Reality Catches up to the Bond Market

Bond yields soared on Friday with the !0-Year U.S. Treasury yield rising 14 bps to 4.6%. Meantime the yield on the 30-Year Treasury hit 5.12%, its highest since 2007. Globally it was the same story, as Japanese yields are at their highest level since 1997 and government disarray in the U.K. is sending yields soaring there.

What’s going on? Three critical factors are coming together: rising inflation, government deficits, and an AI capital spending boom. Triggered by soaring oil prices caused by the Iran War, the U.S. consumer price index (CPI) is now 3.8% over year ago levels, and the producer price index (PPI) is now 6% over the same period a year ago. To be sure, core inflation at the CPI level is lower at 2.8%, but the core PPI is now running at a high 5.2% rate. More concerning is the likelihood that over the near-term, inflation will move higher, not lower. This clearly is not an environment for rate cuts.

Second, huge fiscal deficits are the order of the day. The U.S. continues to run a $2 trillion deficits around 7% of GDP, and with tariff refunds and higher defense spending it will go higher. Although the rest of the G-7 is doing much better, ex-U.S. the G-7 is running a deficit of 2.4% of GDP.

Last, the AI boom in the U.S. is sucking capital in from all over the world. Witness Alphabet’s recent $60 billion global offering. Here are the AI companies that used to supply capital to the rest of the world; they are now massive users of capital. Hence real rates have to increase and in the short run the massive expansion of data centers will put upward pressure on the price of inputs, ranging from memory chips to electrical equipment and construction labor.

 

This is the environment that incoming Fed Chair Kevin Walsh is facing. It is hardly an environment to cut rates. Indeed, with the two-year note now yielding 4.08%, well above the current midpoint of the Federal Funds rate of 3.63%, the market is now pricing in a rate hike. Those who say that Warsh will follow Trump’s orders to cut rates will soon be disabused of that notion. Kevin Warsh does not want to be remembered as the Fed chairman who looked inflation in the eye and blinked.

 

Finally, it is important to recognize that the recent rise rate is taking place in the context of a structural bond bear market. (See: https://shulmaven.blogspot.com/2025/01/we-are-in-early-stages-of-bond-bear.html ) Bond bear markets, just like bond bull markets last a long time. The last bond bear market lasted 35 years, from 1946 – 1981. We are now only in the sixth year of the bond bear market that began in 2020, when the 10-Year U.S. Treasury Bond bottomed at 0.56% in August of that year. So, buckle up, we are still early in a very long cycle.

My Review of G. Edward White's "Robert H. Jackson: A Life in Judgement"

 My Favorite Supreme Court Justice

Robert Jackson is my favorite Supreme Court justice. Here University of Virginia Law School professor G. Edward White brings to life one of the finest legal minds of the 20th Century in a detailed biography of his professional and personal life.  Unlike the current court which is dominated by snooty lawyers from Harvard and Yale, Jackson did not go to college, and he attended Albany Law School for only one year.  He read the law with a local lawyer which enabled him to pass the Bar Examination. We went on to become a leading public utility lawyer in New York.

 

Jackson grew up in a Democratic family in Jamestown, New York. Democrats were few and far between in western New York; Franklin Roosevelt, a rising politician took notice of him. When Roosevelt was governor, he asked Jackson to join the Public Service Commission, but he declined. Although Jackson represented most of the utility interests in western New York, he was so respected that consumer advocates supported him.

 

Roosevelt convinced him to come to Washington, first to the Internal Revenue Service and then to the Justice Department. He managed the high-profile Mellon tax case and helped write the Public Utility Holding Company Act of 1936. Later as Attorney General he helped draft the destroyers for bases deal and the Lend Lease Act. In late 1941 Roosevelt appointed him to the Supreme Court.

 

Most observers thought that Jackson would be a rubber stamp for New Deal laws and generally hew to an activist liberal position. That was not to be the case. However, in Wickard v. Filburn (1942) Jackson writing for a unanimous court declared that the Agricultural Adjustment Act of 1938 applied to a small farmer planting corn for his own use and hence was in violation of the Act. To me this stretched the power of Congress to regulate interstate commerce beyond a reasonable limit.

 

Jackson supported the court’s decision in West Virginia Board of Education v. Barnette (1943) which ruled that the state couldn’t compel a Jehovah’s Witness student to say the Pledge of Allegiance on free speech grounds. Simply put, the government can’t compel speech. In Korematsu v. U.S. (1944) Jackson dissented in a case that supported the government’s right to intern Japanese citizens on the west coast as a wartime measure.

 

Professor White brings out the long running feud Jackson had with Justice Hugo Black. They didn’t like each other from the beginning, and it exploded when Black refused to recuse himself in Jewel Ridge Coal v. United Mine Workers (1945). Black’s former law partner was the attorney for the mine workers and Black was one of the authors of the Fair Labor Standard Act of 1938 which was what the case was about. On a broader level he philosophically disagreed with Black’s and also Douglas’ result-oriented view of decision making. Jackson started at the bottom and worked his way up, while Black and Douglas started at the top and worked their way down to support their conclusions.

 

In 1945 Jackson took leave of the court, to become the Chief Prosecutor at the Nuremberg War Crimes Trials. Indeed, practically on his own, he created the full panoply of procedures that the tribunal would adopt. His goal was to bring justice to the Nazi war criminals with a modicum of procedural safeguards. Thus, it was far from a show trial.  Indeed, Nazi leader Hermann Goering actually tripped up Jackson during his examination. No matter, Goering committed suicide in his cell. To Jackson, his time at Nuremberg was the highlight of his career. He witnessed the obstinacy of the Soviet justices making him deeply suspicious of their motivations and the Nazi rise to power taught him to be very suspicious of authoritarians of all stripes.

 

Jackson return to the court in 1946. In perhaps one of his most important dissents in Terminiello v. Chicago (1949) he noted that the constitution is not a suicide pact. More specifically he wrote “…it will convert the constitutional Bill of Rights into a suicide pact.” Thus, he was not free speech absolutist in the tradition of Justice Black. He noted that “there was no unlimited freedom for dangerous speech.” That opinion, yet again, demonstrated what a fine legal writer he was.

