Safe as Houses - Real Estate Cycle 1991 - 2010

"...such imbalances and dislocations as we see in the economy today probably do not suggest anything more than a temporary hesitation in the continuing expansion of the economy."
Fed Chairman, Alan Greenspan, summing up at his appearance before the Joint Economic Committee, January, 1990.

"I think the real estate market, with the exception of Northern New Jersey, is probably not going to be any significant drag in terms of the over-all national picture of the real estate sector."
Gerald Corrigan, president of the Federal Reserve Bank of New York (and Fed vice-chairman), to a closed meeting of the Federal Open Market Committee, February 1990.

"The issue is very, very serious. We can not allow...a loss of faith in the deposit insurance system... Confidence is at the root of everything because if we lose the confidence of the people, no system will stand up to that."
Congressman Henry Gonzalez, chair of the House Committee on Banking, warning FBI director William Sessions of the urgency of dealing with the thrift crime. In Effectiveness of Law Enforcement against Financial Crime, pt. 2, page 15, House Committee on Banking, Finance and Urban Affairs. 101st Congress, 2d session, April 1990.

"There are several things that we can stipulate with some degree of certainty: namely, that those who argue that we are already in recession... are reasonably certain to be wrong."
The Fed Chairman again, this time to the Federal Open Market Committee, August 21, 1990.

(The National Bureau of Economic Research subsequently went on to date the start of that year's recession at July, with Greenspan's Fed going on to cut short term rates 24 times in succession in a desperate bid to shore up market confidence, stop the recession , save the banking system from collapse and reflate the economy.)

"Neither the market nor the regulators had anticipated the adjustment of asset values or the drop in US real estate values."
James Grant, The Trouble with Prosperity, page 180, quoting Citicorp's 1990 annual report, which was suggesting the downturn was really nobody's fault as the bank reported more and more non-performing real estate loans.

"Perhaps the most significant financial crisis in this nation's history."
GAO Director Harold Valentine, describing the bank and thrift fraud to a Senate Committee on Banking, Finance and Urban Affairs, Sub-committee on Consumer and Regulatory Affairs, Effort to Combat Criminal Financial Institution Fraud, page 19. 102nd Congress, 2d session, February 1992

"This industry is very close to the heart of the American economy. We teetered on the edge of a major, major problem here... we teetered on the edge of a major collapse... You know, all these (financial) industries could bring down the whole economy ! "
Senior staff member of the Senate Banking Committee, personal interview quoted in Big Money Crime: Fraud and Politics in the Savings and Loan Crisis, page 135.

Plus ca change, plus c'est la meme chose. Another boom, another real estate led bust, roughly 18 years after the last one. As the newly elected president, George Herbert Walker Bush took office, his most pressing first problem was the thrift industry, or rather, its impending implosion. Some $100 to $150 billion worth of assets were threatening the entire US economy. All because land prices were now deflating. The thrift industry would not have been unfamiliar to the President; one of his first tasks as Vice-President in Reagan's first term had been to chair the Task force on Regulation of Financial Services.

The changed economic conditions of the late 1980's had exposed, then deepened the thrift crisis. First, in Texas, the fall of previously high energy prices – reflected soon thereafter in real estate values – revealed for all to see the poor loans the S&L's had been making in oil and real estate. Fewer loan repayments and rising defaults compounded the problem. Real estate prices nation-wide began falling after that, made worse by the 1986 Tax Act that took away some of the favourable treatment previously offered for real estate investment. Thrifts (and banks) were left with more non-performing loans since the loans were secured by the real estate now worth significantly less than the loan balance.

In June of 1989, Integrated Resources, a real estate syndication company with a large load of debt failed. The company had suddenly found itself unable to renew its commercial-paper borrowings. In October of 1989 the junk bond market collapsed, (the proposed buyout of United Airlines had hit a snag and did not proceed, the market reacting badly with the Dow falling 6 percent) rendering the junk bond portfolios of many a thrift practically worthless overnight. Again, a problem compounded when all the thrifts tried to offload all the bonds all at once. Shortly thereafter, several previous junk bond financed leveraged buyouts failed, with the companies seeking bankruptcy protection. On 13th February 1990, Drexel Burnham itself, the firm that had started it all, joined fellow clients in bankruptcy. Thomas Spiegel's Columbia Savings and Loan failed shortly after that, leaving depositors short billions of dollars. The thrift industry was in a fine mess.

So too were the banks. The FDIC reported that its fund for guaranteeing bank deposits was under 'very substantial stress' because of the rising number of bank failures. FDIC chairman, L. William Siedman, noted that the thrift crisis had clearly had an effect on real estate markets: "by lowering property values and making mortgage loans harder to get." Siedman added further that: "Real estate markets have an effect on bank results. So there is a relationship between the two. And the effect has not been good." (Time, Aug 13, 1990) On April 18th, 1990, the government put the Seamen's Bank for Savings into receivership: the continued rise in short-term interest rates was putting heavy pressure on the market value of the bank's securities. (Grant, page 106) This bank's failure was going to cost the FDIC $400 million. Even Citicorp seemed to be in difficulty. Indeed, as shown by James Grant (The Trouble with Prosperity, page 64) the state of the top New York banks, including Citicorp, was actually worse in 1990 than it had been at the bottom of the Great Depression in 1932. "If a panic had actually occurred, no journalist or historian would have been at a loss to explain why," Grant explained. "The existence of government guarantees inspired the bankers to take greater risks than their unsocialized forebears could have afforded to take. When some of those risks turned out badly, the depositors were calmed by the knowledge that the government and the biggest banks were partners in all but name."

Swiftly, Congress sought a bailout of the bankrupt institutions with the help of Joe the Taxpayer, raising $50 billion over three years through the sale of government bonds to be paid back over the next forty. After the Columbia failure, it looked like the cost of the bailout might approach half a trillion dollars if interest was added to the bill. (A subsequent July 1996 General Accounting office calculation confirmed this figure to be about right.) To put that figure into some sort of perspective, it was noted by various authors that at the average house price then of about $85,000 the government could, with the same amount of funds, have built a new house for every family living in the nine largest cities in the US. Instead, $12.5 billion will be repaid to banks every year for the next 40 years. The fact that part of the funds for the bailout were going to come from borrowings and the issue of government bonds – keeping the monies off budget – helped maintain a recent Bush campaign pledge: 'read my lips, no new taxes'.

