Review of Phillip J. Anderson, 2008, The Secret Life of Real Estate
(London: Shepheard-Walwyn (Publishers) Ltd.)
Review by Mason Gaffney, May 2009
This is an exciting, important and timely work; it will sell well.
Anderson has ferreted out and marshaled dozens of sources on the 18-year
cycle of boom and bust in real estate, its history, its mechanics, and
its dynamics. Some sources are old and neglected; some are current and
neglected; but after Anderson it will be hard for macro-economists to
continue neglecting them. He melds the dramatic skills of a raconteur
with the industry of a scholar and the discipline of a field marshal, to
keep readers wide awake while they follow and most likely accept
Anderson’s take on economic history.
One test of an hypothesis is prediction. Anderson accepts that
challenge, even providing us with a “clock” to let us know where we are
in the cycle. His theme is “Understanding the Past to Predict the
Future”. After guiding us through many 18-year cycles, from 1800 to
date, he sums up with a chapter disarmingly titled, “Knowledge we Gained
along the Way”. Here are some major findings.
1. The prices of land peak before other measures do, i.e. it is a
leading indicator. Construction peaks after land prices do, but before
recession hits, where “recession” is measured in GDP and other familiar
metrics used by the NBER.
2. Few people study history, so few under about 42 even know there is a
land cycle. All they know is their own recent experience, so in the heat
of a land boom, lasting several years, they easily fall prey to
projecting the boom indefinitely forwards. Few leading “mainstream”
experts forecast crashes, even as they are beginning to happen; quite a
few deny them even as they turn catastrophic. Anderson names names,
including Ben Bernanke’s, and most of us could add more.
3. Bank credit swells and shrinks in synch with the land cycle. The two
interact in a positive feedback process: swelling bank credit raises
land prices; buyers need more credit to purchase the land; the
appreciated land then serves as collateral for more bank loans, and so on.
4. Banks are highly vulnerable to downturns because they borrow short to
lend long. In the heat of a land boom they carry inadequate capital
reserves to cover the 18-year crash, even though that is, to Anderson,
predictable. Insuring deposits, and bailing out failed banks, creates
moral hazard that leads to repeated excesses.
5. Economists recently have programmed their computers not to predict a
downturn of more than 25% of the standard deviation (a “black swan”
moment). This is only the modern manifestation of a group delusion that
has marked every boom in history, a cautious tuning-out of extremes.
(This propensity is also manifested in their choice of statistical
measures: medians instead of means; standard deviations instead of mean
deviations, for example.)
6. Several credit crunches and minor disasters occur before a major
tsunami hits. It takes a real estate cycle to generate the proverbial
“9th wave”. There is usually at least one mid-cycle slowdown from which
we recover nicely. Most economists are conditioned to blank out land
prices from their analyses, so their histories fail to distinguish major
from minor cycles. Accordingly, they (e.g. the NBER) jumble them
together indiscriminately, and so miss the 18-year cycle of land prices.
Anderson finds, on the contrary, that “land value is the key to
forecasting”.
7. Anderson gives us dates. There were land-price troughs starting in
1955, 1973, 1991, followed by slow recovery with a “hockey-stick” boom
at the end. Accordingly the next trough is due in 2009. Going back to
1800 he gives us peaks: 1819, 1836, 1857, 1873, 1893. The peak of 1911
is curiously muted, and 1926 came a little ahead of schedule, even
though one could pick 1929. World War II understandably upset the
schedule, which picks up again, however, after the Korean War, from a
trough in 1955.
8. The system of government-granted licenses (privatization) is
spreading. Privatization is the precondition for trading in and
monetizing land titles, which creates the land cycle. He mentions The
World Bank making its loans conditional on privatization, and no-bid
military contracts, but might have added items closer to home: fishery
licenses, pollution permits, spectrum assignments, aircraft slots,
water-pumping permits, mining and drilling leases, preferential zoning,
subsidies to water licensees, and a host of evolving forms of private
privileges.
9. Some reliable indicators of a forthcoming peak are: A, unusually high
land prices and price/rent ratios; B, a rash of extra-tall buildings; C,
a boom in copper prices; and D, an inverted yield curve.
The NBER cycle-dating committee, led by Robert Hall of the Hoover
Institution, did not announce the downturn of December 2007 until 11
months after the fact! That was said to make it “official”. Actually,
the NBER is private. Calling it “official” displays an authoritarian
cast of mind within the economics profession. Choosing a Hoover Fellow
to make the “official” calls betrays an unhealthy dependence on
far-right think tanks, whose forecasting record is dismal.