 

In the late 1940’s and early 1950’s the Supreme Court got caught up in the growing Cold War tensions with the Soviets and the fear of communism domestically. Jackson supported the Smith Act and sustained the conviction of the leading members of the Communist Party in Dennis v. U.S. (1951). Later in 1953 he supported the conviction and the execution of the Rosenberg’s in the atomic spying case. (Rosenberg v. U.S. (1953)) White brings out the perfidy of Justice Douglas in his supporting the execution, but wanting to dissent to show off is civil liberties bona fides.

 

My favorite Jackson opinion is his in Youngstown Sheet and Tube v. Sawyer (1952), the steel seizure case. Here Jackson enunciated the rule concerning presidential power versus Congress that stands to this day. He divided the question into three parts. The first is where the president is strongest when he “acts pursuant of expressed or implied authorization of Congress.” Second where “Congress has not given or denied authority” is sort of a “twilight zone.” Third, the president is weakest when “he takes action incompatible with the expressed of implied will of Congress.” In case of the last, the courts should strictly scrutinize the presidential act. Jackson’s rule today is directly applicable to the current controversy over the War Powers Act.  Just to note Youngstown was about the domestic powers of the presidency, while the War Powers Act is concerned with foreign policy which gives the president more leeway.

 

The last major case Jackson dealt with was Brown vs. Board of Education (1954), the famous school desegregation case. Initially Jackson was ready to rule against Brown, and White goes through several detailed drafts where Jackson ultimately changed his mind. While the case was being deliberated Jackson suffered a heart attack. He was thinking about writing a separate concurring opinion questioning, in part, the decision, but was talked out of it by Justice Frankfurter.

 

Jackson died soon thereafter at the relatively early age of 61. Had he lived another decade, he along with Justice Frankfurter (See: Shulmaven: My Amazon Review of Brad Snyder's "Democratic Justice: Felix Frankfurter..........." ) could very well have functioned as a braking influence on the Warren Court. Jackson wanted to avoid political questions (i.e., redistricting), and he believed that the court was moving in the same direction as the Lochner and anti-New Deal courts of the 1930’s by substituting their personal values above the constitution. My guess is that had the court taken that path it would be far less controversial than it is today.

 

Robert Jackson was a legal giant. It is a shame our society seems incapable of producing someone like him today. Perhaps the current Justice Amy Coney Barrett, a Notre Dame graduate, comes closest to him.

The Redistricting Melee

Donald Trump started the redistricting melee by calling on Texas to undertake an unprecedented mid-census congressional redistricting to create five additional Republican seats. California Democratic Governor Gavin Newsom responded in kind by calling a successful referendum to redistrict California to create an additional five Democratic seats and the partisan war was on. It came crashing down for the Democrats in Virginia this week when their Supreme Court ruled their redistricting referendum unconstitutional. That plan would have created four more Democratic seats. Along the way Trump unseated candidates in Indiana's Republican primary that opposed his redistricting plan for the state.

Then of a sudden the U.S. Supreme Court declared parts of the Voting Rights Act of 1965 unconstitutional paving the way to redistrict a host of Black (Democratic) seats across the South. Tennessee and Louisiana have already acted. Further, by 2028 elections there will be a raft of redistricting across Democratic and Republican states. I don't know who the ultimate winner will be, but I do know the American voter will be the loser. Simply put voters should choose their politicians, not the other way around.

Meantime after being down in the dumps all year, the Republican Party now has some spring in its steps. To me their optimism and the Democrats pessimism is premature. Why? In a wave election, and if there is to be a wave, it will be the Democrats that sweep and instead of helping, redistricting will hurt because it dilutes a party's strength where it was presumably strong.(See: https://shulmaven.blogspot.com/2018/07/gerrymandering-wont-save-republicans-in.html ) Second, I would hope that the electorate gives a big F-You to both parties by voting Republican in California and Democratic in Texas. It maybe too much to hope for, but I fear that both parties are now circling the drain. We need something new.

The Purim War - Part 6, Cracks in the Home Front*

Although America’s blockade of the Persian Gulf is working causing oil storage problems in Iran, an implosion of its economy and a collapse of its currency, severe cracks in the home front have emerged. The 60-day clock of the War Powers Act has run out, and President Trump’s approval rating, with gas prices up nearly 50%, has declined to 37%, according to the latest poll. Indeed, beyond the wackos on the Right and the Left who are rooting for Iran, it seems that voices of the liberal establishment are implicitly supporting an Iranian victory. Why? Their hatred of Trump overwhelms all considerations of America’s security interests in the middle east region.

 

So, where do we go from here? Trump’s novel interpretation of the War Powers Act arguing that direct fighting between the U.S. and Iran ceased in early April, means that should hostilities resume a new 60-day clock would start. The ball is now in Congress’ court, but I would note Congress did nothing in 2011 when President Obama engaged in hostilities in Libya for six months. Further, every president since Nixon have has stated that the act is unconstitutional; it looks like we will once again be headed to the Supreme Court on the issue of executive power.

 

Meantime, Trump, and Chinese leader Xi are scheduled to meet in less than two weeks. This meeting has been postponed before, and it may yet be postponed again. Nevertheless, my guess is that meeting or no meeting, Trump will execute the new military plan to attack Iran’s infrastructure as a means to coerce Iran to yield on its nuclear program.

 

Beneath the surface the dynamics of the middle east are changing before us. The UAE is leaving OPEC and there seems to be a budding alliance between the UAE and Israel. Israeli troops are on the ground in the UAE to assist in its first ever deployment of its iron dome air defense system outside of the country.  Thus, it would be a foreign policy blunder of the first order for the U.S. to fail to achieve its fundamental war aims.

* See: Shulmaven: The Purim War- Part 5, Deadlock in the Strait of Hormuz*

AVB/EQR Merger: A Target on Their Backs

REITland is abuzz following a Bloomberg story that apartment behemoths AvalonBay and Equity Residential are talking merger. Such a tie-up would create an $80 billion apartment colossus. From an economic point of view, given the large geographic overlaps and the potential for large G&A savings, the merger would make a great deal of sense. In addition with the RealPage settlement both AVB and EQR lost the ability to engage in collusive practices. So instead of using RealPage, the new REIT would no longer have to collude; it would be one entity. 

However, from a political point of view, it would place a target on the back of the new entity. With high rents becoming a political flashpoint, populist politicians would place everything it does under a microscope and it would be continually harassed. Thus, if I were in the boardroom, I would think long and hard about the potential merger.