Under the 1989 Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), signed by the president into law in August, the FSLIC was dissolved and the FDIC made the insurer for both the thrifts and all other bank deposits. The FHLBB was also dissolved, with its authority transferred to the newly created Office of Thrift Supervision (OTS), to be run by the Secretary of the Treasury. Bank holding companies would now be permitted to buy S&L's, requiring a change to the earlier Bank Holding Company Act of 1956. Thrift operating rules were strengthened, accounting rules amended, new lending standards imposed. Ironically, these actions probably for a short time worsened the crisis since the stricter lending standards caused a brief credit crunch in early 1990. (Time, Aug 13, 1990.) The primary objective of the bill was of course to restore confidence to the thrift industry and its depositors, some of whom were now actively withdrawing their savings from the system in fear of its insolvency. Indeed, Time magazine reported (Feb 20, 1989) that such was the fear of the new administration of the possibility that its plan to bailout the thrifts might start a run on deposits, that senior administration officials met with the Fed Chairman, Alan Greenspan, in the Roosevelt Room of the White House the night before the plan was made public, with Greenspan assuring officials that the Fed stood ready to pump whatever cash was needed into the thrifts, if required, to make sure a panic didn't happen.

Anyone following the yield curve would have noted that the curve inverted in late 1988, warning of potential trouble ahead, especially for any banks heavily dependent on short-term borrowings to finance longer-term lending, (as the Seamen's Bank was) and especially since the inversion was happening at the tail end of a reliable (so far) 18-year real estate cycle.

In order to facilitate the smooth selling of all the assets of the failed (and yet to fail) thrifts, the Resolution Trust Corporation (RTC) was created as a further part of the 1989 bill. The RTC discovered it was now the proud owner of billions of dollars worth of all kinds of real estate and other assets, including objects d'art, yachts, planes, windmill farms, mushroom farms, golf courses, shopping malls, junk bonds and even a sperm bank. The RTC became the nation's largest employer of property managers, valuers (appraisers), accountants, lawyers and real estate agents as it engaged people to sell off what it had recently acquired. "The biggest liquidation in the history of the world," noted the FDIC Chief.

(By 1995, the RTC had collected some $350 billion as proceeds from the sales, effectively reducing the ultimate net cost to the taxpayer and the administration of the bailout. Though this is in dollar terms of course, and ignores the social costs of job losses and the wasted capital allocated to massively overbuilding real estate that could have gone into other more socially beneficial projects or new businesses. Not to mention the fact that a good many of the criminals were never chased and got away with their loan proceeds. In 1996 the RTC itself was dissolved, having completed its task in selling off all the real estate. The administration also recovered various sums from accounting and law firms caught up in the scandal. Ernst and Young, for example, settled claims with the government that it, as auditor of some of the nation's largest thrift failures including Lincoln, Silverado and Vernon, failed in its duty as auditor. The accounting firm settled for $400 million, with $300 million coming from insurance syndicates associated with Lloyd's of London, and $100 from partners spread through the company's operations over the next four years. "This would not have a significant impact on the yearly earnings of the company's partners," said one partner. (L. A. Times, Nov 24,1992) No wonder the firm settled.

The orderly sell-off of the troubled real estate, and the recapitalizing of the banks (effectively nationalizing the failed institutions and 'socializing the losses'), slightly different to past pre World War II cycles, helps ameliorate the nasty side effects of the property collapse. Land values do not collapse like previously, though some areas fared far worse than others. Pyhrr (1999) reported for Texas that office properties selling for $100 to $120 per square foot in 1985 sold for $25 to $35 per square foot in 1992, apartment buildings that sold for $25,000 to $30,000 per unit in 1985 were selling for $7,000 to $10,000 per unit in 1991 and zoned office land that sold in 1985 for $25 to $30 per building square foot (with approved site development permits) sold for only $4 to $5 per square foot in 1992–1993. The city of Boston suffered its "worst commercial real estate crash" in that city's entire history. (Herring, 1999.)

More important, no depositor loses his or her savings either, since the other responsibility taken over by the RTC was to mail out the reimbursement (bailout) checks to depositors. In this, the Federal bankers have learnt from history. In a stock market led downturn: lower interest rates as low and as fast as possible to protect asset values (lower interest rates must ultimately lift capital values, or at least mitigate the fall). In a real estate led downturn: back-stop the banks, bail out the ones worth saving or if 'too big to fail', collect all the real estate collateral and keep as much as possible off market until it can be re-sold when things improve. And make sure depositors don't lose their money. Bankers have realized the government will bail them out if the system is threatened, so who cares where the credit creation ends up. The situation is made worse with government insuring deposits, resulting in a situation of 'moral hazard', as it has come to be called. It guarantees us another banking crisis at some point in the future. Government cannot ultimately substitute for market behaviour in controlling the risk in lending. The government did though, in 1991, move to pass the Federal Deposit Insurance Corporation Improvement Act (FDICIA), requiring the FDIC to promptly close any future failing bank in the least costly method.

In an ironic twist to the orderly real estate sell-off, former owners of some of the once high-flying but now defunct thrifts were keen bidders for the very properties their former thrift had once owned or had loaned money on. Amongst some of the Private Investor Groups trying to buy what the RTC was selling was Charles Knapp, of Financial Corporation fame (cost the taxpayer $4 billion) and Joe Russo from Ameriway Savings in Houston (cost the taxpayer $170 million). Russo was bidding on a $3.8 million four-acre tract next-door to the Houstonian hotel complex (which Russo owned), being the hotel of choice for President Bush when not at home or in the White house: "his home away from home". (The Nation, July 30, 1990) One wag quickly labelled the Private Investor Groups scooping up the sometimes heavily discounted real estate offerings as 'PIGS'.

The public attention (and anger) to such matters did not last long however. In what became, with hindsight, quite a prophetic comment, as the clean up bill for the S&L scandal mounted, Paul Horvitz, a finance professor at the University of Houston, declared: "the government needs a sideshow to shift focus from the cost of dealing with the problem." (Time, June 25, 1990.) The government got one in August of that year when Saddam Hussein invaded Kuwait. Very bullish for the markets when the US responded in January of 1991.

So where did all the money go ? In testimony before the Senate Banking Committee in February of 1989, Attorney General Richard Thornburgh said most of the money was long gone. "In many cases, the assets have been dissipated through laundering schemes or taken out of the country, and are beyond the reach of federal authorities. We'd be fooling ourselves to think that any substantial portion of these assets is going to be recovered. Besides the money that was simply stolen, billions of dollars were lost on high-risk investments and frittered away by paying excessively high interest rates to attract depositors." (Time, Feb 20, 1989) In some respects though this may have been a cover. Government was far more interested in making sure the system did not break down, than in pursuing justice by prosecuting all the fraud. Government, after all, depends for its existence upon the relatively smooth functioning of its government granted licenses and privileges (monopoly capitalism) and future tax receipts than it does on satisfying citizens demands that the crooks be put in jail. Especially if one or two of those crooks are in government. Not even 15 percent of suspected criminals in Texas are ever likely to face prosecution. On average, less than three percent of borrowers in any state who received loans fraudulently will likely face indictment. (Calavita, page 147, and 154) For those unfortunate enough to have been caught, the jail time will be far less than had they attempted the same tactics – robbing the bank – with a balaclava and a gun.

