All posts by Bryan Kavanagh

I'm a real estate valuer who worked in the Australian Taxation Office (ATO) and Commonwealth Bank of Australia (CBA) before co-founding Westlink Consulting, a real estate valuation practice. I discovered, by leaving publicly-generated land rents to be privately capitalised by banks and individuals into escalating land price bubbles, this generates repetitive recessions and financial depressions. We need a tax-switch: from wages, profits and commodities onto economic rents/unearned incomes, if we are to create prosperity and minimise excessive private debt.


The cause of this recession? Economic pundits ignoring history’s voice

As long as factional interests like bankers or economists override common sense, there will be another crash.

Illustration by Noma Bar

The Queen, reported the Daily Mail, was wearing a speckled cream suit and matching hat. Her Majesty was at the London School of Economics, listening to a professor, Luis Garicano, talk about the credit crunch. “It’s awful,” she said suddenly. “Why did nobody see it coming?”

For three years I have pondered the Queen’s question, and the answer. (LSE was institutionally flummoxed; a year later, it gave her a waffly reply, that “everyone thought they were doing the right thing,” and that “wishful thinking was combined with hubris”.) It resurfaced last Tuesday with the publication of the Financial Services Authority report into its own conduct of the 2008 collapse of RBS and the attendant chaos. It is like expecting the Cosa Nostra to investigate the mafia. We are all sinners, ruminated the FSA, and need forgiveness, but no one was really to blame. It is a rough old world.

Had the banking fiasco been a Russian invasion, nuclear meltdown or outbreak of plague, every expert would have faced inquisition, damning or being damned. Soldiers would have been cashiered and scientists ruined; doctors would have choked, blaming government cuts. Yet from the profession of economics and its gilded acolytes in the City, nothing but silence. The Queen’s question remains on the table, its acid quietly eating into the woodwork.

The world economy is in a mess. At such times we take refuge in familiarity and choose metaphors that fit our prejudices. Last week we either opted for the slow lane of Europe’s great future, or carefully declined a luxury berth on the Titanic. Britain was a dog slinking miserably from the top table, or walking proud into the sunset.

I prefer to seize the apron strings of history, following a series of articles in the New York Review of Books by the American Nobel economist Paul Krugman. For two years he and his colleague, Robin Wells, have been seeking to set current economic woes in the context of the past. They have studied previous crashes and distilled what was ordered at the time by such pundits as Keynes and Friedman. From the cliff of economic history, Krugman hacked nuggets of wisdom, many sane, most alarming. They should be wrapped in vellum and delivered to Buckingham Palace.

A year ago Krugman wrote up Reinhart and Rogoff’s history of financial crashes – with the ironic title, This Time Is Different. Every crash was unpredictable because everyone thought it was unlike the last one – until found in crucial respects to be the same. Then came Jeff Madrick’s The Age of Greed, with its eerie narrative of how each crash since the war had been worse than the one before and nobody noticed, and Roubini and Mihm’s Crisis Economics – with Krugman admitting “outrage fatigue” amid a crescendo of gloom.

At each turn the financial gurus assert that a recession will be temporary and “different”. Over the past two years each prediction, including from Britain’s Office for National Statistics, has been wildly optimistic. Mathematical models have proved as useless to economics as leeches and blisters once were to medicine. As Krugman notes, whatever the evil tidings, “things have turned out considerably worse … and are running fairly close to the historical norm”.

The western world is in the grip not of a blip or retrenchment, but of “the second great contraction” of modern times. It matches that of the Great Depression of the 1930s, out of which the west climbed only with the spending spree of Hitler’s war. Its roots lay in the same cause, a speculative bubble (this time in housing) linked to reckless bank lending to individuals and states. That lending concealed wide imbalances between national economies.

The fact that no remedy has seemed to work has had remarkably little impact on policy. During the Depression Milton Friedman’s call for an increase in money supply proved ineffective when that increase was merely hoarded by stricken banks. Thus pumping up the banks is exactly what the Bank of England is doing today: to the same minimal effect.

Likewise in the 1920s and 1930s governments that forced national budgets into balance through austerity saved their banks, but exacerbated stagnation and slump. Krugman accepts that deficit finance is more acceptable today than in the 30s, but it is as yet insufficient to stimulate real growth. Equally disastrous was forcing nations to sustain overvalued currencies in deference to the gold standard. Yet the EU is still trying to shackle the weaker European states to an overvalued currency.

There are lessons in smaller crashes, such as the 1982-3 boom in Latin American debt, the Swedish crash of 1991, or the 1997 downturn in the so-called Asian tiger economies. Latin America descended into depression and hyperinflation. Japan has yet to recover. Some things worked. Korea rescued itself by halving the value of its currency, leading to an export-led boom. Sweden nationalised, divided and recapitalised its banks.