My Review of Barry Eichengreen’s "Money Beyond Borders"

 All Glory is Fleeting

U.C. Berkely economics professor Barry Eichengreen opens his history of global currencies with the “Nixon Shock” of 1971 which broke the dollar’s link to gold. (See my previous review of this event at Shulmaven: My Amazon Review of Jeffrey Garten's "Three Days at Camp David..........." ) I also reviewed a much lighter version of what Eichengreen discusses here earlier this year. ( See: https://shulmaven.blogspot.com/2026/01/my-review-of-david-mcwilliams-history.html )

 

Professor Eichengreen, the author of “Golden Fetters,” on the workings of the interwar gold standard, is a serious scholar of international monetary affairs. Here he is writing against the backdrop of a weakening U.S. dollar where the role of the U.S. dollar’s pivotal role in in the global monetary system is being called into question. This is far from the first time a preeminent international currency has been called into question. Eichengreen goes back in time to Athenian silver coins, the Roman denarius, the Florentine florin, the Dutch guilder, the Spanish “pieces of eight,” and the British pound sterling. All had their day in the sun and then faded away.

 

Although there were many idiosyncratic reasons for their demise, there were several common factors involved. The currencies lost their panache because of either internal or external political weakness and the willingness to engage in a debasement policy. Furthermore, as we moved closer to the modern era, Eichengreen notes that there has to be a credible lender of last resort. For example, as trade moved from the Mediterranean to the Atlantic the florin became less relevant and as British power outstripped that of the Netherlands, the guilder lost its relevance.

 

In discussing the rise and fall of currencies Eichengreen goes into great detail about the trading arrangements of the Florentine bankers who had correspondents across Europe at a time when communication was based on the speed of a horse. He also discusses the critical role of the Spanish Potosi silver mine in Bolivia that made Spain wealthy and it flooded Europe with liquidity. He also discusses how Britain’s Baring Brothers and Hope and Company of the Netherlands funded Thomas Jefferson’s Louisiana Purchase.

 

Now getting back to the fate of the dollar the question is how long will its “exorbitant privilege,” in the words of French finance minister Valerie Giscard d’Estaing, last? The privilege enables the U.S. to borrow in its own currency all the while remaining a safe asset for both private and public sector institutions. In 1971 the world said no more, but after a devaluation the dollar became even more prominent in the global monetary system. So, if the “Nixon Shock” didn’t break it, what would? To Eichengreen, even with all of the U.S.’s current domestic and international troubles there remains no alternative. I am sure the British and the Dutch had similar thoughts, but someone whispering in the ear of Secretary of the Treasury Scott Bessent, should tell him that all glory is fleeting.

The Purim War- Part 5, Deadlock in the Strait of Hormuz*

With the Iranians continuing to prevent shipping from leaving the Persian Gulf and the American Navy blockading the entrance to the Strait of Hormuz, it looks like fighting will resume after the ceasefire ends on Wednesday. To be sure the U.S. delegation is now enroute to Islamabad to negotiate; it remains to be seen if the Iranians will show up. Further it is not clear whether or not the Iranian team can bind the Revolutionary Guard (IRGC) to accept any terms they agree to. From the outside it looks like there is a division between the political and military factions of the government.

 

As we noted last week it is untenable for the U.S to accept Iranian control of the Persian Gulf and for Iran to maintain its uranium enrichment program. ( See: Shulmaven: "Millions for defense, but not one cent for tribute" ) Thus unless there is a change of heart on the part of the IRGC, a resumption in the fighting seems inevitable. A harbinger of that occurred today with the U.S. seizing an Iranian flagged ship in the Indian Ocean. Indeed, should the fighting resume, it will be taken to a more destructive level than we have seen thus far.

 

Thus, the party goers in Friday’s financial markets are likely to suffer a hangover when trading resumes on Monday.

 

*-See: Shulmaven: The Purim War - Part 4, The Ceasefire Fog*

My Review of Odd Arne Westad's "The Coming Storm: Power, Conflict......"

 War Clouds on the Horizon

In a previous blog I noted that we are living in a prewar era analogous to the runup to the start of World War II. (See: https://shulmaven.blogspot.com/2023/11/reliving-1930s-part-5.html ) Here Yale historian and global affairs professor Odd Arne Westad argues that a more appropriate analogy would be that of the prewar period approaching World War I. In many respects his argument parallels that of Graham Allison’s Thucydides Trap where the rise of China is inducing fear in the United States that has the potential to make war inevitable. ( See: https://shulmaven.blogspot.com/2017/08/my-amazon-review-of-graham-allisons.html ) Instead of the Balkans being the hotspot in the pre-1914 world, today we China-Taiwan, Israel-Palestine, Russia-Ukraine, and Pakistan-India. Anyone of which that could put the great powers in play.

 

In the pre-World War I era it was the rise of Germany that was threatening Britain, but Westad goes further by stating the bipolar world of the Cold War is over, and, in fact, we are now living in a multi-polar world with many strong regional actors such as India, Türkiye, Brazil and Iran.  He further analogizes that Russia is the Austria-Hungary of our day by being China’s junior partner. Similar to our time, the pre-World War I era was characterized by rising nationalism and a growing dissatisfaction with globalism. Fear and resentment were the motivating forces of the era. Sound familiar? 

 

My problem with Westad’s book is that he doesn’t offer real solutions, but who can, to the U.S.-China antagonism and for the regional hotspots. Because the book was written prior to the current Iran War, which has the potential for a great power conflict, Westad doesn’t have much to say.  There is also little discussion on the current revolution in military affairs involving drones and artificial intelligence which is greatly influencing the diplomatic chessboard. That said, if pre-World War I is the appropriate analog, we are in for trouble.

 

"Millions for defense, but not one cent for tribute"

 The American delegation to the Iran War peace talks in Pakistan this weekend should take to heart the words of Congressman Samuel Sewall of Massachusetts in 1798 when he shouted out “millions for defense, but not one cent for tribute.” Those words were said in response to French Foreign Minister Talleyrand’s request for a bribe before negotiations would begin to end the quaisi-naval war with France in the so-called "XYZ Affair." 