Fortune magazine, in its September 10, 1990 issue also attempted an answer to where all the money went. In a type of step chart and graphic, it listed a $25 billion cost in the original mismatch of the government's mandated borrowing short and lending long during the inflation of the 1970's; $28 billion on real estate losses made possible by the 1982 deregulation; $14 billion in excessive operating costs fuelled by brokered deposits and protected by insurance (read lavish living); $14 billion paid by thrifts in excessive interest to get the brokered deposits in the first place; $5 billion in crime and the cost of crooks; a further $6 billion on other real estate investments, junk bonds and insider lending; $12 billion in government inefficiency (though this hides the fact that in closing down a thrift, regulators had rules to follow, "careful, measured" rules, said Pizzo (page 71), "calmly, quietly and the public wouldn't panic"); and $43 billion in government delay in shutting down the industry. Doing so in 1982, when it should have been done, would have reduced all other costs. But of course back then, the real estate market was in full swing. In the state of Texas, of the more than 400 thrifts in that state in 1982, all but 16 failed.

Whilst the whole S&L episode does not immediately look like having involved the creation of credit, merely thrifts grabbing deposits from other institutions so they could then lend it out as they saw fit, it was ultimately a very effective credit creation process since at the end the government borrowed (from banks) what had to be paid back to insured depositors, by issuing bonds. Plus interest. The thrift's owners just spent it before the government had paid for it. (Rough final calculations were eventually made of the final bailout bill, which the FDIC Banking Review in December of 2000 put at $153 billion, of which the US taxpayer will pay $124 billion. The most costly banking crisis the world has ever seen, though as we have noted already, in every cyclical real estate led downturn the collapse has been the same, just the numbers grew larger.)

One further banking cost that Fortune Magazine could have added to the bill, had it known about it, was the estimated $5 billion in loans supplied, some people suggest, by the Bush and Reagan administrations and perhaps other Western powers to Iraq between 1985 and 1989, through the Atlanta branch of the Banco Nationale Lavoro (BNL), allowing Saddam to secretly re-arm. It is not known what happened to all the money.

The turn.

Following a set economic and political routine, in 1990 with the recession really beginning to bite, real estate industry trade associations united to try and recover the federal income tax subsidies that were lost in the 1986 Tax Act. (Weiss, 1991) Real estate needed a stimulus, they argued, to get the economy moving again and out of recession.

The real stimulus came however, from an unanticipated source, the stock market, though it was still ultimately a repeat of past behaviour. Whilst the boys were away at Desert Storm, the market quietly began its absorption of the collateralized real estate with the banks beginning the arduous task of rebuilding their balance sheets, ably assisted by the banking authorities.

Engineered by the Fed, short-term interest rates fell from 8 percent in 1990 (actually ten percent in late 1989) to 3 percent in 1992, then did not move for the rest of 1993, the lowest rates had been since 1960 or so. In January 1991, as the US goes into Iraq to push Saddam out of Kuwait, it becomes likely the market low has been seen. The January low for the Dow is higher than the October low, and war is mostly bullish for markets. More important, markets tipped to the bullish side as it became clear the government and the Fed would not permit of a system-wide bank run, (Citicorp had had a severe credit scare October 24, 1990), the non-performing real estate loans at the banks were stabilizing and besides, not all could be lost since the real estate involved was most likely worth something in a market that had now readjusted its values. (Values of much of the commercial real estate in Texas, for example, had fallen 50 percent.) If the banks could lift their earnings from here, then their shares were in fact cheap.

As we have seen before, and in a few words which James Grant repeats for us so well (The Trouble with Prosperity, page 184): "In the late 1980's, speculative-grade debtors had promised to pay very high interest rates, but the collateral values and the income streams on which the promises depended sometimes fell short. The result in those cases was a period of adjustment that took the form of bankruptcies...". The fall in short-term interest rates put the yield curve back into its usual territory, short rates below the long bond. Borrowing short, to lend long put the US banks back into profit. Continued Grant (page 189): "Borrowing at a low rate, an investor was able to earn a slightly higher rate...For $10 million down, a well-to-do speculator was able to purchase $500 million of two year Treasury notes. His or her bank would lend the $490 million difference. The cost of the loan was 5.125 percent. The yield on the notes was 5.89 percent. The difference between the yield and the cost worked out to approximately $4 million per annum. Thus, the rate of return on the speculator's down payment amounted to approximately 40 percent." All built on the yield curve. The exact process that killed off the S&L's in the late 1970's. It is indeed all in the timing.

The true money-making schemes are never marketed to the public.

This time around though, the numbers for the players got even better as the bond market went into 1992 and '93. The buying of government securities by the banks in these years, borrowing short to lend long broke all records in these two years, until the party stopped on February 4th 1994. 24 times in succession the Fed eased short term rates, keeping the yield curve in positive territory and sometime even widening the gap (steepening the curve). The profits rebuilt the bankers balance sheets. But on Feb 4th, the Fed lifted rates – albeit a mere one quarter of one percentage point, but it caused the speculators to reverse positions and sell, which caused more selling, which eventually unmasked those late to the party; Orange County, California being one. The county had continued to bet, using derivatives, that interest rates would go lower, or at least not go higher. (Partnoy, chapter 8)

Gradually, the financial improvement spilled over into other economic activity, finally moving the prices of commercial real estate upwards once again. "The stock market assisted recapitalisation of the banking system", as the Fed Chairman put it, was in full swing. Naturally, the banks only passed on the lower rates to customers slowly. Profits were boosted because the rates banks charged for loans fell less quickly that the rates paid for deposits.

Along the way, the Fed had instigated one additional move as regards credit. In December of 1990 it reduced or eliminated reserve requirements on certain bank liabilities. Fed watchers knew what this meant: an accommodating stance in monetary policy. The Dow, staying above the October 1989 lows was reflecting the buying support of professional investors prepared to back their view with their capital.

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The stock market move out of its October 1990 and January 1991 lows was not without a few jitters – but higher lows nevertheless. Midlantic Bank in Edison, New Jersey, warned on Jan 24, 1991, that without an improvement in general operating conditions, the bank (a "real estate-bedecked bank", noted Grant, page 205) might shortly have losses approaching $4 billion. "There is a nervousness out there that I haven't seen in my 25 years in the organization..." said Nicholas J. Ketcha, director of supervision for the New York region of the FDIC, in March. "We are running our businesses on the assumption that next year will be difficult," the chairman of Citicorp stated to the market in April. (Grant, page 205) In June, the chairman of the FDIC chipped in with a very downbeat forecast on the future of the banking system. In July, the firm of Keefe, Bruyette & Woods declared that: "This year could shape up as the grimmest for dividend cuts since the Great Depression by major banks..." The Dow however, hardly moved, remaining in a tight range just under past all time highs. W. D. Gann would have approved. It was happening just as he says it does: the passing of dividends marks the passing of the lows.

