I'm on a tour with my new book Enshittification: catch me next in Chicago, Los Angeles and Calgary! Full schedule here.
Here's a surprising stat: from 1845-1960, UK house prices pretty much kept pace with inflation – a house you'd bought 20 years ago could only be sold for more-or-less what you paid for it (technically, houses rose about 0.25% ahead of consumer prices).
From 1960-1979, house prices started to nudge ahead of inflation, averaging gains that were 1.75% higher than consumer prices. But it wasn't until 1980 that the annual above-inflation price increase of houses grew to 3%. Steve Keen's "Remedies for Ridiculous House Prices" explains what happened to make housing so eye-wateringly expensive (and how to make it affordable again):
Keen unpacks just how dramatic this change is: since the Thatcher years, house prices have doubled every 23 years. Before 1960, the house prices rose so slowly that they would have taken 280 years to double (which is to say, the fate of most houses was to turn to rubble, not to double).
So what did Thatcher do to make homes so eye-wateringly expensive? The high-level explanation is that the UK – like much of the world – transformed its housing stock: not a way provide the basic human right to shelter, but rather, an asset:
Transforming a human necessity into an asset is a terrible idea. Governments work to increase the price of assets owned by actors in their economy. But increasing the price of housing only benefits the minority who own houses, while everyone else – everyone who needs a roof over their head – suffers. For a comparison, imagine if our governments instituted a policy of making some other necessity as expensive as possible, say, food or water. Transforming shelter into an asset class was always going to end badly.
Keen is an econ prof, and the point of this piece isn't merely to observe this remarkable shift in the economics of having a home, but also to trace the policy choices that led us to this moment, and to propose policies that could change things so that everyone can have a home.
So what did Margaret Thatcher do to destroy the chances of everyday Britons to have a home? Well, this is Margaret Thatcher, so if you guessed the answer was "deregulation," you'd be right. Prior to Thatcher's deregulation, home loans in the UK mostly originated with "building societies," a specialized lender whose operations are fundamentally different from the operations of a bank.
Here's the difference: when a building society makes a home loan, it withdraws money from a regular bank account at a regular bank, much like your savings account. In order for your building society to credit your mortgage account by £100k, there must be a corresponding decrease of £100k in its savings account (just like when you send £10 to a friend, you have £10 less and they have £10 more).
But that's not how it works when a bank originates a loan. Banks are "fiscal agents" for the UK's central bank, the Bank of England. That means that banks can create new money, simply by crediting one of its depositors' accounts. When a bank loans you £100k to buy a house, £100k in new money is created. Banks don't raid other depositors' accounts for your loan – they make new money, out of thin air.
So after the bank originates your loan, your account has £100k more in it, and the bank has an IOU from you for £100k, which sits on its books as an asset. In the moment the money is created, the bank makes £100k in new money for its balance-sheet.
Every time a bank issues a new mortgage loan, the money supply increases – more money is added to the economy. Thatcher deregulated mortgage lending, and after that, the majority of UK mortgages came from banks, not building societies. Every new mortgage increased the supply of money in circulation in the UK.
As Keen writes, this precipitated an "explosion" in house prices – and in household debt, which rose from 20% of GDP to 80% of GDP by the time of the Great Financial Crisis. Since Thatcher, house price have risen by 350% more than consumer prices.
Thatcher's deregulation "set off a vicious cycle": the existence of more mortgage debt made house prices rise (when banks supply more bidding money to buyers, buyers bid higher sums). As housing prices went up, housing could be used as collateral for still more loans, which encouraged homeowners to stake their homes to borrow money in order to buy more homes to rent out. Because they have so much collateral (an overpriced home), they can borrow so much (from banks that can create money) that they are able to outbid people who don't have a home yet and just want to buy a home so they can live in it.
This is Keen's diagnosis, but the real question is, what do we do about it? The UK housing situation has been vapor-locked, because there's a powerful voting and donating bloc of homeowners who want to keep house prices high, both to maintain their personal net worth, and to avoid having their "chained mortgages" collapse when prices fall and they suddenly no longer have enough collateral and the banks demand repayment.
This is where Keen's proposal gets really interesting. In this installment, he proposes two policies that break the deadlock, offering a glide-path out of the housing crisis, rather than a crash.
The first of these policies is deflationary – it will lower prices. It's called the "PILL" ("Property Income Limited Leverage").
With the PILL, the most a bank could offer a housebuyer for a mortgage loan would be some multiple of the rental income from the property they're buying. Say that multiple is 10, and the home you're trying to buy would rent out at £50k/year: the largest mortgage you'd be allowed to take would be £500k (even if you're not buying a home to rent it out, you'd still be subject to this cap, since potential rental income is a large determinant of the price of a home).