The United States was only 24 years old and was standing up to the great power of France. We can do no less today with respect to Iran. Simply put, the delegation consisting of Vice President JD Vance, Jared Kushner and Steve Witkoff should put the Iranians on notice that no tribute will be paid by ships passing through the Strait of Hormuz.” Full stop. 

 

The delegation should also remember the first words of the Marine hymn, which begin with “from the halls of Montezuma to the shores of Tripoli…”  Tripoli being the focus of the Barbary Pirate Wars of the early 1800’s. (See:https://shulmaven.blogspot.com/2026/04/the-purim-war-part-4-cease-fire-fog.html) President Thomas Jefferson had no qualms about fighting the Barbary Pirates and certainly the Trump Administration should show the same fortitude in fighting the modern-day Iranian pirates.

The Purim War - Part 4, The Ceasefire Fog*

The rally in the stock and bond markets and the collapse in oil prices is signaling that the Purim War is all but over. That, indeed, may be true, but we are a long way from a final settlement and there is a nontrivial chance that fighting will resume.  In fact, both sides have already reported ceasefire violations. We will know more this weekend when the U.S. and Iranian negotiators meet in Pakistan.

In the meantime, ships aren’t traversing the Hormuz Strait, and it looks like Iran wants to set up a tollway. Should that happen, it would represent a severe challenge to “freedom of navigation” on an international waterway, a concept that the U.S. went to war three times in its history. (War on the Barbary Pirates, The War of 1812, and World War I) If Iran prevails on this issue, it could rightly claim, that despite its enormous tactical defeat, it won a significant strategic victory enabling it to hold the global oil market hostage.

Although President Trump has stated that Iran will give up its enriched uranium and end its nuclear program, this hasn’t been confirmed by word and deed by the Iranians. Remember that ending the Iran nuclear program was the primary goal of the war to begin with. We will learn much on this point in a few days.

 

As we previously noted Israel would take the opportunity to take care of its unfinished business in Lebanon. ( See: https://shulmaven.blogspot.com/2026/02/the-purim-war.html ) As we speak Israel is pounding Hezbollah in Lebanon and both the Iranians and the Pakistanis are saying Israel’s war in Lebanon are part of the overall cease fire. Both the U.S. and Israel believe that it is separate issue.

 

Thus, the way I see it, the war is far from over with the ultimate winner being determined by the Hormuz and nuclear issues.

 

*- See: https://shulmaven.blogspot.com/2026/03/purim-war-part-3-end-game.html

My Review of Matti Friedman's "Out of the Sky: Heroism and Rebirth in Nazi Europe"

 Parachuting into Statehood

While reading Matti Friedman’s wonderful new book, I was reminded of my trip to Prague where I visited the memorial for the dead Czech paratroopers who were gunned down in a Prague Church. (See: https://destinationwwii.com/operation-anthropoid-memorial/ee:) Their mission organized in 1942 by the British under the name Operation Anthropoid succeeded in assassinating Reinhard Heydrich, the butcher of Prague and an architect of the Holocaust. To me, this is Friedman’s best book and I reviewed several of his works before. (See for example: https://shulmaven.blogspot.com/2022/05/my-amazon-review-of-matti-friedmans-who.html )

 

Here we are told the story of another British mission to send newly trained paratroopers into occupied Europe in 1944. The British in cooperation with the Hagenah recruit 32 Jewish citizens of their Palestine Mandate, whose mission was to help downed pilots evade and escape from the Nazi’s. They were chosen because of their language skills and their knowledge of the countries they were to be dropped into. All of them recently escaped from Nazi Europe and now they are choosing to go back into the hell they left.

 

However, the Hagenah has a different mission. That mission is help organize Jewish resistance to the Nazi occupation and to also, if possible, to get them out of Europe. Indeed, the paratroopers are fighting for a state that does not yet exist. The mission has the high-level involvement of the leading figures in the Jewish state in waiting, including its first Prime Minister David Ben Gurion.

 

Of the 32 recruits most die or are captured. Friedman tells the stories of four of them. Haim Hermesh 24, known as the scythe, airdrops into Yugoslavia enroute to Hungary. He like all of them he flies from Cairo to Beri, Italy where he is then parachutes in. He survives. Enzo Sereni, the group leader and a father of three drops into northern Italy. Marta Reick 30, known as Haviva drops into Slovakia where she becomes and important figure in the resistance. Indeed, Freidman takes you into the forests and clearings where the paratroopers landed and their interaction with the local partisans. One thing I did not know, was that for a time the resistance actually controlled a small amount of territory before being overrun by the German army.

 

The most famous of the four was Hannah Senesh 22, the author of the lyrics to “Eli, Eli.” She is the daughter of a famous Hungarian playwright and leaves an extraordinary paper trail. She was captured in Budapest and was killed in prison a few months before the arrival of the Red Army. Her mother was in the same prison with her for awhile and is ultimately freed and ends up in Israel.

 

We also learn from Friedman that the Nazi’s had a good understanding of the operation. Both the Hagenah and the U.S. OSS availed themselves of the services of a double agent in Istanbul. A monumental intelligence failure that put the entire operation at risk.

 

Although from a strict tactical sense the mission of the paratroopers ended up as a failure, in a broader sense the mission succeeded beyond the wildest dreams of its promoters. Their lives become the legends that gave inspiration to the new State of Israel.

 

In order to write the book Friedman researched the Hagenah archives loaded with musty boxes, found unpublished letters from relatives of the paratroopers, and discovered long out of print books. He also visited all of the drop zones of his four protagonists and followed the trail from there. It was a three-year effort, and it paid off in a hell of a good story.   

NATO: R.I.P., b.1949 - d. 2026?

NATO is dead, or in the process of dying. NATO was born when the United States stood alone militarily and economically as the West's  power while Europe was weak. Europe is no longer weak, but it certainly acts that way. If if it had the will, Europe would be capable of defending itself. Hence the founding predicate of NATO no longer holds.

The proximate cause of NATO's demise was President Trump's announcing his willingness to seize Greenland by force from NATO ally Denmark earlier this year, (See:Shulmaven: Donnie Does Davos* and Mayhem in Minneapolis ) his failure to consult on his war plans to attack Iran, and most important the the obstruction of NATO allies Spain, France and Italy to deny their respective airspaces to the U.S. Air Force's efforts to to attack Iran. Indeed they even denied access to the U.S. air bases in those countries. It is one thing for them to be passive, it is far another thing to actually obstruct the U.S. military. 