In October, Donald Trump warned of a 'deep recession – slash – depression' if real estate moguls like himself were refused tax breaks (Grant, page 206). Of course he would say that. Each time an impending warning came out however, it seemed as if the Fed was there to lower rates yet again. In 1993, the Fed lifted its portfolio of government securities by 11.7 percent (Grant, page 239). The Fed buying Treasuries is pure credit creation, plain and simple. The nation was being reflated.

Wall Street was able to help with the reflation one final time, through the vehicle of the REIT's - the real estate investment trusts, those same structures that sent the markets over the top in the early 1970's. This time around, with markets improving and credit expanding, Wall Street and the REIT's allowed the banks to reprice, refinance or indeed offload their non-performing collateral. Through the REIT's, noted Grant once again (page 241): "Banks and insurance companies could sell the properties they had acquired in bankruptcy proceedings. Developers could sell their buildings before they lost them in bankruptcy proceedings. Fully half of the public money raised for REIT's in 1993 was equity capital, and this $9 billion represented no less than 22 percent of all the initial public offerings floated in the United States in that year...In need of funds, leveraged corporations and real estate-clogged banks successfully turned to investors."

With that, the 1991 real estate induced recession passed into history and investors found new things to worry about.

The acceleration.

1994 saw a reversal in Fed policy somewhat; as interest rates were put back up. Stock markets went sideways or retraced the 1993 gains. The Fed policy shift lifted short-term rates by 2 and a half percent over the year. 30 year bond yields rose also. Mexico defaulted on its bonds, only to have the new US President, William Jefferson Clinton argue – successfully – that the US ought to bail them out. Some ripple effects spilled over into 1995 when Chemical Bank disclosed a thumping pre-tax loss on what it called 'unauthorised Peso trading'. Nick Leeson sent Baring's to the wall with $1.4 billion in derivatives losses. Baring's blamed its rogue trader, the Bank of England concluded a serious failure of controls. The Directors still got their bonuses. (For an inside account of all the derivatives manufacturing going on at this time, F.I.A.S.C.O., authored by Frank Partnoy makes for an entertaining and lively read. About the Mexican bailout, Partnoy said, (page 214): "The US had agreed to lend $20 billion to Mexico to help it support the Peso and repay other debts. By doing so, the Clinton administration saved Wall Street a fortune and secured many of (Morgan Stanley's) risky positions.")

The S&L scandal came up again in 1994 with the $73 million bailout of Madison Guaranty Savings and Loan, owned by President Clinton's close associates Jim and Susan Mcdougal, and the banks alleged questionable land deals and / or diversion of funds to help with the then Governor Clinton's campaign expenses, the Whitewater deals. All up though, any alleged wrong doings were chicken-feed compared to the 1980's deals and bailouts: ultimately an effective political football in the hands of Republicans who used this material far better than the wealth of material available to the Democrats in 1988. The material available at that time went begging, the Democrat presidential candidate's running mate, Lloyd Bentson, was himself an S&L owner. (The Nation, Jan 25, 1993) Whitewater cleverly diverted attention and media resources away from the earlier looting.

Midway through 1995, the Fed yet again reversed interest rate policy, lowering rates and easing monetary conditions. As it happened, 1995 proved, according to Martin Fridson (page 215) yet another 'very good year' for stocks, with the S&P ending the year up 37 percent. The markets tenth best year since 1900 in fact. A sharp reversal of Fed policy had again provided the initial impetus reported Fridson. (Page 196) Liquidity to the banking system was being quietly provided in response to the Orange County and Mexican debt debacles. Business and the public in general seemed unperturbed by the news however and celebrated the loose monetary policy: mergers and acquisitions set a new record for 1995, so too the inflows into Mutual Funds. A bull market was in full swing, just four years into the new real estate cycle.

Pssst, wanna buy some air ?

The Fed had been busy last cycle, after all, a lot of bad loans had to be shifted to the public. Between 1982 and 1986 the Fed backed up the US government in bailing out Mexico, Argentina and Brazil, when each country defaulted on its bonds. The Fed bailed out the Continental Bank in 1984, after it was deemed too big to fail. (Similar problems to the thrifts.) The Fed supported panicking stock market investors after the 1987 crash with liquidity and lower rates, then contrived supportive conditions again for the Savings and Loan institutions that could be brought back to life, quietly killing off the others, between 1989 and 1992. The Fed also found time to rescue the Bank of New England, then Citibank after the tanking of the real estate market. This cycle was not proving much different as far as bailouts were concerned, with the Fed helping to prop up the Mexican peso, 1994-95, in its need to help all the US banks and pension funds that had bet the other way.

Despite it all however, US markets just kept going up, defying all the odds except one, easy money. In March of 1997, the Fed chairman mentioned to Congress in one of his bi-annual addresses: "We are now in a position where we have to move ahead of the curve." Markets took this as a sign the Fed might start a round of tightening. Probably it was about the right time to do so. Several events intervened to prevent it: the Asian economic flu, a Russian Bond default, the Long Term Capital Management hedge fund collapse, and Y2K. All in a day's work for the Fed, but it kept interest rates low and liquidity high. And fuelled a NASDAQ stock market bubble.

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Amidst all these flu's and defaults, US corporations started buying air, as much of it as they could fund. In 1993, the Federal Communications Commission started auctioning off in earnest more wireless communications rights. A government granted license. Corporations (or anyone who could afford it) were asked to bid for these rights, then permitted to retain ownership. A government granted license capitalized into a tradeable commodity. To access the licenses, the buyers usually borrowed, the money raised either from stock market investors or borrowed from banks. A government granted license capitalized into a tradeable commodity, financed (if from a bank) by credit created for that purpose. Between 1994 and 1996, Federal government auction of the frequency allocation (air rights) for personal communication services netted $18 billion. The NASDAQ rise was built in part on these communication rights as the corporations rolled out their networks (M.C.I., WorldCom, Vodafone, Global Crossing) or facilitated trading by creating their own, like Enron. The 1996 Telecommunications Act went even further, practically giving away the public wealth contained in the air waves. A new industry was founded virtually overnight, but things could have been done a little differently and all the eventual wasted capital and bankruptcies avoided had these frequency allocations been leased to buyers instead of bought, the wealth then kept in the public's coffers to facilitate, say, lower taxes in other areas. But that's another story.

BRW magazine called the whole process "the beach-front property bonanza of the information age." (Aug 12, 1996) Inevitably, start-ups formed amongst venture capitalists for the express purpose of acquiring what the government was selling. Alliances – both old and new – formed to control the newly created space, and to ensure their existing licenses, e.g. TV broadcasting, did not come under threat. Government influence was, as ever, bought to protect such new licenses. Repeating history but applied to a new space.

