1. The Business Cycle: causes and remedies
Fred E. Foldvary
Dept. of Economics,

2. Georg Wilhelm Friedrich Hegel:
Nations and governments
have never learned anything
from history.
Philosophy of History, introduction

3. The factors of production
Land: all natural resources, including space.
Labor: human exertion that seeks to create wealth (goods and services).
Capital goods: goods which have been produced but not yet consumed.
Economic investment: capital goods.

4. The time-structure of capital goods
Real estate development
New factories
Machines, durable goods
Crops
Inventory in stores
Food in your refrigerator

5. Time preference
The tendency of most people most of the time to prefer goods in the present day to goods in the future. Life is uncertain and short.
The rate at which future goods become discounted becomes the natural free-market interest rate.

6. The role of interest
The interest rate has important jobs in the economy:
Equalize borrowing and savings
Equalize savings and investment
Allocate spending between consumption and investment.

7. The distortion of interest
Manipulations by a central bank prevent interest from doing its job.
Pushing down the interest rate creates unsustainable and wasted economic investment.
Result: inflation, recession

8. The real estate boom
When the central bank expands the money, the interest rate is pushed below its natural rate.
The credit expansion fuels a boom, especially the purchase and construction of real estate.

9. Excessive expansion of money
The manipulated interest rate falls.
More investment in long-lasting capital goods, especially real estate.
These turn out to be bad investments when interest rates go back up.
Not just inflation, but also a change of relative prices, a wasteful distortion.

10. The boom-bust cycle

11. Real estate the major player
Real-estate construction is a major portion of economic investment.
Artificially low interest rates induce a construction boom.
Low rates also create land speculation.
Land values rise beyond the point at which enterprises can make a profit after paying for rent or mortgages. The most optimistic speculators get a winner’s curse.

12. U.S.: Fannie and Freddie Fannie Mae and Freddie Mac,
government-sponsored enterprises
buy mortgages from originators
government guaranteed
subsidize real estate, land values
generate real estate derivatives

13. Public Works: the Mother of all Interventions
Much of the value of land comes from public works and services, paid for by taxes on labor and capital goods.
Adam Smith noted that "Every improvement in the circumstances of society tends either directly or indirectly to raise the real rent of land,
to increase the wealth of the landlord."

14. The land-value subsidy
* Public works and civic services increase the value of land.
* Little of this is paid from property taxes specifically on land.
* So these public goods get capitalized as higher land value and more rent.

15. The US real estate cycle
land value construction start of depression
interval interval interval
! !

16. High interest rates
and high prices
for real estate
choke off new investment.

17. Malinvestment falls
The unsustainable bad investments (malinvestments) slow down and stop.
The collapse of economic investment causes the rest of the economy to plunge.
Workers in construction and other real estate lose their jobs.
Loans default, banks fail, the financial system crashes.

18. Result: the financial waterfall

19. The fiscal and monetary remedy for depressions
The elimination of the business cycle requires the elimination of the real estate boom-bust cycle.
This can be accomplished by the provision of public goods by private communities.
That eliminates the implicit subsidy to landowners.

20. Public Goods are effectively provided by private enterprise by tapping the generated site rent.

21. Fred Foldvary, 1994
Public Goods and Private Communities
Market success providing public goods, in theory and in practice.
Demand is revealed by rent.
No free riders: users pay rent.
Land trusts, condominiums, residential associations.

22. Private Communities
Landowners pay for the public goods that service their area.
No subsidy.
No speculative land-value boom.
No financial crisis.
Government can privatize or else copy what private communities do.

23. Fiscal remedy
The public goods provided by government generate land rent.
The collection of this rent by government prevents the subsidy to landowners.
The price of land falls to a small amount.
This removes the gains from excessive land speculation.
A tax on land value has no excess burden.

24. The financial side
To prevent the boom-bust sequence, we also have to fix the financial side.
The remedy for credit manipulation is
free-market money and banking
(free banking) with competitive private bank notes.
* Provides flexibility and stability.

25. Free banking George Selgin, The Theory of Free Banking
There is a base money such as gold, and private bank notes are convertible into gold.

26. No more depressions! Private communities, free banking.
Or, the public collection of rent.
No imposed costs, no subsidies,
Stop the fiscal and monetary subsidy to investment and land value, and the business cycle will go away.
No more boom and bust!