It is not as if NATO has no skin in the game in the Persian Gulf. Indeed their economies are suffering far more from the rise in the price of oil than the U.S. I don't know what, if anything, President Trump will say tonight on NATO, but the clock is ticking on its demise. Further it will require congressional approval for the United States to withdraw from NATO. Of course, the only winner in this will be Russia's Putin

My Review of Lloyd Blankfein's "Streetwise: Getting to and Through Goldman Sachs"

The Rise of Lloyd Blankfein*

This Jewish street kid from Queens salutes the Jewish street kid from Brooklyn. Lloyd Blankfein, with the help of Jacob Weisberg, describes his rise from the housing projects of Brooklyn to the commanding heights of Goldman Sachs. His father worked the night shift at the post office and his mother worked for a burglar alarm company, a growth industry in Brooklyn at the time. Although I am a decade older than Blankfein, I feel in some respects we led parallel lives. Obviously, his success was far greater than my own.

 

Blankfein grew up in a two-bedroom apartment with his parents, his sister, and his grandmother while I grew up in a one and half bedroom apartment in Queens with my parents, a brother, and a sister. To be sure my neighborhood was far nicer than his. That said, just like his, our living room furniture was covered in clear plastic so no one could mess it up. He married his wife Laura who was a scholarship student at the elite Fieldston School, while had a long-term relationship with Fieldston scholarship student.

 

While he was at Goldman Sachs, I was at Salomon Brothers and Lehman

Brothers. We both witnessed the great bull market in financial assets that began in 1982, the crash of 1987, the bond market collapse of 1994 that nearly brought both Goldman and Salomon to their knees, and we were both in our offices in lower Manhattan at the time of the 9/11 attacks. While I was semi-retired in 2008, we both were caught in the whirlwind of the 2008 financial crisis.

 

Where Blankfein stood out was his raw smarts. He skipped the 8^th grade and received a full ride scholarship to Harvard at age 16. From there he went on to Harvard Law School while I went on to Baruch College and UCLA. He started out in tax law, but he realized quickly that it was not for him and applied to several investment banking firms, including Goldman. Goldman, in its infinite wisdom, turned him down. However, Blankfein did find work at J. Aron, a commodity trader, which was acquired by Goldman. So here was Blankfein with a slew of outer-borough traders trying to integrate into the very toney Goldman Sachs investment banking environment. At the end of the day, it is not clear who had a greater influence over the other as Goldman Sachs soon become dominated by its trading activity.

 

Blankfein quickly became a star a Goldman. Here was a Jewish kid from Brooklyn negotiating a Sharia compliant investment structure for a Saudi prince. He later helped invent an institutional commodity fund that offered a yield by taking advantage of the implicit interest rates embedded in spot versus futures prices. Soon he was running all of Goldman’s FICC group (fixed income, currency, and commodities) that was generating three quarters of the firm’s profits.

 

Blankfein goes into the politics behind Goldman becoming a public company. Thus, in a way Blankfein offers us two books, one being his autobiography and the other being the recent history of Goldman Sachs, of which he becomes a leading player. He certainly succeeded at playing the game of thrones at Goldman to become its chairman in 2006. Along the way we meet Henry Paulson, Jon Corzine, Bob Rubin, Gary Cohn, and David Solomon among many Goldman luminaries.

 

Blankfein chairmanship arrives just in time for the Great Financial Crisis. Early on he realizes something is going awry in the markets. He orders all of his trader to set their positions “close to home,” and he became very strict about the firm’s daily mark-to-market culture. This prepared the firm for the ordeal to come, but with the whole neighborhood burning down, even the most fire-resistant houses are in danger. In an interesting vignette Blankfein describes how Goldman received $5 billion in financing from Warrant Buffet’s Berkshire Hathaway. It was done very casually over the phone while Buffett was taking his grandson to a Dairy Queen.

 

As we all know Wall Street gets bailed, but the senior executives become among the most vilified people in America. Blankfein is no exception and he was required to have permanent armed security for several years and was continually raked over the coals by Congress and the Financial Inquiry Commission. Here Blankfein’s humble roots and his sense of humor came into play when he sparred with such pseudo-populists as Bernie Sanders and Mayor DeBlasio.

 

What struck me was that Blankfein continually kept the entire Goldman team up to date conditions within the firm and the ongoing crisis. He did a series of voice mails for the Goldman community, many of which are published in the book. My sense is that my career would have benefitted me far more by working for him rather than Salomon’s John Gutfreund or Lehman’s Dick Fuld, both of whom I knew.

 

Blankfein gets very personal in his discussion concerning his bout with cancer while still heading Goldman Sachs. He was hospitalized for intense chemo treatment and when he was out, he held Putinesque meetings with his colleagues with him sitting at one end of a long table and the others at the far end. Simply put, his immune system was totally compromised.

 

Here I only scratched the surface of Blankfein’s remarkable life. He comes off as a very real person, and I wish I had a chance to know him and I wish Goldman was more proactive in hiring outer-borough kids.

 

*- With apologies to Abraham Cahan 

Purim War- Part 3, The End Game*

The end game in the Iran War has begun. By attacking Israel’s Dimona nuclear facility and the Temple Mount, the home of Islam’s Dome of the Rock holy site, Iran has demonstrated it has become desperate. To add an exclamation point to it, Iran fired off an intermediate range ballistics missile (IRBM) at the Diego Garcia airbase 4,000 kilometers away to prove it had a missile capable of reaching western Europe. Instead of scaring off Europe, it will bring NATO around to giving full support to our efforts to reopen the Persian Gulf to navigation.

 

The existence of the Iranian intermediate range missile represents a proof text of the existence of the imminence of the Iranian threat.  Simply put, Iran’s strategy is now to take down everything around it as the price of its regime collapsing. Make no mistake, Iran is being run by a death cult thereby making it less likely that the Mullahs would seek an offramp.

 

In response President Trump has threatened to destroy Iran’s electricity infrastructure if it fails to reopen the Strait of Hormuz by early tomorrow evening. The first round would likely be done with an electro-magnetic pulse weapon used in Venezuela that would not permanently destroy the facility. That along with the Saudi move to kick out the Iranian embassy indicates that by early next week the entire gulf will be ablaze with tit -for- tat Saudi/Iran attacks on each other. In this environment the Persian Gulf will be closed to all.

