1. Charles Roxburgh, Susan Lund, Charles Atkins, Stanislas Belot, Wayne Hu, and Moira Pierce, Global capital markets: Entering a new era, Seoul, London, San Francisco, and Washington, McKinsey Global Institute, 2009, p 31, posted on www.mckinsey.com
2. Adam Ashcraft and Til Schuermann, Understanding the Securitization of Subprime Mortgage Credit, Federal Reserve Bank of New York Staff Reports, no. 318, March 2008, posted on www.newyorkfed.org
3. Ian Abley, Predicting the future of British house building, 10 November 2009, posted here
4. Ibid, p 22
5. James Heartfield, State Capitalism in Britain, 24 June 2009, Metamute, posted on www.metamute.org
6. Charles Leadbeater, Living on Thin Air - The New Economy, With a New Blueprint for the 21st Century, London, Penguin, 1999
7. James Surowiecki, The New Economy Was a Myth, Right? Wrong, July 2002, Wired, posted on www.wired.com
8. Ibid, p 11
9. Ian Abley, Predicting the future of British house building, 10 November 2009, posted here
10. Analytical Services Directorate, Housing and Planning Key Facts, London, Communities and Local Government, November 2009
11. Ian Abley, Prince Charles is Britain's master-eco-fraudster, 11 July 2009, posted here
12. Stephen Kirchner, More houses, not taxes, 12 November 2009, The Australian,
13. James Heartfield, Green Capitalism - Manufacturing scarcity in an age of abundance, www.heartfield.org, 2008, p 91, with details of how to buy posted here
Don't expect explanation from a McKinsey report
The McKinsey Global Institute was established in 1990 as McKinsey & Companys business and economics research arm. In September 2009 MGI published Global capital markets: Entering a new era, saying:
'Much of the rise in assets in mature markets did not reflect capital being channeled into economically productive activities; rather, it reflected growing asset bubbles. It turned out that the risk diversification benefits of securitization had been illusory because some of the biggest investors in securitized instruments were the leveraged financial intermediaries that had created them. And the global spread of such assets did not diminish risk by dispersing it; on the contrary, these assets were a source of contagion, transmitting the crisis around the world when asset prices collapsed.' (1)
This is quite an admission. Securitization of mortgage loans is a complex process that involves a number of different players, but it has long been thought by advisers like MGI to enable investors to diversify their risk and reduce the need for expensive bank capital. While more sophisticated intermediation between players lowered borrowing costs it also revealed frictions between them. (2) Clearly productive activities need lost cost finance, but the expansion of "secured" finance since the mid 1990s has not simply served to expand productive activity. The byzantine financial mechanisms developed facilitated the growth of asset bubbles, and a substantial securitization sector. Most significantly in mortgage lending.
MGI's report on Global capital markets describes what happened in the last decade and a half. However the authors fail to explain how the asset bubble in residential property came about, or why Britain is such an extreme case of financialisation. Why is there so much finance for the trade in the stock of housing rather than the building of new ones?
Look at the audacity prediction graph. (3) In particular the graph line generated by adjusting the Financial Times Average British House Price Index to 2007 Prices. This asset inflation line shows a remarkable correlation with the graph McKinsey present as "Exhibit A" in Global capital markets, showing House Price Inflation Indices from around the world. There is some misfit around 2007, where McKinsey think the bursting of the bubble has been more dramatic than the FT, but we are still world leaders in house price inflation and mortgage lending.
It would be good to compare data for house building, household growth, and lending for a selection of these countries, in the context of their interconnected political economies. But that is a work of many hands that will have to wait. We lack the resources of McKinsey, but we know that in Britain housing production is falling as mortgage finance expands. Those trends are linked, and we're trying to account for the complex of interactions. More could be done to overcome simplistic claims of causality. It is not the case that planners set about to create housing asset bubbles. Demographia have done great work in publishing better analyses about housing affordability internationally. It is hard work to overcome the "blame the bankers" reaction to recent events.
