it’s the direct result favourable tax and incentive-driven housing policies that encourage speculation, land banking and drive up house prices.

”The rapid run-up in housing prices has provided a lucrative torrent of windfall gains via capital appreciation for investors while rents have not kept pace,” Soos writes.

”Faced with this set of circumstances, investors may conclude that renting properties make for dubious investments when factoring in the wide array of costs associated, including time and effort.”

In other words, it’s a better deal to turn a viable home into a lock-up-and-leave investment.

This is exactly the outcome our tax system is designed to encourage.

Why bother working on a 45% income tax rate when you can adopt a Self Managed Super Fund and pay ZERO capital gains tax? The incentives for hoarding over housing are extortionate at all levels of housing policy. For some reason few dare talk about the role of speculation on affordability.

Vacant land is another matter. Some councils already charge a premium to rates for residential land left fallow.

Others do not, meaning owners are able to reap a windfall in rising land prices while paying less than others to hold their property.

In one case, a vacant 167-square-metre block was charged $991 for the year, while the liveable house next door on a 158-square-metre allotment paid $1540.

Valuers will also tell you that vacant blocks and derelict homes can hurt the values of other property holders in the street, especially direct neighbours.

For their part, Earthsharing Australia and Prosper Australia argue that a ”substantial” land value tax would help ”blunt” capital growth and encourage owners of unused homes to put them on to the rental market.

We do not support differential rates on vacant land. It leads us down the dangerous wealth-envy path of politicking as Wayne Swan and K-Rudd know so well post the mining tax bash. Victoria should return to a flat but higher rate on land value alone – Site Value Rating.

The Vedelago reference of higher council rating on the family home than the larger block of neighbouring vacant land is due to Capital Improved Valuations. This sees the family home paying about 30% more in council rates than a land banking speculator. This distortion actually provides a motivation for investors to smash down what could be affordable rental housing. With no improvements, the land banker gets a tax discount under CIV/ NAV.

So called ‘progressive’ politicians have decided that anyone with a large home is wealthy. They should be penalised. Anyone with solar panels or a water tank faces the same maddening fate. No wonder people don’t like the rating system. KISS.

This goes against the grain of decades of research showing that municipalities that actually encourage improvements to a house or shop encourage higher employment and economic activity. Location as represented by land value is a better indicator of ‘capacity to pay’. This is our timeless reminder to municipalities like Ararat, where moves are afoot to remove council rates. Perversely, it is the poor utility of the council rating system that sees local ratepayers wanting the regressive GST to replace the subversive CIV/ NAV system.

The core issue is that land in prime locations benefits from improved community services. A new community library or a redeveloped train station can add tens of thousands to a property owner’s land value. Those who benefit by living closer should pay for that improvement by the increased windfall gain they did comparatively little to receive. The rating system naturally does this over time – not in one hit.Can one argue with these principles? Instead, we are seeing a growing move to replace beneficiary pays with a regressive user pays system. When the windfall gains to land owners is significant, it is within their interest to squash chances of a more equitable system of public finance. For this reason we see fraudulent economic analysis published as mainstream news.

The fact is a land banker pays about $450 in Land Tax and about $1,000 in rates on an average location in Melbourne. When the windfall gains have been over $30,000 per annum for most of the last decade, we have to ask who are rising property prices good for? Banks and speculators win, whilst the community struggles to pay for services.

Earthsharing’s Speculative Vacancies report finds that 19 of the 20 highest vacant suburbs were in Melbourne’s west. As economists of note could tell you, the price has followed the change in the Land Tax threshold, having increased from $85,000 – $250,000 over the last decade. This western trend has grown because land is barely $250,000 in value. Thus investors pay next to no Land Tax.

The usual argument for investment is that when price goes up, supply will follow. Investment in land, no matter by how much, cannot produce any more land. It is as if neo-classical economists believe in flat-earth economics.

There are 842 vacant properties in Footscray. 860 in Essendon. 90,700 in total – about a year’s auctionable supply of property. But yet we sprawl further. With a higher holding charge on land holdings (Land Tax and Site Value Rating), these properties would put significant pressure on prices. However, with the Real Estate 4 Ransom mantra we live under, ‘developers’ can simply remove stock off the market to choke price falls.

The most affordable land was in Mitchell at $171,500 and a median lot size of 512sqm. Mitchell recorded the largest shift in supply, dropping from a 20-month supply in the March quarter to 8.5 months in the June quarter. However this was due to stock being withdrawn from the market, rather than sales.

With that in mind, we hope this report helps raise the importance of penalising lazy land use so that land is used for housing not hocking.

Read past reports.

Listen to Karl Fitzgerald on the weekly Renegade Economists podcast

photo by: Bilal Kamoon