Keen notes that UK rents are really high, but property prices are even higher – property prices (and mortgages) have risen faster than rents. The average London home price is about 25x the annual rent it generates, and London mortgages are about 20x the annual rent for the properties those mortgages cover.
The PILL would cap mortgage issuance at the current multiple (so in London, about 25x annual rent), but that number would be gradually reduced, a few points per year, until it reaches about 10x annual rent. This will have the effect of making homes a much less attractive asset-class for speculators, gradually driving "investors" out of the market, so that the majority of homebuyers would be people who were in the market for somewhere to live.
This will make houses cheaper over time, and the majority of Britons (who can't afford to buy a home) would like this. But house-rich Boomers would not, and for good reason: the austerity-starved UK state has slashed benefits for everyone, and older people rely on selling or borrowing against their homes as a way to remain sheltered, fed, and cared for as they age.
How do we win those Boomers over and stop them from scuttling affordable housing (again)? That's where the second proposal kicks in: AHA (the "Affordable Housing Authority"). This is a system for making homes more valuable, offsetting some of the reductions from the PILL, but without denying homes to people looking for somewhere to live.
The biggest barrier to buying a home isn't the price of the home – it's the price of the home and the price of the mortgage. Decades of mortgage interest vastly increase the total cost of a home, and the interest on a monthly mortgage can make the difference between an affordable home and one that makes you "house poor" (where the cost of your home eats up so much of your income that you struggle to pay for heating, groceries, transportation, etc).
Here's Keen's math: say you're a median UK household (£37k/year in disposable income) and you buy a median house (£270k) with a 10% deposit (what Americans call a "down-payment"), at 7% interest. Over a 25-year mortgage, your monthly payments will be £20.6k/year, more than half of your disposable income.
Not only is this more than you can afford – it's also so much that you just won't get a mortgage from a bank. They'll look at those numbers and decide that you can't afford to pay back this loan (they'd be right, too).
But what if we trim that interest rate to zero? At 0% interest, the annual payments for your mortgage go from £20.6/year to £9,300 per year – an easily affordable sum for the median household.
So the question is, why do we pay so much to the banks in interest? The Econ 101 answer is that banks take a risk when they loan out their depositors' funds, and they need a reward and incentive to take that risk. But banks don't lend out deposits: they create deposits. When you take out a £100k mortgage, the bank adds £100k to your account, without taking it from anywhere else. Banks are "fiscal agents" of the national bank, and they are permitted to create money this way – and then charge you rent (interest) on that money they can create for free.
Keen's AHA is a different kind of lender, a publicly owned one that creates money in exactly the same way as banks do, but without charging interest. The AHA is charged with offering loans solely to people trying to buy a home who have been priced out of the market. These loans will drive property prices up (by putting more buyers into the system), offsetting some of the price declines created by the PILL.
Other than the fact that AHA loans won't come with interest, these loans will work like regular mortgages: the borrower will pay them off every month, until they have paid back the entire principle. If they default on the mortgage, AHA can foreclose on the house and sell it off to get its money back. AHA always gets its money back and costs nothing – on balance – to operate.
Do interest free loans sound like a communist plot to you? Keen asks us to consider such noted socialist proponents for this ideas as Henry Ford and Thomas Edison, who railed against financing the Muscle Shoals hyrdroelectric plant with bank loans, instead insisting that the national bank should simply create the money to make those loans:
[Ford] thinks it’s stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000—that is what it amounts to, with interest. People who will not turn a shovel of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest.
As Keen points out, it's not merely that the banks that currently issue mortgages don't "turn a shovel of dirt or contribute a pound of material" – they simply will not issue a mortgage to a median buyer. The median buyer can't get a mortgage, so the system is rigged to make them pay someone else's mortgage through their monthly rents, every month until they die.
AHA cuts the banks "out of a market they won't even enter."
Now, it's true that current financial rules (foolishly) ban the Treasury from having a negative balance at the Central Bank. But we don't have to repeal those rules to make this work: the Treasury can offset AHA loans by offering bonds to private banks.
These two policies create "winners all round." New home buyers can afford a home. Banks get interest from AHA bonds to offset losses from limits on mortgage lending. Current home owners get a cushion to protect their net worth even as homes become more affordable.
The loser is the investment sector, the City boys who buy and sell mortgage debt. And you know, fuck those guys.