We can call it the "Brown Bubble", but we insist that the 1997 to 2007 house price bubble is not the fault of borrowers. McKinsey comes close to blaming the public. MGI noted that '... in the United Kingdom, as in the United States, households were the biggest drivers of debt growth, accounting for 43 percent of the increase.' Adding, limply, that:
'No one knows what the optimal or sustainable level of borrowing is for a country. But it is clear that the recent debt surges in the United States, the eurozone, and the United Kingdom were not sustainable and will likely reverse. This may mean less consumption and investmentand possibly more sluggish growthfor some time.' (4)
Why so much finance? Why so much dependence on finance? For James Heartfield the two dominant trends in contemporary British capitalism - the growth of the financial sector and the growth of state expenditure - are both indicative of the retreat from production that has seen UK industry and manufacturing stagnate:
'Rather than generating new wealth through innovation, Britain's capitalists are increasingly involved in desperate rent-seeking activities, plundering the public sector or living off the commissions earned on financial intermediation in the City of London.' (5)
In 2008 this corporate welfare reached new heights when the British and American governments bailed out the failing banks. All MGI say is that the world is entering a "new era" of financialisation. But we were repeatedly told in the 1990s that Britain and America were going to enjoy a "new economy". One in which making things was less important than thinking about things being made somewhere else. Charles Leadbeater gave New Labour and The City the myth of Living on Thin Air:
'Today more and more of us make our livings from thin air - from our ideas and know-how. This is because knowledge is becoming the most creative force in the modern economy. In old capitalism, the critical assets were raw materials, land, labour and machinery. In the new capitalism, the raw materials are know-how, creativity, ingenuity and imagination.' (6)
This patent nonsense flatters architects, or mortgage brokers, while diminishing bricklayers. It is the rhetoric that politicians like to hear from economists because it does not require anything to have been understood from the "old era" or the "old economy". (7) The supposed newness of the future is sufficient for an ignorance of the past to appear irrelevant. This is fraudulent. Yet it stands largely unchallenged. We need a better appreciation of the industrial present.
'From the perspective of Britain's entrenched elite, with its freakish specialisation in financial intermediation, there was no alternative: without government guarantees, Britain's financial services would have lost all credibility in the world market. But saving the banks is a disaster for the British economy in the long run - all that the bailout has done has been to shore up the same parasitic financial sector (increasing the "moral hazard" that comes when investors are shielded from their own risks) that was the problem.' (5)
That is why another housing asset bubble is beginning again. McKinsey say that '... because home prices are slow to correct, the current slide may persist for some time.' (8) This is simply not the case in badly housed Britain. Here, house price inflation is not a remote prospect. It has already revived, and that is popular. (9)
Communities and Local Government say the average house price in England has reinflated back up to £195,000 in the second quarter of 2009. Only households with annual income of more than £65,000 could call that "affordable", and they form only part of the top 20% of households. Homelessness is slightly declining, while there is officially overcrowding for nearly 3% of households in England, and approaching 7% in London. There was no report of vacant dwellings except for 2% of the Registered Social Landlord stock. Rents of all kinds of tenure were up by between 3% and 6% in a year, even though 35% of them were designated "non-decent". The density of new housing has been raised to 44 homes a hectare, with 80% on Brownfield land. (10) But the little new housing built is either a luxury, an investment, or a subsidised benefit.
The population of London particularly, England certainly, and Britain in general, is being squeezed into the existing housing stock, while less and less new land is built on. At the moment, rather pathetically, we put up with the predicament. No-one can yet see a serious political alternative in Britain to the project of saving the mortgage lenders, and allowing house building to dwindle. It feels like a weakness in British society.
We could stay resigned to this failure to build. Of course there is much to abolish in Britain, fraudulent monarchy included. (11) But as a population we might accept being squeezed by an eco-aristocracy. As Heartfield says, '... it will not be easy to restructure British industry on more productive lines, still less to make sure that working people are not made to pay the price for the grotesque failures of their rulers.' (5)
We are already badly paid, and don't seriously push for more. The majority of home owners hope they can continue to withdraw housing equity as a substitute for having a better household income, and fear a return of the situation in the mid 1990s, when that was not possible.