Describing the government bonanza in Australia, the Australian Communication Authority's manager of spectrum marketing said: "This is better than selling sand to the Arabs or ice to the Eskimos...we are selling nothing here," as he delivered $1.33 billion from the sales into the pockets of the government. Eventually, it was realized that the Telco's had overbid for the licenses, might now be caught in a web – no pun intended – of debt and have trouble building their networks as a result. This realization helped deflate the NASDAQ very early in 2000, just after the yield curve went negative. Telco's went on to fail in record numbers in 2001, crippled by their debt load. (Wall Street Journal, May 11, 2001)

True to form, the real, real estate took a good deal of the digital real estate gains. On-line companies very quickly discovered the need for a physical presence was just as important – if not more so – than their on-line presence. Rents went through the roof in select areas of the US, especially the warehouse districts of San Francisco and Chicago, and in Silicon Valley in particular. Such realization regarding the rent also hit home in late 1999. (See Fortune magazine, The Age, and Australian Financial Review articles amongst many others.)

The scientists who created the world wide web in 1991 did not bother to add in click on pictures, images or sounds with their new baby. It took a 23 year old programmer at the University of Illinois, Marc Andreesen to do that when he developed the programme Mosaic, something that made it easier to view documents on the web, and to click between them. The Internet was away, and the battle for its control – a kind of new electronic space seen through a browser – began. New businesses spawned everywhere as the space was put to all sorts of new uses.

Since most readers more than likely lived through the whole NASDAQ explosion, then implosion, we need not cover the whole process again here, except perhaps for a few pointers.

As interest rates stayed low and the Fed pursued an accommodative monetary policy, by early 1997 in the excitement of all the new business growth, pundits were claiming an end - yet again - to the business cycle as we know it. The venerable Wall Street Journal, November 15, 1996 reported: From board rooms to living rooms and from government offices to trading floors, a new consensus is emerging: the big, bad business cycle has been tamed. The Washington Post added its voice several weeks later exclaiming: "The economy appears to have entered a new period of stability in which recessions no longer seem inevitable and both inflation and joblessness remain relatively low." Opinions of the Fed and its handling of the economy lifted with the stock market. Bankers moved back en-masse into real estate lending. The FDIC reports banks now have $316 billion of real estate on their books at the end of 1996, up from $299 billion one year earlier.

The July 1997 cover of Wired magazine screamed on its front cover: "We're facing 25 years of prosperity...You got a problem with that ? A mania develops in collectibles, particularly in Beanies. The child's toy becomes Ebay's hottest selling item. Wave Systems, a small technology outfit in Massachusetts, attracts a devoted following calling themselves Wavoids. Each devotee puts all their money on the stock; the company touts a security chip that is soon expected to be in every computer in every part of the world. Absolute certainty to go to $500, the next Microsoft say all the chat sites. The wave turns into a bubble, inflating on easy money.

In April of 1998, the Department of Commerce issues a report revealing a new Internet law: Internet traffic doubles every 100 days. A claim WorldCom took to repeating every chance it got. (The Economist, July 20, 2002) The claim is later traced to UUNET, WorldCom's Internet subsidiary. To carry the expected surge in traffic, telcos build even more furiously.

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In 1999, as Internet floats lift off into the stratosphere, two analysts, James Glassman and Kevin Hassett, scholars at the American Enterprise Institute, suggest in their new book that a Dow at 36,000 is entirely reasonable since the usual market valuation models are now out of date. Also in this year, to compensate for historically depressed prices, Congress passes a rescue package for farmers. The package capitalizes straight into land price of course. (All of the available literature on this point agrees with the contention that support to agricultural production is readily capitalized, with the owners of land being the main beneficiaries. These owners may not necessarily be the actual farmer.)

In the backwaters of Melbourne, Australia, a little known company begins advertising land for sale on Mars for $45 per plot, including defined boundaries. The response is overwhelming. Back in the US, is currently trading at $4.68 a share, with turnover averaging just under 100,000 shares a week. NetJ's business model reads: "The company is not currently engaged in any substantial business activity and has no plans to engage in any such activity in the forecastable future." A recent 5 for 1 stock split saw the shares surge from 32 cents a few months prior. (Australian Financial Review, Feb 17, 2000.) On November 16th, 1999, the Fed lifted interest rates (a quarter point) for the third successive time. The yield curve was now negative, though few noticed amidst the bubble fever.

History shows the stock market bubble deflated. Notably though, the US economy after a stock market peak and collapse has been far easier to reflate with the orthodox toolbox available to the Fed than has been the deflation of the real estate market, though it can also make a difference at what time in the real estate 18 year cycle the stock market crash occurs. The later in the real estate cycle, the longer it takes to recover. At least that is what history teaches us.

The usual scams and cons.

As per tradition, if the stock market has collapsed mid real estate cycle, or any time really, the usual stock market related scams and cons come to light as the market deflates. This one was no exception. It was revealed that executives at Qwest Communications International Inc. made almost $500 million selling stock from 1999 to 2001 during which time the company was reporting profits that it said later were "exaggerated and based on improper accounting." (International Herald Tribune, July 31, 2002) Ken Lay at Enron grossed $247 million in pay and remuneration from 1999 to 2002, whilst leading the company into the largest bankruptcy ever seen, until the WorldCom debt and accounting farce just a few months later. Global Crossing CEO, Gary Winnick, took home $512 million in the couple of years prior to this company's collapse. Having incorporated in Bermuda, Global Crossing had made notable savings in its tax bill. In total, executives at the biggest bankruptcies (almost all of them telco's), made $3.3 billion. (Financial Times Europe, July 31, 2002, page 1)

The telco's themselves ran up debts of approximately $1 trillion. (The Economist, July 20, 2002) Much of it bank created credit. As the debts increased, some companies began resorting to finance and accounting tricks to conceal the problems; WorldCom for example classifying $3.8 billion of its network maintenance costs as capital, rather than an expense, inflating profits and hence the stock price. One of the simplest accounting tricks available. (What were the auditors thinking ?) Much of CEO Bernie Ebber's wealth was of course tied up in WorldCom stock. By early June of 2002, WorldCom's stock value had deflated from a high of $120 billion in June of 1999 to just $300 million, a value that was less than the quantum of personal loans ($408 million) the company had kindly extended to Mr Ebbers. The more appropriate business name as things turned out might have been WorldCon. The company went under with more than $30 billion of debt outstanding. (Financial Times, June 27, 2002) Fears of a 'credit crunch' in the bond market surfaced.

At Enron, both its bankers J. P. Morgan and Citigroup facilitated Enron's hiding of losses via the use of dummy accounts. (CNN, July 22, 2002 and Wall Street Journal Europe, June 25, 2002) In later settlements, liability by the bankers was neither admitted nor denied. It was also later disclosed that Enron had given the White House and senior Bush officials early warning of its financial troubles (International Herald Tribune, Jan 11, 2002), confirming once again that key insiders practically always know these things well before the public does, which is why the market is so effective in its discounting of future news.