Keen finishes by teasing one more policy prescription that he thinks will tie this all together: the intriguingly named Modern Debt Jubilee, a way to "to reduce private debt, but in a way that doesn’t cause an economic collapse," which he says he'll cover in his next post. Can't wait!
If you'd like an essay-formatted version of this post to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:
Economic forecasts predicting the potential impact of climate change grossly underestimate the reality and have delayed global recovery efforts by decades, a leading professor has said.
¿Podemos evitar otra crisis financiera? - Steve Keen (2021)
La gran crisis financiera tuvo efectos catastróficos en la economía global y tomó completamente por sorpresa a los economistas convencionales. Muchos comentaristas destacados declararon poco antes de la crisis que se había encontrado la receta mágica para la estabilidad eterna. Menos de un año después, se produjo la mayor crisis económica desde que estalló la Gran Depresión. En este libro…
The First Fight between Michael Hudson and Thomas Piketty about thenature of Debt was held on the 10th anniversary of the edition of DavidGraeber’s 5000 Year...
https://museum.care/the-great-debt-debate-q-a/
Cited from the website:
“The First Fight between Michael Hudson and Thomas Piketty about the
nature of Debt was held on the 10th anniversary of the edition of David
Graeber’s 5000 Years of Debt.
Michael Hudson and Thomas Piketty were seeking answers to the burning questions of our time. The fight had so many rounds that we didn’t have time to answer a lot of questions from the public.
So in the spirit of a boxing match, we’re going to have our combatant Michael Hudson conduct a post-match debrief, where the public can ask questions and get answers.
Let’s discuss the tactics and strategies suggested in the Fight. Let’s explore the way out of the mess we’re in together!
Meet Steve Keen, Michael Hudson, Pavlina Tcherneva and Astra Taylor!”
I thought this was really informative and interesting. I think some of the perspectives being put forth here are very useful, moving forward...
"Nick Grubernick is a professional animator who would like to animate my cartoon on money using Miguel Guerra's drawings. He can make the characters talk, as you can see in the video above ("Freud" switches to English at the 1 minute & 46 second mark in this video--turn on subtitles so you can read what's being said before that if you, like me, don't understand German). To do this video properly, we need "voice actors": people who can bring some life to the script of the cartoon (attached to this post for easy reference: we'd do the first volume only initially). So this is a call for "talent": is there anyone in the community here would be willing to lend his/her voice to bring Dr Strangle, Giles, Rita, Tom, Dick and Harry to life?"
I know tumblr is replete with creative energy and good folks, so, share widely and hop into it! Steve Keen is one of the most inspiring economists I know of, and I think his work is extremely important.
So if anyone has a good voice to lend, check it out!
Steve Keen's Critique of the Marxian Laboratory Theory of Value
But it seems perfectly valid. I do not know exactly what to make of the political implications of Keen's critique (I don’t see how it refutes the notion of labor as intrinsically exploited under capitalism)
There’s an “post-Keynesian” economist called Steve Keen who I encountered many years ago on YouTube and has often criticised something called the “money multiplier.” I’ll get to what the money multiplier (MM) is soon. I only recently came to understand Keen’s argument (he could be clearer sometimes) and a recent video by MRU explaining the MM has reminded me of the issue.
What is money? What do banks do? I need to give an intro to this before discussing the MM.
By the end of this post you will also understand why the massive increase in the monetary base in 2008 didn’t lead to hyperinflation.
Intro to Banking
Suppose I want to set up a bank. How do I do that? I’m a wealthy individual with a big pile of cash in my vault. Some people come to me ask for a loan. I give them $X from my vault and I write out a certificate which says I am the owner of the loan for $X which I hold onto. Others come to me and want to deposit money for safe keeping. They give me $Y in cash which I place in my vault and I print out IOUs which I give to them. They are free to cash in these IOUs at any time and exchange them for hard cash from my vault.
Over time, I establish a reputation for always redeeming my IOUs. People begin to treat my $1 IOUs as if they were completely interchangeable with real money (cash).
Something that’s very important is always to keep track of the assets and liabilities of the bank. I take $100 out the vault and lend it to someone. Reserves (the amount of cash in the vault, included in assets) has gone down by $100, but I also write out an certificate which says I own the loan of $100. This certificate is an asset of value $100. Equity = Assets − Liabilities, is unchanged. As a rule of thumb, almost all actions will conserve equity. You can really only change your equity by creating or destroying value.