Krugman holds strongly to the thesis that indebtedness is no enemy of growth, as creditworthy Britain showed for much of the 20th century. The task for government is to make the trade-off: how much credit to risk for how much growth. The argument between George Osborne and Ed Balls is old as the hills. Now that Osborne has established his bona fides on the credit front, the message of history is probably tilting Balls’s way, towards more aggressive stimulants to demand.

The question is not what history says but who is listening. The relaxation of global regulation in the 1980s arose from the influence over government of a profession that was becoming both rich and arrogant. Bankers paid lobbyists and courted politicians. Their influence is vividly narrated in Madrick’s Age of Greed, as they moved their lending into sovereign debt on the thesis that “countries don’t go out of business” and were “too big to fail”. It was a phrase they deftly applied to themselves when disaster struck.

This week Britain’s bankers likewise persuaded David Cameron that “the national interest” required a refusal to accept or even participate in a new regulatory regime, despite such a regime being palpably needed. The same lobby resisted pressure to reduce bonuses, erect Chinese walls or adopt the recent Vickers report on bank restructuring. History is clear: as long as sectional interest overrides prudence or common sense, there is another crash.

This repeats the awful lesson offered by Seymour Hersh in his book, The Target is Destroyed. Describing events after the Russians accidentally shot down a Korean airliner in 1983, Hersh accused Washington of refusing to believe its own clear intelligence that the shooting was in error. In the grip of the cold war, the most sophisticated surveillance on earth was useless because no one wanted to believe it. Reagan’s White House needed an excuse to hurl threats at Moscow. The message of economic history is similar. It can scream as loud as it likes, but if power is not listening it might as well be mute.


Thank goodness for ‘alternative’ media!

Recently, I’ve been interviewed fairly regularly on Sharon Firebrace’s “Razor Sharp” on radio Melbourne 3KND.

I make the point that economics is simply the interaction between people and the planet to produce wealth – because everything comes from the land.  So we proceed to discuss the issues of the day in terms of this measure – whether a particular activity is acting to benefit people and/or the planet.

Does the banks’ putting people into hock for thirty years against bubble-inflated mortgages assist or hinder people?

Do large corporates getting our mineral wealth out of the ground owe more than trivial royalties to the Australian people because, let’s face it, the extraction is pretty permanent, and the resources are ours?

Like Michael Hudson, we’ve also come to the conclusion that the FIRE sector (finance, insurance and real estate), like fire itself, is a good servant but a bad master.

As I mentioned to Sharon Firebrace yesterday, analytical and challenging programs such as hers and others on 3KND and on 3CR are not to be found on mainstream commercial stations. The latter are too busy comparing the selfsame policies of Tweedledum and Tweedledee – and trying hard to distinguish a difference.  There’s none.

The mainstream will interview a minister or a shadow minister and try to find something contentious in what they’ve said—if they do, they’ll get all worked up about it—but never challenge the social sickness of longstanding poverty or the wealth divide, nor how current policies are assisting to reinforce the obscenely growing gap between the mega rich and the 99(.9?)%.

Speakers for the status quo proliferate on the commercial stations, and any others are roundly derided or abused.

For all that, I’m confident that younger people have seen through the pointlessness of mainstream radio and are looking for alternatives sources of information, in programs such as “Razor Sharp”, and via the social media.

Much of the mainstream appeals to older people and those who are working themselves up into an angry tizz about the social change that every day becomes more essential.


Those who cannot remember the past are condemned to repeat it.
– George Santayana

The banks funded land price bubbles in the 1880s.
We had a depression in the 1890s.
We said we’d regulate banks so it couldn’t happen again in the 1890s.
We had a world war from 1914 to 1918.

The banks funded land price bubbles in the 1920s.
We had a depression in the 1930s.
We said we’d regulate banks so it couldn’t happen again in the late 1920s.
We had a world war from 1939 to 1945.

The banks funded land price bubbles in the 2000s.
We’re experiencing another depression now.
We’re saying we’ll regulate banks so it can’t happen again.
We will ….

