A new group of US millionaires revealed their desire for renting as opposed to owning homes on September 16 in the Wall Street Journal  title. The idea of the article has the ability to lead to a significant change in government and central bank policies that favor real estate in lending.
Central bankers are able to accomplish two things effectively. One is to maintain the value of a nation’s money. The other is to manage financial establishments. Since the US Federal Reserve was established in 1913, the dollar has lost 99 % of its getting strength in gold, which suggests that it has not performed so well on the primary matter.  ,  ,
The US Savings &, Loan problems, the Long Term Capital Management fiasco and the 2008 global financial crisis demonstrate that the Fed did not do well on the second consideration, either.  ,
The mistake common of these three crises was the financial sector’s extension of too much credit to” junk” consumers,” junk” companies and” junk” countries, with two of the crises related directly to misguided real estate policies.  ,
The Federal Reserve Act embraced the so-called” True Payments” theory in 1913. The doctrine stated that there can never be” too much” money if banks gave credit only against short-term commercial bills, backed by “real” transactions.  ,
The Board holds that there is little chance that the funds created and distributed by the Federal Reserve Banks will be in extreme volume if it is only limited to effective uses, according to the Fed’s 10th Annual Report from 1923.
As the earth was then on the silver standard, the report did not mention that for the theory to operate, it needed an “outside” outlet serving as an “alarm signal”. Then, there could , be extra liquidity, prices and crises – as however turned out to be the case.
John Law ( 1671-1729 ) came up with this doctrine, though his name is associated now with the” South Sea Bubble” . , He sought a solution for the problem of how much currency and credit creation there can be without stoking inflation.  ,
His answer was a “land-collateralized” word concern that drew on three principles: money’s purchasing power should be firm, issuing credit has anticipate , “real” trade, and land should be the collateral.
His error was that he overlooked how increasing prices, particularly land prices, are raised, which falsely rationalizes more credit expansion and thus initiates a vicious cycle.  ,
Adam Smith made the mistake and suggested using industrial paper as the collateral rather than subjective land-based collateral. He also recognized the need for specie ( gold ) convertibility under the” Real Bills” doctrine to limit the growth in the amount of money and protect the value of contracts.  ,  ,
With this second condition in place, the price level is already set, and there is no need for complicated and statistical ( mis)calculating of price indices.
Devaluation to silver is not a necessary condition for the” Real Payments” to work: responsibility for the price of silver becoming the “alarm signal” is plenty. The price of gold may indicate errors caused by either excessive or insufficient bank payment and currency. This philosophy was adapted from the Bretton Woods agreement.  ,
It failed, however, because institutions did not enforce two of its crucial phrases:  , allowing for occasional depreciation and penalizing places accumulating extra reserves. Paul Volcker, a participant in the discussions over reneging on the Bretton Woods agreement, noted that it never went down well.  ,  ,
Here are some sketches of the financial crises in the US and Japan that illustrate how they came about as a result of false real estate assumptions.  ,  ,
The 2008 crisis began with the drastic reduction of real estate’s and bonds ‘ capital gains tax exemptions from 1977. Predictably, investment poured into real estate as it became more of an “asset class” than before, with neither the Fed nor the statistics bureaus noticing the implications.  ,
Subsequently, Congress required banks to give loans to lower-income earners on the idea that home equity would offer them collateral. Subprime loans went from 2 % of total loans in 2002 to 30 % in 2006, accompanied by much fraud and no collateral-creation.  ,
Banks packaged the loans as CDOs that rating agencies rated AAA   without doing enough due diligence. Investment banks, both in the US and around the world, bought them without doing due diligence either. These notes, which were the US’s largest capital export at the time, entice foreign investment.
Unsurprisingly, the loans started to default, and regulators made mistakes by altering the accounting standards for commercial and investment banks, resulting in significant write-offs. Real estate is solid collateral, but forget that if it is n’t backed by future incomes, it melts into thin air as a result of this series of events.  ,
Japan’s decision to use “real estate” as its main collateral had its origins during the 1930s following the , 1920s and 1930s crises both in the US and Europe and a large number of Japanese defaults in 1931.  ,  ,
The government established the Bond Issue Arrangement Committee ( BIAC ) to manage the collateral for both convertible and regular government bonds, which makes it illegal to issue corporate bonds without the support of real estate or specific government bonds. This requirement left the Japanese corporate bond market without a market for them, allowing the banks to take over the majority of corporate finance.  ,
Only in 1979 was the rule relaxed, with Sears Roebuck Tokyo issuing the first uncollateralized bond since the 1930s. However, the rules continued to exclude financing to small and medium-sized companies that most needed to raise funds by issuing convertibles and warrants, thus limiting investment opportunities.  ,
At the same time, well-established firms issued convertibles, turning them from net borrowers to net suppliers of funds to the banking system. Flush with funds, the banks lent against land – as it continued to be the approved collateral.  ,
Thus, Japan entered the John Law mess. Land prices increased and, as large companies held more and more land as collateral, their stock prices rose. The Bank of Japan fueled the inflation by lowering interest rates from 5 % in 1985 to 2.5 % in 1987.  ,  ,
By the end of the boom,  , 10 % of corporations owned over 80 % of company-owned land in Tokyo. While loans to the real-property industry by banks made up 11.5 % of all their loans, the non-bank lending sector’s exposure to real estate was 36 % of its total loan portfolio.  ,  ,
The most notable example of this is the Rockefeller Center acquisition, which Japan also completed in foreign real estate. ( Mitsubishi lost$ 1.4 billion on the deal once the credit creation–land–stock spiral deflated. ) Japan did not heed Adam Smith’s lessons.
Additionally, it made mistakes worse by correcting what were monetary errors through a number of fiscal errors. Those errors included the imposing a 20 % withholding tax on savings, a capital-gains tax on equity sales, a security transfer tax, a 3 % consumption tax, a 6 % tax on new cars,  , and a 2.5 % surtax on corporate profits among others.  ,
At the end of 1989, it introduced the Basic Land Law, which focused on suppressing land” speculation” – drastically raising capital gains taxes. The changes were complex, but they actually caused 20 % to 50 % of real estate capital gains taxes if individuals or businesses sold land before the ten-year holding period. The crash of 1991 in land and stock prices was thus hardly “irrational”.
In total, both crashes and crises were caused by labeling land as being “real” despite the fact that it frequently melted into thin air. A more stable financial future may require a more accurate understanding of the qualities of talent and capital, all being held accountable for performance, as opposed to policies encouraging people to hold onto immobile parcels of land.  ,
The article draws on Brenner’s Force of Finance,” How the Financial Crisis Did Not Change the World”, and” Toward a New Bretton Woods Agreement”.