Since my IOUs have become as good as real money (cash), people start to use them in transactions. Often this is easier than doing all transactions in cash. It may reach a point where all transactions are done in terms of the IOUs. Now I don’t necessarily have to go handing out pieces of paper saying IOU on them. Instead I just enter into a computer system a number next to your name saying how much I owe you. These are the chequeing accounts. But they’re still IOUs. A bank run is what happens when people lose confidence in the redeemability of the IOUs.
If someone tries to deposit a Bank A IOU at Bank B, as is the case when persons from two different banks transact with one another, Bank B will mark up the person’s chequeing account—that is, give back a Bank B IOU. Over time banks will accumulate one another’s IOUs. Periodically they will want to redeem these with one another. Suppose Bank B has $1 in IOUs of Bank A. Then Bank A owes $1 to Bank B and so transfers $1 in cash reserves between their vaults after they burn the IOU. Bank B has $1 more in reserves—that’s an increase in assets; but the person with an account at Bank B who deposited the $1 had their account marked up by $1—that’s an IOU held by that person, a liability to the bank of $1. No change in equity.
The Money Multiplier
The whole idea of the money multiplier rests on the idea that banks lend out deposits. You deposit $X in a bank. The bank will lend out most of that, and it will keep some fixed fraction r in reserve. But since practically all transactions are done via bank accounts and not via cash, the money loaned out $X*(1−r) will be deposited. This deposited money will then be lent out again, and so on ad infinitum.
In the process, many new IOUs will be printed which operate as money interchangeably with cash. How much?
X is deposited in cash
X(1−r) is loaned out and deposited, creating IOUs of value X(1−r)
This is then loaned out again and deposited, creating IOUs of value X(1−r)2
This is then loaned out again and deposited, creating IOUs of value X(1−r)3
etc.
So you have a geometric series X + X(1−r) + X(1−r)2 + ... = X/r using the formula for an infinite geometric series. An initial injection $X in cash is transformed into an increase of $X/r in the total money supply. 1/r is called the “money multiplier.” For example, if banks hold onto 20% of a deposit, the money multiplier = 1/20% = 1/0.2 = 5.
Problems
On closer inspection though, this story doesn’t really make sense. Banks do not lend out cash deposits. If you take out a loan, you don’t get handed an enormous pile of cash only for you to deposit this cash in the exact same bank. Doing so would result in no change in the banks cash reserves, your account getting marked up by the value of the loan (a liability to the bank) and the bank printing out a certificate which says you owe the bank a certain amount (an asset to the bank). Handing you cash from the vault is an entirely unnecessary intermediate step. Instead the bank can just mark up your account by a certain amount.
Banks do not lend out cash deposits. If they wish to loan $100 they print out $100 in IOUs. The IOUs are what is being lent, not real cash. And these IOUs can be printed out by the bank at will. In this way the money supply, which includes these bank IOUs, is really only constrained by the profit maximising behaviour of private banks. It isn’t constrained by the total amount of cash in the economy, a quantity which is known as the monetary base or high-powered money. The central bank, which has the unique power to create new cash, has complete control over the monetary base; but not, as I’m arguing, over the money supply.
If banks don’t lend out cash reserves, what are cash deposits good for? Well as we’ve already established:
Reserves secure the value of the IOUs. Without the assurance that a $1 IOU can always be redeemed for $1 cash, they would cease to be of equal value in the marketplace.
Sometimes people prefer to do transactions in cash and may want to withdraw money from time to time.
Reserves are necessary to facilitate transactions between customers of different banks.
These three things are all roughly proportional to the number of customers a bank has, the amount of money its customers have and the number of transactions it processes. So if a person takes out a loan it may be prudent for the bank to look for more reserves. But it doesn’t need to do this immediately.
I said earlier that the monetary base is the total amount of cash. This is not entirely true because in addition to holding cash reserves, banks have chequeing accounts at the central bank which can be redeemed at any time for cash. So the monetary base is cash + central bank reserves. Furthermore banks can be overdrawn on this account, which is what makes the CB a “lender of last resort.” The bank needs to repay that overdraft by acquiring more reserves which they can do by borrowing from other banks or by persuading consumers to deposit their cash.
Because of the CB overdraft, in the short-run the money supply is free to expand and contract in accordance with the demand for credit (money supply is “endogenous”). It would probably be a bad thing if the CB did not allow this to happen. Furthermore, if a bank already has enough reserves to fulfil functions 1-3, then more reserves will not lead to more loans. I think this explains why the massive increase in the U.S. monetary base did not result in any significance inflation, let alone hyperinflation.
Not sure how to round this post off but here’s some links:
Money Multiplier, RIP? by David Glasner
The Myth of the Money Multiplier by Steve Keen