As the London Financial Times ably pointed out in its June 27, 2002 commentary (page 13), Kenneth Lay and Bernie Ebbers had now successfully done more damage to American's wealth than Osama bin Laden and Mohammed Atta. Bank created credit financing government granted licenses permitted to trade as a commodity; a process built on sand and inherently unstable. Global Crossing discovered that laying fibre-optic cable from nowhere to nowhere still did not make a viable business model.

All remaining telco entrepreneurs came under 'duress' as their stock prices plummeted. Craig McCaw sold down his holdings in Lucent and Nextel, and then performed a bit of house cleaning with the sales of several island resorts, ranch and waterfront properties, a Gulfstream G-5, Boeing 737 and 300 foot yacht that housed two helicopters, speedboat, sailboat and swimming pool. (International Herald Tribune, Sept 29-30, 2001) The telco crisis of 2002 continued when Adelphia Communications, owned by the Rigas family, defaulted on a $96 million bond payment in late June and was then declared bankrupt. The SEC would later be investigating the intermingling of family and company business where loans of up to $3.1 billion were used to finance luxury apartments, golf club membership, golf courses, the buying of forests and even a professional ice hockey team.

The mid cycle banking and economy bailout.

Officially, the recession is dated from March 2001 to November 2001, nine months. The average since World War II has been 11 months. Prior to that the recessions lasted longer, but government is much more pro-active these days and economists no longer argue that recessions are ordained by God. Though economists do believe them to be a 'natural' and inevitable part of capitalism, which they are not. Monopoly capitalism - a commodified economy - is what the real estate cycle is all about.

So the Fed dived back into its tried and true toolbox of economic quick fixes, lowering interest rates in quick succession, again opening the monetary spigots somewhat, and then waited to see what would happen. This time, the stock market does not respond so quickly (the NASDAQ has a long way to fall) and business capital spending doesn't seem to move. (A good deal of it has been speculated away on those air rights and the occasional luxury resort and yacht or three.) As the stock market deflates further, in particular the NASDAQ, every time it bounced a little, there was talk that the Fed was quietly intervening. With rates so low, the Fed had exhausted one of its tools of reflation. (Could rates go to zero ?) But the intervention stayed just that – talk – and could neither be proved nor disproved, although the Fed's January 2002 minutes did speak of "unconventional policy measures" as something that "could not be dismissed altogether." The fear ? If interest rates went to zero, and the US stayed in recession, could anything else be done to rescue the situation ?

House prices (more correctly land price) did respond however: prices went up. Housing starts increase and hit a 16 year high the first quarter of 2003. As interest rates fall, it frees up capital for home-owners as they take advantage of the lower rates to refinance existing mortgages. An estimated extra $100 billion in spending power for consumers, (Wall Street Journal, May 2003) who promptly do what is required and go out and spend it.

In May of 2002, the US Congress, in a move to ensure continued support for Republicans in the up-coming November mid-term elections, votes to extend US farm subsidies to a record total of $173 billion spread over the following ten years. This dollar amount is now larger than the output of 158 of the world's 180 measured economies. The government is now paying farmers a 60-cent subsidy for every one dollar of output. (US Department of Agriculture and Congressional Budget Office) The amount of the subsidy, as we know, capitalises immediately into land price at the prevailing interest rate. Between them, the US and the EU now spend more than one billion dollars a day supporting their farmers. Perhaps the farmers should just plant dollars.

The Fed is also worried about Latin American prospects in 2002. In August, the IMF is forced to loan Brazil $30 billion, its biggest loan ever, to stem a regional economic breakdown after it looked like the country could default on its debt – again – when the Brazilian currency, the Real, plumbs new lows on fears leftists may actually win the approaching election. This comes just three days after the US gives Uruguay $1.5 billion for essentially the same problem. The US can ill afford their neighbours collapsing at such a crucial time for itself.

In June of 2003, the Fed drops rates to just 1 percent. Adjusted for the current inflation measured at 2.1 percent, it makes the real interest rate for borrowing actually negative, cheaper to borrow than if it were free. A possible new bubble is forming – in housing. But it saves the stock market for the time being, and the economy too. Fed intervention has again removed the threat of a deflating economy and saved the banks from themselves and we move on – to yet another war that began in the March, at the start of which the Dow forms a higher low, the same as in 1991. The surge in military spending becomes a big contributor to second quarter growth for 2003. "Blessed are the young," said Herbert Hoover some time ago, "for they shall inherit the national debt."

History shows the pattern of US national debt has always expanded during war time. The debt tripled between 1812 and 1816; quadrupled between 1845 and 1851 (Mexican war); increased 42 times during the civil war, increased 50 percent between 1893 and 1899 (Spanish – American war); rose 21 times during World War I; and lifted sixfold between 1939 and 1946. (Readers Companion to American History) With the assistance of today's central banks, the issuing of debt is quite simple, the marketing of which has become virtually continuous. Newly created money (credit expansion) for federal government debt. It is also a convenient way for nation states to finance their wars against one another.

The president, George Bush, also has an upcoming election to think about. He needs unemployment lower, a growing economy and a happy populace, otherwise they won't vote for him. As his father found out in 1992. The year before (early 2002) the President had already announced economic measures to his people that he hoped would 're-invigorate' the economy including extending unemployment benefits by thirteen weeks, a variety of tax breaks and a stimulus package to 'pump' $51 billion into the economy in 2002, $43 billion in 2003 and $29 billion in 2004.

In late 2003, the pace of new home construction hits an 18 year high. The Fed says growth rates, now the fastest since 1986, are "excellent". (Bloomberg, Nov 19, 2003) Interest rates, at 1 percent, are at 45 year lows. Tom Beyer, President of Home builders Financial Network Inc is quoted by Bloomberg (Nov 19): "Builders almost unanimously believe this market is real, is strong and that the supply absolutely does not meet demand...they are more optimistic than ever."

Although the gain has not been without some pain. In July of 2004, it becomes clear, based on figures from the IRS that overall incomes American's reported to the government "shrank for two consecutive years after the Internet stock market bubble burst in 2000," (New York Times, July 29, 2004) the first time this had happened since the tax system had enabled the record keeping from after World War II. Quite a mid real estate cycle slowdown this time. This may have had something to do with so many more pay-packets dependent upon stock option performance than ever before. By November of 2001, American industrial production had fallen for 13 consecutive months, also the first time for such a continuous decline since the Second World War. Significantly though, the recession had not been land price induced, as can be anticipated for the next one due any time after 2008.

Some pointers for the second half of the real estate cycle.