 

Needless to say, the oil and stock markets will reflect this turn of events with oil prices moving sharply higher and stocks sharply lower.  

 

·       See: Shulmaven: The Purim War and Shulmaven: The Purim War: Part 2 )

My Review of Sarah Hurwitz's "As a Jew: Reclaiming our Story....."

Be Strong and Stand Tall

Former senior speech writer to President Barack Obama and head speech writer to Michelle Obama, Sarah Hurwitz has written an important book on the need for American Jews to reclaim their proud identity and go beyond being a “social justice” Jew or a “cultural” Jew. Although Hurwitz was a Bat Mitzvah her experience with Judaism was of the pediatric variety. She didn’t really rediscover her Judaism until she was 36 when she walked into an Introduction to Judaism course. Thus, much of the book is autobiographical.

 

She tells us of her discovery of the very long text-line of Judaism going from the Tanakh, to the Talmud, to later rabbinical commentaries and on to the modern era. She didn’t realize the full depth of Judaism as a way of life and a way of thinking. She also has become learned in the history of antisemitism going back to the early Catholic Church relying on the work of James Carroll’s “Constantine’s Sword.” She goes on to discuss the antisemitism that originated in the Soviet Union and how the Soviet’s anti-Zionism was picked up by the Islamic world.

 

Hurwitz picks up on Dara Horn’s theme distinguishing between Purim antisemitism and Chanukah antisemitism. Purim antisemitism calls for the destruction of Jewry while Chanukah antisemitism is all about societal pressure for Jews to give up their identity. The latter is the antisemitism of the Left in America today.

 

In order to be cool in Left circles Jews have to be social justice warriors and denounce Zionism. I have seen many a letter to the editor signed by an anti-Zionist Jew starting with "as a Jew." She characterizes Jewish anti-Zionism as a luxury belief similar to those who live in gated communities calling to defund the police. Here she goes into the history of the Israel-Palestine conflict where she effectively rebuts much of the pro-Palestinian propaganda that has become mainstreamed in America today.  That said, Hurwitz is a self-professed ‘liberal Zionist” who supports the two-state solution.

 

Her solution is for Jews to lean in to be strong and stand tall against the wave of antisemitism we are now experiencing. We have to reclaim our proud story and to that we have to reclaim our story going back to the beginning.

My Review of Per Hansen's "There Will be the Devil to Pay"

 The Mother of all Financial Crises

This is a book for economic history nerds, not for the typical lay reader. Danish business school professor Per Hansen takes us deep into the financial crisis of 1931 starting in May when the Credit Anstalt Bank of Vienna collapsed and ending in October in the aftermath of England going off the gold standard. Although the crisis has been covered before by Barry Eichengreen, Peter Temin, Liaquat Ahamed and Tobias Straumann (See: Shulmaven: My Amazon Review of Tobias Straumann's "1931:Debt, Crisis and the Rise of Hitler" ), Hansen’s account is the most detailed.

 

Instead of writing history after the fact, Hansen takes us into the minds of four key players in the crisis as they try to make sense of the enveloping collapse. His four players are Montague Norman, Governor of the Bank of England; George Harrison, President of the New York Fed; Francis Rodd, bank of England official on loan to the newly formed Bank for International Settlements; and Harry Siepmann, Advisor to Norman. They all, especially Rodd, took detailed notes. Hansen records many of them in full and he had access to the numerous telegrams that lit up the wires of Europe.

 

For all four of them the maintenance of the gold standard was the highest priority and as Eichengreen, Temin, and yes Keynes noted, it was the fetters of the gold standard that worsened the crisis. Hansen calls out the fact that the United States and France did not play by the rules of the gold standard by failing to ease credit sufficiently to staunch the inflow of gold coming from Germany and England. It was the gold outflow from Germany and England that forced upon them a deflationary spiral from which there was no recovery.

 

All four of them were operating under the lender of last resort rules proposed by Walter Bagehot in 1873. (See: Shulmaven: My Amazon Review of James Grant's "Bagehot: The Life and Times of the Greatest Victorian" )  Bagehot’s crisis rule called for central banks to lend freely, against good collateral at a penalty rate. That works if there is sufficient good collateral to lend against. In the case of Credit Anstalt, there was none. Indeed, Credit Anstalt was more a private equity fund controlling about 70% of Austrian industry, than a commercial bank. Simply put, it was funding long term equity with short term deposits. When the market recognized the bank’s assets were worth far less than was thought, a bank run ensued. What exacerbated the crisis was that Credit Anstalt was a highly prestigious Rothschild bank with a blue-ribbon board of directors. If it could happen to them, it could happen to any bank.

 

The crisis then moves to Germany in July when the Danat Bank failed triggering an internal and external drain on deposits. In an effort to maintain the gold standard, the Bruening government yet again adopts further austerity policies as a condition to receiving aid from the Bank of England, the Bank of

France and the New York Fed. Yes, George Harrison of the New York Fed was in up to his eyeballs in the European crisis. Although he formally needed approval from the Fed’s Board of Governors in Washington, that was a mere formality. As part of the crisis management a standstill agreement on withdrawing international deposits from Germany was put in place.

 

That standstill agreement kept England from withdrawing gold from Germany exacerbating a gold outflow that was already in train. To staunch the gold outflow the Bank of England recommended an austerity budget which triggered a naval mutiny over pay cuts. It was then only a matter of time before England left the gold standard and let the pound float.

 

The German crisis put such a strain on Montague Norman that he suffered a nervous breakdown and was out of action from mid-August to late September. However, there was not much he could have done. Hansen highlights the fact that origin of the European crisis was the after affects of World War I that left a legacy of inflation along with German reparations payments and an inter-allied debt to the United States. In June of 1930 President Hoover called for a one-year moratorium on all debt repayments, but that was scuttled by France. While England would have benefited because it received less reparations payments than what was owed the United States; for France it was the reverse.  

 

Thus, reparations and the inter-allied debts hung over Europe like a dark cloud until the June 1932 Lausanne Conference which suspended all payments. By then the depression was in full force and Hitler was well on the way to power.