And yet, the “Secret life” of real estate is not really so secret.
Anderson has found it from secondary sources, which he simply marshals.
What’s secret is why this open secret is closed to our most prominent
macro-economists. One reason is they choose to ignore economic history,
as shown by their rooting it out of their required curricula, replacing
it with courses in abstruse theory and econometric techniques that mark
modern “mainstream” writers and journals. "...the institutions that
teach American elites to think about the modern world are unconcerned
with teaching them to look at it" (Ada Louise Huxtable).
Another reason is that they disdain the study of land values and other
privileges, lowball their values, and avoid integrating them into their
models and hypotheses. This is partly from an overreaction to the
historical Henry George, who put land values at the core of his
analyses, and bitterly condemned academicians for not following his
lead. Being both an intellect and a political force he stirred up
throngs of disciples, some of them unlearned and crass, to make of this
feud a tradition. That seems too petty, however, to explain such
systematic dismissal of the obvious role of land. The greater and
enduring reason is probably the defensiveness of rentiers against any
challenge to their rents and unearned increments. This has led them to
found and fund leading universities, and more recently think-tanks, and
to pack the boards of public universities with regents supportive of
their views. “Governors of universities fall into their natural place
behind the golden calf, bearing shovels” (Tom Beer). Critics label this
as “deep lobbying”, and it now dominates the intellectual and media worlds.
Another reason is the overemphasis on manipulating data as opposed to
gathering and evaluating raw data itself. “Give us data to chew, and we
will chew” is the prevailing attitude, even when the data is garbage and
the output night soil. There is little work on the quality or relevance
of the data, and that little comes from the fringes of the profession
without penetrating the core, as engraved in the stone of dozens of new
and ongoing textbooks. Few heed Jonas Salk’s saying, "I get into a
dialogue with nature and put the question to nature, not to my
colleagues, because that's whence the answer must come."
On the negative side, “The Secret Life” falls short of being the classic
it might be because of Anderson’s haste. This is understandable,
considering the timeliness of his thesis, but he leaves many loose ends
to trouble a critical reader. Worse, they provide fuel for captious
critics, who are sure to materialize with arson in mind.
Anderson is an investment counselor and popular speaker, like one of his
favorite sources, Roy Wenzlick. Anderson has stitched together many
newsletters written over many years, aimed at clients looking for
investment counsel, leaving two things unclear. For one, it is not
evident whether he is addressing public policy or advising speculators
when to buy or sell. His major social value judgment, which appears
often, is so drastic, and so vaguely specified, it does not amount to a
specific workable idea. He blames private land tenure, which he calls
“enclosure”, for the boom/bust cycle. One assumes his investment clients
filter that out, while appreciating his prescient forecasting. Those
seeking a guide to public policy, however, will wish he had attended
more to it. He does draw heavily on Georgist sources, especially Fred
Harrison, George Miller, and Fred Foldvary, so one could infer that he
favors the Georgist policy of taxing land heavily, with the corollary of
reassessing it often, to abort incipient booms of irrational exuberance.
Or he might favor leasing, which he mentions once, except there he
leaves us hanging with “but that’s another story”.
Secondly, it is often unclear to what year his present tenses refer. The
originals, he writes, came from client newsletters he sent out
1998-2004. Some of them read that way. However the book is copyrighted
2008, with some additions up to about 2007, again using present tenses.
Worse yet, he “signed off” on the book Sept. 7, 2008. This is curious
since the book says nothing about the great crash of 2008, except to
claim it as a forecast made earlier. This is probably the result of
haste, but seems a little unfair.
He uses too many long quotations. For example, Chapter 2 on the peak of
1818 is built around 9 such long quotes from Murray Rothbard, along with
several from other authors. A reader wonders if he is not reading
Rothbard’s work with filler by Anderson. At the same time, Anderson
shows no signs of being a doctrinaire Rothbardian: he quotes J.K.
Galbraith as often as he does Rothbard, and draws on an eclectic range
of historians including R.C.O. Matthews, Alfred Chandler, Aaron
Sakolski, Roy Robbins, H.D. Simpson, Paul Johnson, Clarence Long,
Reginald McGrane, Harriet Martineau, John Steele Gordon, Charles
Kindleberger, A.H. Cole, and many others. He has read widely, without an
ideological filter.