Credit standards:
Despite the telco and Internet bubble and the deflating of much paper wealth, some actual real wealth was produced. With the lower rates and repayment of debt by surviving companies, business does eventually improve and a new business cycle commences, what has historically been the second half of the 18-year real estate cycle. After almost a year of rates at 1 percent, the Fed reverses policy once again and starts on a tightening cycle, July of 2004. (The Fed will eventually lift rates in small increments to around five percent, which is about half way back from the point at which they fell, a balance point, and a point from which they are unlikely to move higher in the short term. Four to five percent is about the historical norm.) The behaviour of the yield curve will be important to observe as the economy turns further through the real estate cycle. An inversion of the curve becomes critical the longer the cycle runs.

As US interest rates have progressed back to somewhat more normal levels, credit standards have been dropping, not just in the US, but everywhere. Mortgages approved in the UK without proof of income accounted for just under 30 percent of new lending for the second half of 2003. (Australian Financial Review, May 28, 2004) These are being called in the UK 'self-certified' mortgages. The same phenomenon in Australia is being named 'low documentation' (low-doc) loans. This is never a problem whilst land values are on the up. There are even suggestions that banks may start approving 'zero-interest, equity finance loans': in other words, borrowing a set percentage of any property without interest payable, in exchange for giving up some percentage of the capital appreciation. Again, such schemes look attractive whilst house (land) prices are rising...

For the US itself, the National Association of Realtors is reporting that the number of loans issued to persons of higher credit risk, or with no down payment, or both is on the increase. (International Herald Tribune, June 25, 2004, quoting the National Association of Realtor's Mortgage Statistical Annual, March 2004.) This is of course very much a part of the real estate cycle, especially since 1945 and will occur as house prices (in reality the land underneath) increase. The borrowers are taking on more debt that previously might have been beyond them. At lower interest rates a larger loan – more debt – can be afforded, pushing land prices ever higher. Such borrowers will remain confident that house prices will continue to go up as they have in the immediate past. Indeed, this is most likely the only take on the housing market that such buyers will have ever experienced. By 2008, few home owners anywhere in the world under 40 will have had any direct experience of a land price induced recession. They will only ever have seen 'house' prices go up. The yield curve will at some point in the future test the soundness of such a belief and of such credit creation practices that cause it. In addition, the memory home owners will have is of the 2002 downturn, one induced by a stock market collapse after interest rate increases. This is not the same as a downturn induced by declining land prices.

The bill for war:
At some point in the future, the US will have to start paying the bill for its Iraq adventures. Several hundreds of billions of dollars. It will more than likely do this by restarting its issue of 30-year bonds. Since pension funds, other very long term investors and foreign governments may have been starved of such buying opportunities in the immediate past, they are sure to be keen bidders for what is considered the safest of long term investments. The bidding process will likely push bond prices up and hence long term yields down. At least in the short term, 2006 and 2007. This process will depend upon how the buyers of these bonds view the US economy and the government's ability to pay its debts (those 30 year bonds) as and when they fall due.

Watch the currency:
The US is also likely to pay for its war by printing dollars, as it has done for every other war it was engaged in. A study of past world currency crises would be appropriate: 1893 in the US (plus 120 years takes us to 2010 to 2013), the UK in the mid 1960's, Mexico 1994, the UK again in 1992 and South East Asia, 1997. If the bond holders lose a little confidence in the US for whatever reason, the US government may have to offer a higher rate of interest to entice the buyers back. The effect could be a slower growth economy, even some sort of currency crisis if investors lost faith and stampeded out of dollars. A currency crises is often preceded by a land price downturn, which brings on banking difficulties, leading to a loss of confidence in the economy. (See the discussion in Herring (1999) for example, for further information on this subject.) The land price downturn is likely to have begun however, before a possible currency crisis. The land price, or real estate cycle is usually marked at the top by the collapse of a major financial institution. The spark that could then ignite the currency crisis is the then following investor loss of faith in the US government's ability to finance its external deficit and overseas borrowings.

History has most certainly repeated so far...
With a study of the past real estate cycles, we have observed that without exception, the turn of the real estate cycle has been marked either by a deliberate contraction of credit by monetary authorities, by the collapse of a major financial institution, or both, after a sustained period of land speculation: 1792, after wild speculation the Bank of the United States contracts the supply of credit, 1819 the bursting of the cotton price and its effect on land prices sees the 2nd Bank of the United States way overdo the calling in of loans, 1837 the President's specie circular – issued to cut short the land speculation - sees the public begin to suspect the reliability of the nations banks, then freely establishable by just about anybody, 1857, the Ohio Bank collapse of August 24th after wild land speculation in the several years before it, the September 18th 1873 announcement in New York of the failure of Jay Cooke and Company due to its overexposure to railroad bonds backed by government real estate give-away's, in early 1893 banks calling in loans in fear of the deteriorating economic condition of the country and its currency position, in 1930 the failure first of the banking empire of Rogers Caldwell and then the The New York based Bank of the United States, amongst many others, overloaded as they were with real estate loans, 1974 the failure of the Franklin National Bank of New York after years of rampant land and currency speculation, 1989 the whole Savings and Loan scandle. Each cycle happens differently but the rythym is the same.

We might also have observed that each cycle involved the collapse of larger institutuions with bigger and bigger numbers, affecting more and more people. Were this to happen again, two of the few financial institutions to be involved that could be bigger than the S&L numbers would be those most commonly known as Freddie Mac and Fannie Mae. So maintaining an eye here would be useful.

The herd mentality:
More and more of today's savings are in the hands of fund managers. A fund manager's biggest fear is not performing as well as his/her peers. So they tend to be a conservative bunch content with the same results as their fellow managers. This can lead to a bit of crowd behaviour, especially with index type funds. They all buy at once, they all sell at once. Something to watch that may make any panic, if there is to be one, worse than otherwise might be the case.

The bankers:
After every single land price induced downturn, the US government has introduced rules and regulations to make sure it wouldn't happen again. Every upturn the banks and real estate industry find ways around these laws. Watch this time again for 'new-era' lending activities. The higher land price goes, the more inventive lending institutions have to become. They are of course doing no more than finding ways to increase profitability. In addition, real estate mortgages have become highly traded commodities now; in the US alone up to half of all house mortgages have been securitized. In Australia this figure is around 20 percent, but growing. (Securitisation is the word used to describe the simple practice of taking a number of individual mortgages, putting them together as a group, then onselling the now grouped mortgages to another investor.) This is allowing banks to make loans, then off load the risk. So the lending institutions don't actually care how high the land price is; they just make the loan then securitize it into the market. Rising interest rates will at some point find the weak link in this chain, which may or may not be obvious as land price turns down with the (inevitable at some future time) higher interest rates. The insiders will know though, so reference to the appropriate charts, if there are any available, would be instructive. The relevant stock market indices are a starting point, then the charts of the individual banks, finance companies and mortgage brokers.