 

As someone who read the front page of every New York Times from August 1929 to March 1933 I have to sympathize with the four bankers and others who Hansen portrays. They were living day-to-day in a continual crisis doing the best they can under the circumstances. Hansen takes us into the weeds, which at times makes it difficult for the reader, it is well worth it. They did not know how the movie would end and were forced to make sense out of the situation as they went along. I had the same feeling about the Great Financial Crisis and the COVID crisis. In case of the latter, the Fed threw out the Bagehot playbook, by lending on questionable collateral. It worked, but along with a too aggressive fiscal policy it left a great inflation in its wake.

 

 

The Purim War: Part 2

 We are now nine days into the Purim War (See: https://shulmaven.blogspot.com/2026/02/the-purim-war.html ) where the U.S. and Israeli air forces are pounding the Islamic Republic of Iran. With Iran attacking Saudi Arabia and the Gulf States the war has widened to encompass the entire Persian Gulf with shipping all but shut down in the Straits of Hormuz. At this writing the price of WTI Oil has skyrocketed to $106/barrel. The attacks on the Sunni Arab states are all part of Iran's plan to create chaos in the Gulf to force the U.S. to backdown. In addition as we noted Israel has taken the opportunity to respond to Hezbollah attacks to pound them in Lebanon with the Lebanese government intervening on the side of Israel for the first time.

All of this was expected, but if we step back the Israelis and the Americans have made great progress. Iran's air defenses have been neutralized, weapons warehouses have been bombed, police stations have been taken out and earlier today a major oil depot in Tehran was set ablaze. Tehran was suffering from a severe water shortage before the war, the hit to the depot will only exacerbate an already bad situation.

Make not mistake, from both the Israeli and the American points of view the war is progressing well. Within in two weeks much of Iran's offensive capabilities will be eliminated and with that the Straits of Hormuz will have been cleared.

Today Iran selected Motjaba Khamenei, the son of Ali Khamenei, as its supreme leader thereby undoing a promise of the 1979 revolution to not allow hereditary changes in the leadership. The delay in his appointment signaled major divisions within Iran's ruling circles. By the way Motjaba just happens to own a mansion in London.  My guess is that Motjaba will soon have the same fate as his late father. Once that happens the way will be open for disgruntled members of the Islamic Revolutionary Guard Corps to seize power and open the way for a political settlement. They will be pushed into it when they lose control of the streets of Tehran to the populace and the oil workers at the giant Abadan refinery strike.

The Purim War

 About 2,382 years ago Esther and Mordechai ousted the Jew-hater Haman, first minister of Persia; an event that is now celebrated as Purim by Jews all over the world. In an eerie coincidence Purim starts on Monday evening March 2^nd. This time, instead of Haman being killed, the bulk of the Iranian leadership including the Grand Ayatollah Khamenei was killed in precision airstrikes by the Israeli air force. The U.S./Israeli effort’s goal is to topple the Iranian regime that has long threatened the region and was yet again reconstituting its nuclear and missile programs. With Iranian negotiators practicing “rope-a-dope” tactics with U.S. negotiators, President Trump’s patience ran out, and he unleashed an air and naval armada on the Iranian regime.

 

My sense is that Trump’s logic was the Iranian regime was weakened by the mass protests against it in January triggered by its collapsing economy. The regime responded with brute force and killed anywhere between 30,000-50,000 people. As they say in China, the Iranian mullahs “lost their mandate from heaven.” It will now be up to the Iranian people to establish a new course.

 

What happens next depends on the staying power of the remnants of the regime and the willingness of the U.S. and Israel to sustain a long campaign. Meantime, by attacking U.S. bases in Saudi Arabia, Iran lost the neutrality of the Arab gulf further isolating them. The other thing to think about is whether or not Israel will take advantage of the situation to cleanup its unfinished business with Hezbollah and Hamas.

 

Of course, it goes without saying, the Democrats are up in arms against Trump making war without congressional authorization. However, a careful reading of the war powers act means that what Trump did, as commander in chief, was legal so far. However, he does have to report to Congress on the war, and Congress will have a say. My sense is that Iran 2026 is not Iraq of 2003 but then again time will tell. But make no mistake, the middle east will not be what it was as of last Friday.

My Review of Sven Beckert's "Capitalism: A Global History"

Anti-Capitalism

Harvard history professor Sven Beckert offers up a history of capitalism, but in fact he has written an anti-capitalist screed. Although never mentioned, he follows in the footsteps of Honoré de Balzac’s well-known aphorism, “behind every great fortune there is a great crime.” Beckert treats capital as a unitary bloc, rather than as a multitude of businesses in competition with each other. Further, he sets up a strawman argument that from its creation, capitalism needed state support—as if that violates the notion of a free market. So, what? Adam Smith noted that capitalism needs the state to enforce laws and contracts and provide for defense, among other functions.

He starts his history in Aden around the year 1000, where, to him, the first islands of capitalism are formed. Trust me, he has written a very long history that takes up 1300 pages. His definition of capitalism is a society where capital seeks to reproduce itself in an ever-growing accumulation. This differs, to him, from the primitive markets of 4000 years ago. What is strange to me is that he hardly discusses money and its role in creating a capitalist society. Money in the form of gold coins existed 2500 years before his Aden merchants. (See: https://shulmaven.blogspot.com/2026/01/my-review-of-david-mcwilliams-history.html) He also ignores the role of the free trade zone established by Rome, while noting the importance of the free trade zone established by Islam that supported the Aden merchants.

In Beckert’s opinion, the critical catalysts that put capitalism into hyperdrive were the Caribbean sugar trade centered around the British colony of Barbados and the great Potosi silver mine in Bolivia, which flooded Europe with money. Great fortunes were made, and those fortunes were built on slavery—in other words, Balzac’s crime. However, slavery existed long before capitalism, as in the Hebrew slaves of Egypt. He makes short shrift of the anti-slavery movements in capitalist England and the United States that brought it to an end. One thing he gets right is that capitalism is highly adaptable to changes in circumstances.

With the rise of industrial capitalism in the 1700s, he not only notes its effects on cities but also on the countryside. In the country, common land became enclosed to increase food production and drive farmers off the land into the city to supply labor for the new factories. Beckert is critical that through about 1850, real wages stagnated in England. This is when Marx wrote his famous manifesto highlighting the immiseration of the working class. Nevertheless, that very same manifesto offered a paean to the new capitalist world that was being born. Then, of a sudden, real wages started to increase. He offers no explanation.