Early warnings:-

1880s:  “Progress and Poverty: An inquiry into the cause of industrial depressions and of increase of want with increase of wealth … The Remedy” – Henry George

1930s:   “There never was a time when the need was greater than it is today for the application of the philosophy and principles of Henry George to the economic and political conditions which are scourging the whole world. The root cause of the world’s economic distress is surely obvious to every man who has eyes to see and a brain to understand. So long as land is a monopoly, and men are denied free access to it to apply their labor to its uses, poverty and unemployment will exist. Permanent peace can only be established when men and nations have realized that natural resource should be a common heritage, and used for the good of all mankind…. I am of the opinion that rent belongs to society and that no single person has the right to appropriate and enjoy what belongs to society.” – First Viscount Philip Snowden

2000s:   “In the light of empirical facts suggesting that there is, in fact, a reciprocal relationship between real estate investment and the creation of wealth, in other words, between rent seeking and a nation’s economic health, Henry George’s remedy still awaits trial application. It is not only politicians, but leaders also of business, public instrumentalities and the churches who should be alarmed at the urgency of these economic signals. History will surely condemn their complacency should they fail to look at the extraordinary employment opportunities to be gained by shifting taxes off production and onto resource holding.” – Bryan Kavanagh



Gotta laugh at Tongue lashings in THE AGE today. These included:-

Earl of Sandwich: “Wilkes, I do not know whether you will die on the gallows or of the pox.”

Wilkes: “That, my lord, depends on whether I embrace your principles or your mistress.”

Bette Davis, as a Hollywood starlet passes:  “There goes the good time that was had by all.”

Dorothy Parker, reviewing the play I Am a Camera:  “Me no Leica.”

Margot Asquith, when movie star Jean Harlow sounded the ‘T’ in her first name: “No dear, the T is silent, as in Harlow.”




I wonder about the morality of seemingly intelligent people who can’t see permitting land rent to be privatised consigns their children–humanity for that matter–to lead terribly stunted lives?

Where’s religious morality on this question? As Pauline Hanson would say: “Please explain?” – but I think we might be waiting a long time for an explanation from the men in mitres.

“No, they have their reasons?”  Oh?  What might they be, then?



Who out there doesn’t get what’s happening and what to do about it?

Whilst those who have cried “growth fetish” believe we’re consuming too much, and we will have to adapt to a more stringent lifestyle, this is to confuse two quite separate issues:

1.  More often than not, rape, pillage and despoliation of the environment has been largely conducted by the untouchables; the privileged 1%.

2.  Many of the dispossessed, the poor, and increasingly now the middle class, have had their reasonable expectations for a half-decent lifestyle frustrated. They have inadequate wherewithal and are shackled with too much debt.

Therefore, the financial world slowly grinds to a halt as a consequence of ineffective demand.

We should have learned by now that economies work when people are able satisfy their reasonable desires, and fail when self-seeking parasites deny this of them. Warren Buffett has appreciated the point for some time.

If the current slowdown provides satisfaction and Schadenfreude to idiots who want to complain about all economic growth, it should not, because history tells us that several years into these times, we can expect either bloody revolution or a ‘good’ war to ‘remedy’ such yawning social divides.

So, how do we resurrect effective demand then, Angela Merkel, Nicolas Sarkozy? ……  Zzzzt!  No, I’m sorry you’re both wrong.

What you have to do is this: increase production rapidly by abolishing taxes on labour and capital. As these will no longer be stolen from the earnings of labour and capital that flow immediately from production, the confidence of capital to invest and of labour to spend will return overnight.

Look to resource rents–so called ‘super profits’–for your necessary revenue, guys.

Oh! And all that debt?

Get rid of it!  Ultimately your people should be more important than the Euro.



I see Australian GDP grew 1% for the September quarter (or by 2.4% since June). This was largely off the back of Western Australia’s 8.4% increase in state final product and Queensland’s 3.5% increase. Other states aint doing so good.

Those two states wouldn’t be the big mineral-exporters by any chance? Yup, Australia’s ‘two speed economy’ is alive and well – for now.

Ian Verrender has a very good article today in THE AGE’s Business Day: “Banks have got a good grip and are squeezing us in good times and bad”. He notes “If you want to know the classic definition of a monopoly, it is this: a corporation that prices its output on a ‘cost plus’ basis”.

Yes, Ian, more often than not you’re dealing with a rent-seeking corporation when it doesn’t have to meet the market and can simply go cost plus.  And, of course, banks most certainly have been grabbing our land rents, capitalised into skyrocketing land prices during the course of this 1999-2011 residential bubble, via principal and interest repayments on Australian mortgages.

So, maybe we should be looking to capture back some of that capitalised land rent for revenue?

Which leads me to a fascinating discussion that’s being had on the blogosphere:

Rumours have abounded that federal treasurer Wayne Swan has set up a working group to investigate the possibility of abolishing income tax on companies and replacing it with a ‘super profits’ tax, or return on equity (ROE) tax.  Readers here will understand that anyone getting a super profit is usually thieving a natural resource rent owed equally to all of us.

Although it’s been fairly well received, the odd comment in such places as Macrobusiness (here) and Catallaxy (here) indicate the suggestion is putting the wind up rent-seekers and the brain dead. (Maybe that’s a redundancy?)

Australia had the best standard of living in the world when we saw the need to capture part of our land rent via the  federal land tax (1911-1952).   We’re not trying to think independently again, are we?  Interesting times!