On the plus side for the bankers though, nationwide branching was finally permitted in the US as of June 1997. A long overdue move that will reduce the likelihood of isolated individual banking failures. In addition, it is arguable, possibly, that the general banking sector may be better positioned this cycle to weather a land price induced downturn than in past cycles. Part of this involves regulatory restrictions on how much banks have been permitted to lend (create credit) on land as collateral. Part of this is also the result of an active market for commercial and residential mortgage-backed securities. Banks are therefore holding fewer and fewer "whole loans" on their books these days in order to ensure strong liquidity. Time will tell. Again, higher interest rates will eventually, inevitably, expose the weak spots.

Global synchronicity:
Global house prices are now more synchronized than ever before in history. This is clearly evident through research put out by Marco Terrones at the IMF (Global House Price Boom). With the high, and increasing levels of mortgage securitization, problems in one country are now easily transferable to other nations. This too should be watched. The probability is higher than ever before that any downturn will be far more global in its reach this time than ever before.

Note too, the Internet did not change the spatial patterns of cities; most of the necessary Internet servers are located in larger cities. Just as for the telephone, the Internet has contributed to the land value of cities. (Angiotti, The Real Estate Market in the United States: Progressive Strategies, page 7.) The economic gains of society this cycle have been prodigious. Such gains have been taken by the ever higher land price. It remains to be seen whether society is, towards the end of this current cycle, over-bidding for them.

As this writing goes to the net, much is being made of the fantastic growth rates in China, the investment opportunities in India and the general increase in wealth of the emerging markets. The country to watch, however, will be Russia. This is because the new, 5th, Kondratieff commodity wave that started in 2002 will make substantial wealth for all nations that export energy. The newest, largest beneficiary this 'K wave' will be Russia. Nations that import energy will fare worst, amongst them the US. Over time, the energy issue will add substantial pressure to the value, or lack thereof, of the dollar.

'Left field' analysis:
In all previous land price induced downturns, the event bringing the turn, the change in real estate buyer perception, seems to have come from way out of left field, so to speak, although in hind sight the event seemed blindingly obvious. This is as it should be, for the turn must always be an event that the economy is ill-prepared for; by definition, a shock to the system. Here is one thought at least: the Euro. Whilst all eyes are on China (and western banks and multi-nationals chasing the alleged fat profits to be had) I would be watching Europe, in particular the recent entry of its newest members as they swap to the Euro. If the energy exporters like Russia and the Middle East start to perceive their better interests as receiving 'their' oil payments in a stronger euro, rather than a weaker dollar, then the US has a major problem: no longer could it simply print dollars to pay for its oil. This is a far bigger threat to the US and its dollar than a handful of manic terrorists. A swap by oil exporters to the euro could easily start a currency run. The situation is delicately poised at present. (Not to mention protected by heavy military expenditure in areas strategic to US interests.)

The world's tallest:
The peak of every real estate cycle in the past, since 1837, has been sign-posted at the top with the opening of the world's tallest, biggest, widest, or most expensive. Our most reliable indicator. This is as it must be: ever escalating land price driving cities continually upwards and outwards. For this cycle, one can expect the development of discount-flight airlines to shrink the travel time between favoured locations so that exotic or beach-side locations will show stunning land price growth towards the very end of the cycle. Expect huge projects to be built in ever more remote "untouched", pristine locations. Once the cycle turns down, more than a few will become white elephants to development.

Expect huge casinos to be on the drawing boards, vast architectural projects (like that continuing in Dubai), the world's largest boat, world's largest entertainment icon or something similar in nature. Then the cycle will turn.

To be continued...

Copyright, Phil Anderson, March 2006.

Further reading:

Angiotti, Tom. The Real Estate Market in the United States: Progressive Strategies, December 1999.

Battellino, Ric. (Assistant Governor, Financial Markets, Reserve Bank of Australia) Some Comments on Securitisation, Talk to Australian Credit Forum 2004, Sydney, July 28, 2004.

Fridson, Martin S. It Was a Very Good Year, John Wiley and Sons Inc., 1998.

Grant, James. The Trouble with Prosperity: A Contrarian's Tale of Boom, Bust and Speculation, Random House, 1996.

Herring, Richard and Susan Wachter. Real Estate Booms and Banking Busts: An International Perspective, University of Pennsylvania Working Paper No. 99-27, July 1999.

Partnoy, Frank. F.I.A.S.C.O. Guns, Booze and Blood-lust: the Truth about High Finance, Profile Books, 1998.

Pyhrr, Stephen A., Stephen E. Roulac and Waldo L. Born. Real Estate Cycles and Their Strategic Implications for Investors and Portfolio Managers in the Global Economy, Journal of Real Estate Research, Volume 18, number 1, 1999.

Terrones, Marco. The Global House Price Boom, International Monetary Fund, September 2004.

Weiss, Marc A. The Politics of Real Estate Cycles, Business and Economic History, Second Series, Volume 20, 1991.

Time Magazine
- No End in Sight: politicians hurl blame as the $500 billion crisis races out of sight, John Greenwald, Aug 13, 1990. - Special Report: The S&L Crisis. Barbara Rudolph, Feb 20, 1989.

The Nation
- The S&L Bailout: Sticking it to the taxpayers, Sept 4, 1989
- Shady Customers: How S&L Suspects Profit from the Crisis, Curtis Lang, July 30, 1990.
- The Quiet Americans, David Corn, Sept 10, 1990.
- Beltway Bandits, January 25, 1993.
- Big Bank Bonanza, April 4, 1994.

Australian Financial Review
- Space the final frontier for net start-ups, June 8, 2000, page 65.
- Net the greatest real estate story ever told, March 21, 2000, page 41.
- Much ado about nothing, Feb 17, 2000, page 63.
- Some Big Holes in UK mortgages, May 28, 2004, page 75

International Herald Tribune
- Enron Gave Bush Aides Warning of Meltdown, January 11, 2002.
- Qwest Chiefs Netted Millions, July 31, 2002, page 7.

- Accounting Firm to Pay Record Fine over S&L Failures, Robert Rosenblatt, Los Angeles Times, Nov 24, 1992.
- S&L's: Where did all those billions go ? Fortune, September 10, 1990.
- Savings and Loan Bailout: The Bills Keep Coming, Insight on the News, June 7, 1999.
- Curry, Timothy and Lynn Shibut. The Cost of the Savings and Loan Crisis: Truth and Consequences, FDIC Banking Review, Volume 13, No. 2, December 2000.
- Bank Failures in Mature Economies, Bank for International Settlements, (BIS) available on-line at
- Wrong numbers: Telecom Debt Debacle Could Lead to Losses of Historic Proportions, Wall Street Journal, May 11, 2001, page A1.
- The Power of WorldCom's Puff, The Economist, July 20, 2002, page 58.
- The Great Telecoms Crash, The Economist, July 20, 2002, page 11.
- How to buy with others' money, The Weekend Australian, March 11-12, 2006, Business, page 39

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