Academic journal article The American Journal of Economics and Sociology

1 the Role of Land Markets in Economic Crises

Academic journal article The American Journal of Economics and Sociology

1 the Role of Land Markets in Economic Crises

Article excerpt

I

Boom and Bust in Real Estate

WE HAVE FALLEN INTO an economic disaster, probably the worst since the 1930s. Here is. some of the evidence:

* The unemployment rate rose 78 percent from April 2008 to April 2009 (from 5 percent to 8.9 percent), an unusually rapid increase in joblessness (U.S. Bureau of Labor Statistics 2009a).

* Nearly 12 percent of all Americans with a mortgage--a record 5.4 million homeowners--were at least one month late or in foreclosure at the end of 2008, according to the Mortgage Bankers Association (CBS News 2009).

* In addition to the I million households that have been hit with foreclosure since 2006, it is likely that almost 6 million further households will face that situation by 2013 (Grow, Epstein, and Berner 2009).

* The net worth of American households fell by 31 percent (annualized rate) during the fourth quarter of 2008, the largest rate of decrease in 50 years (Board of Governors of the Federal Reserve System 2009). Losses by unincorporated business were almost as great (a 29 percent drop). (Since household consumption has remained steady, there has been a huge drop in savings.)

* Corporate profits from current operations declined by $250 billion or almost 17 percent in the fourth quarter of 2008, the largest percentage drop since 1953. That does not include losses in the financial sector from mortgage defaults (Nutting 2009). Since most new investment comes from corporate profits, this bodes ill for the possibility that corporate investment will recover quickly.

* Job losses in the fourth quarter of 2008 rose to 0.9 percent, the second largest loss in 50 years. So far, 2009 has been far worse in terms of rising unemployment. Mass layoffs in February 2009 were 150 percent above the average for the period from January 2005 to October 2007 and 28 percent above the last quarter of 2008 and January 2009 (U.S. Bureau of Labor Statistics 2009b). According to Milne and Sakoui (2008), twice as many companies will declare bankruptcy in 2009 as in 2007: "The U.S. will see 62,000 companies go bust next year, compared with 42,000 this year and 28,000 last year, says a report by Euler Hermes, part of German insurer Allianz."

We probably have not yet hit the bottom, the equivalent of 1893 or 1933, so the full severity of this crisis is not visible. But based on those signs, this turn of the wheel is likely to be as damaging as those two depressions.

We have seen economic overexpansion followed by a severe contraction many times before. The peak of each cycle has recurred roughly every 18 years. Major wars and plagues have broken the rhythm, but the cycle has persisted over the last 800 years.

Understanding the cause of this cycle is imperative if we are ever to learn to tame it and avoid the catastrophe that it brings. We need a better understanding of the conditions that have repeatedly debilitated the financial system and crippled the national (and international) economy.

The place to begin looking for answers is not inside the financial system, where attention has been focused lately. Instead, to understand the cause of the current economic malaise, we need to examine the way the boom led to a bust. Our hypothesis has nothing to do with the "hangover hypothesis," a moralizing approach that proclaims suffering today as the wages of sinful overconsumption in the past. There was in fact overconsumption, but what we are looking for are the causes of that behavior outside of personal motivation. We want to understand the structural conditions that created the binge of 2002 to 2006, which led to the current contraction.

The proximate cause is plain if we will but look. The boom and bust of the land market represents a pattern of land speculation that has preceded many similar episodes in the past. Hence, we start by examining the record of how land speculation precedes economic crises. …

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