The coverage is extensive, but the scholarship leaves something to be
desired. Some older sources he omitted are Carter Goodrich, Homer
Vanderblue, Lewis Maverick, Ernest Fisher, Harry Scherman, Philip
Cornick, Alexander Field, and others. On the other hand, to his credit,
he has exhumed the neglected research of Roy Wenzlick. Scholars have
undervalued Wenzlick because he was, like Anderson, something of a
showman and promoter of his consulting business. Like Anderson, he took
his material on lecture tours with dramatic display tools, and catered
to the self-interest of clients. Yet he, too, discovered the 18-year
cycle, and left a trove of research materials, which Anderson has
studied, at the University of Missouri, St. Louis.
The more serious omission is the current work of Robert Shiller, Karl
Case, Nouriel Roubini, Bryan Kavanagh, Michael Hudson, Piet Eichholtz,
Anne Goldgar, Eitrheim and Erlandsen, and others, not to mention the
foolhardy optimism of Bernanke, Lereah, Mandel, Greenspan, and other
false prophets. It seems that Anderson’s extensive reading stopped
around 2006. Thus he cites Foldvary’s 1997 work, but omits his timely
2007 forecast, The Depression of 2008.
On the nitpicking side, Anderson cites several long quotes only to
virtual sources, without naming the authors. I searched for one on
banking at www.college.hmco.com/history, and found only ads for what
look like high school texts, with nothing on banking, and no clue as to
whom he is citing. This and other signs of impatience with sourcing need
correcting in a sequel or second edition.
He does a good job of hitting the high spots of major land cycles after
1800, along with many vignettes to keep the work readable and
entertaining. As much as he may digress, however, he keeps his eyes on
the main chance. He marshals all his material to illustrate and confirm
his basic thesis about the key role of land pricing in the 18-year
cycle. His randomness optimally tempers his single-mindedness.
At one point he calls 1818 the “first” U.S. economic downturn (p.57).
Worse than the dating error is the bizarre reason Anderson advances for
it, an alleged Federal land monopoly that converted what had been a
commons into taboo territory. That is simply bad history, so bad that
Anderson himself later ignores it. Elsewhere he makes out 1792 to have
been a major crash.
We can overlook the contradiction as a product of haste. More seriously,
though, he omits the major crash of 1798. This is odd, in a work based
on the thesis of an 18-year cycle. 1798 is tolerably close to 1818 less
18, but 1792 is not. The crash of 1792 was real enough, but was simply
the mid-cycle downturn that Anderson has noted in other 18-year cycles.
England’s banks survived, and her internal improvements moved ahead. The
American crash was abated by application of the cotton gin and expansion
of the slave economy of the south. These events in America broke the
last bottleneck to applying Arkwright’s inventions of 1769-70 to allow
the explosive growth of England’s cotton industry in Lancashire,
archetype of the industrial revolution. Slater’s Mill of 1793 in Rhode
Island helped bring the industrial revolution to the new world.
As to 1798, though, it was 1797 when the B of E suspended cash payments;
when Pitt imposed the first income tax to raise funds to fight Napoleon;
when English capital was diverted on a grand scale from America to
subsidizing Napoleon’s enemies; when Robert Morris, financier of the
American Revolution, lost 200,000 acres and went to debtor’s prison;
when Andrew Jackson lost his lands and conceived his hatred of banks;
.. this was a major crash, and the likely reason John Adams’ lasted
only one term, Hamilton lost favor, and Jefferson became President.
It would be an error to think that economic history began in 1800 or
1798. There were capitalism, land tenure, banking, and boom/bust cycles
– all the elements that Anderson analyzes so well from 1800 to date,
that one can trace back for centuries: the Mississippi Bubble of 1720;
the Tulip Bubble of the 1630’s, which Eichholtz and Shiller showed to
have been a land bubble; the end of the Great Migration to New England
after 1630; the Florentine and Medici banking collapse of 1494; and so
on. M.E. Levasseur has traced such cycles back to the year 1200.
Whatever its minor faults, Anderson’s Secret History is a book to study,
remember, and steer by. It reminds me of a German barber I once
patronized. However I squirmed to defer the next trim he would repeat
compulsively, vierzehn Tagen, vierzehn Tagen! Anderson’s readers will
learn to repeat, achtzehn Jahren, achtzehn Jahren! Whoever wins the
Presidential election of 2024, Be Prepared! This future President would
also be well advised to select economists who, like Hudson, Harrison,
Foldvary, Kavanagh, Shiller, Roubini, and Anderson, foresaw the Great
Crash of 2008, rather than insiders like Romer and Bernanke who foresaw
only a “Great Moderation” because we had, so they said, “conquered the
business cycle”.
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