But HEW is no substitute for pay, and paying less for better housing. As in Britain, the American economy is looking to the mortgaging rather than the production of housing. There is a societal demand for house price inflation rather than housing as a landlord free utility. The "free market" idea that demographic demand for the utility should generate supply is wrong. Supply in production need not meet demand for a home when The City or Wall Street require households to be soaked in mortgage debt. State dependent financiers and their client governments are busy expanding the circulation of mortgage lending on inflating assets to accrue interest on a vast pool of unproductive capital.
The British planning system is a near perfect instrument for frustrating attempts at widespread house building. Much more building would make housing asset inflation impossible in an industrial society. The planning system is loved in Britain, and "Smart Growth" advocates will become more anti-development in America. But we also need not to generalise about planning systems. In Australia Stephen Kirchner, a research fellow at the Centre for Independent Studies, has oddly argued that:
'House price inflation can only co-exist with over-investment in housing if constraints on new housing supply are preventing this investment from translating into additional houses being built... House price inflation was a global phenomenon, arguing against country-specific factors as the main cause.' (12)
Planning systems vary around the world, and Britain's is the most effective as an institutionalised frustration. It is well worth looking at the country-specific character of planning as development control. There is considerable variation, with no other country to my knowledge operating a national denial of development rights. "Planning" means substantially different things in different countries, and as America shows, even within countries. Kirchner's "classical liberal" critique of planning in principle, in favour of the elusive "free market", misses the point. We do suffer in Britain from the state controlling development in ways that prevent widespread building activity and allow asset inflation. This is not a conspiracy to create a financial bubble so much as a reflection that the British state has no politically easy alternative but to manage one every few years. Planning exists in a context. None of this was planned in 1947.
Today the world is experiencing the intersecting consequences of the global phenomena of expanding financialisation and deepening environmentalism. Britain is just more vulnerable to these debilitating trends than most industrial democracies, and has a post-war planning system that, luckily for the government, helps the government cope.
Looking at the FT Index for Britain, it is clear that we have surpassed the United States in housing asset inflation. Even Australia looks mild by comparison to us. Our graph is inflating again. Australia and the United States show signs of being similarly affected, while their environmentally minded planners look on the British planning system with envy.
To what extent did British financial intermediation help inflate the housing bubble in the USA, which led to the sub-prime crisis? How has financing the planning backed British housing market distorted the markets of the other eurozone members that MGI consider? What is particularly the matter with Belgium, Spain, the Netherlands and Ireland?
Japan's housing experience has been very different, with a protracted period of economic sluggishness. In Japan it is land that appreciates as an investment, mortgaged over generations, while the structure of the home is often separately funded as a depreciating consumer durable. It will be worth looking at Japan again.
It is Germany that appears as something of a house price success story by comparison, and despite the strength of environmentalism in that country. The German planning system is still generally interested in house building. Households tend to save more from income. Such differences are also subjects to return to later.
British greens are containing and crushing the construction industry, from the top down, as they call for more corporate welfare in a McKinsey style "new era". Here, as elsewhere, it is environmentalism as the ideology of capitalism in retreat from production that must be challenged. Politically challenged by those who want to make the democratic case for industrial advance. (13) Loose talk of a "free market" explains as little as McKinsey.
Where are the capitalists NOT in retreat from production? What are they going to do to oppose greens who care less about industry? Industrialists are not in evidence as a progressive social force in Britain anymore, and will do nothing to oppose the environmentally moralised financialisation of the economy. Who, then, will stop the retreat from production?
We'll have to do that ourselves.
So who are "we", and in addition to abolishing the denial of development rights in the British planning system, what are we determined to do?
Ian Abley 17.11.2009
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