He casts blame on capitalism for causing racism, sexism, and environmental destruction. None of these are unique to capitalism, as all three have existed for millennia. And if Beckert were fair, he would note the environmental destruction on a grand scale that took place in Soviet Russia and Communist China. Indeed, most of the progress in ridding the world of racism, sexism, and environmental destruction has taken place under capitalist auspices.

What really bothers me is his use of the Marxist term, “commodification.” He uses it over and over to denounce the growing role of markets in our daily lives. He doesn’t like dating apps. Along a similar vein, he cites such leftist economists as Polanyi, Piketty, Sraffa, Braudel, Hobsbawm, and Gramsci, for example, while spending far less time on Chandler, Friedman, Schumpeter, and Mokyr. His sympathy for socialism is obvious.

While he lives comfortably off the benefits of capitalism in Harvard Square, he just doesn’t get that capitalism involves huge risk-taking and somehow misses the spirit of enterprise that invigorates the process of capitalist accumulation that drives our society forward.

Trump Gets a Lesson in Constitutional Law

" All I can offer them is that most major decisions affecting the rights and responsibilities of the American people (including the duty to pay taxes and tariffs) are funneled through the legislative process for a reason. Yes, legislating can be hard and take time. And, yes, it can be tempting to bypass Congress when some pressing problem arises. But the deliberative nature of the legislative process was the whole point of its design."

        Justice Neil Gorsuch concurring in Learning Centers v. Trump

President Trump is learning the same way that President Harry Truman learned over 70 years ago that the power of the presidency is not unlimited. In Youngstown Sheet and Tube v. Sawyer (1952) the Supreme Court found that President Truman could not seize the steel mills under the exigency of the Korean War without the express approval of congress. Similarly the court ruled that Trump does not have the power to impose tariffs under the International Emergency Economic Powers Act (IEEPA) without the express approval of Congress. To be sure Trump has other tariff statutes available to him that are authorized by Congress and he is using them as we speak.

What all this means is that tariff are here to stay, but much of the recent arbitrariness of the process will be removed. There will of course be a series of court fights about how the refund process will work for those who paid the illegal tariffs. My guess is that will take time given the number of claimants and the huge dollar amount in excess of $100 billion.

Nevertheless, the bottom line is that for the first time the Supreme Court placed a real check on Trump's growing dictatorial powers. The next check will likely come when the court decides that he can't arbitrarily remove members of the Federal Reserve Board. Thus in a modest measure the framers of our constitution are being vindicated.

My Review of Jeremy Grantham's "The Making of a Permabear:........."

Regression to the Mean?

 

I met Jeremy Grantham of GMO fame on several occasions many years ago and I had a working relationship with Dick Mayo, the M in GMO. Thus, it was a pleasure to read Jeremy’s autobiography written with the help of Edward Chancellor. Grantham is a value investor’s value investor and as such numerous times in his career he was out of step with a raging bull market, hence the title “Permabear." In the interest of full disclosure, I would characterize myself as a value investor.

 

Grantham was born in Yorkshire, England in 1938, just at the onset of the war that would kill his father. His background was middle class and he attended Sheffield University, a far cry from the Oxbridge of the elite. However, the future Nobel Laureate John Hicks read one of his papers. Nevertheless, by the dint of his efforts and natural intelligence he ended up at Harvard Business School and ultimately into investment management.

 

He broke off from Keystone, a prominent mutual fund manager in the early 1970’s to form Batterymarch Financial where he was a pioneer in the nascent index fund industry. He left them to form his own firm, and Dick Mayo soon joined him. The mid-1970’s was a heyday for value managers as the once exalted nifty fifty cratered and practically everything else moved higher. Simply put, value was having the sale of the century.

 

Like most value managers, Grantham believes that stock valuations and profit margins are mean reverting. Simply put, when the market’s price/earnings ratio gets down to around 7 or 8, the market as a whole is a buy and when the ratio is well into the 20’s on normalized earnings, the market is a sell. Grantham backed up his investment analysis with serious quantitative research that covered international markets as well.

 

The dot.com boom of the late 1990’s tested Grantham like no other. Valuations went to the sky from 1998 to early 2000 leaving GMO’s performance in the dust. Nearly half of its assets when out the door. Here Grantham is very astute in talking about business risk and career risk. Being bearish in a bull market brings with it enormous risks to investment managers and their principals. Trust me, as a sell-side equity strategist at Salomon Brothers I felt the brunt of career risk. Nevertheless, Grantham stuck to his guns and was buying REIT stocks that were yielding up to 9% at the time. I had the same instinct at the time and built a personal portfolio holding a basket of REITs. I later became the REIT analyst at Lehman Brothers. In early 2000 the dot.com boom crashed and burned, but unlike in the mid-1970’s the overall stocks market did not get really cheap.

 

In the early 2000’s GMO recovered dramatically, but by mid-decade Grantham blew the whistle on the unsustainable housing boom. Yet again he was early, but dead right. Although stocks suffered from a vicious bear market in 2008-2009, the averages only stayed cheap for a few short months by Grantham’s reckoning.

 

As I write this Grantham is again calling out what he perceives to be the outlandish valuation of the U.S. stock market. Profit margins are at an all-time high and the cyclically adjusted price/earnings ratio is just a touch away from its 2000 peak. What’s going on? Perhaps, the economy has changed so much that it is now dominated by a few highly profitable tech monopolies that are skewing aggregate profit margins. Furthermore, the emphasis has shifted from tangible capital to intangible capital. That was true until last year when the tech behemoths started to massively spend on data centers to support artificial intelligence. The big question is whether or not those investments will be sufficiently profitable to support today’s valuations.

Grantham, through his foundation, is a very active environmentalist. He almost went to jail in opposition to the Keystone XL pipeline. He rightly worries about climate change and chemical pollution. In his private life he attacks the major oil companies, but my guess is that as a value manager he holds the stock in those very same companies. In his environmental hat he applauds the decline in population growth, but as a money manager, he realizes that might have negative consequences for future profit growth.

 

To sum up, Jeremy Grantham is quite the character. and it comes through in his book. For those readers interested in the stock market, its contrarian take is well worth the read and if you are of value bent, like me, it will gird you for the market that lies ahead.

  

My Review of Bike Bird's "The Land Trap: A New History of the World's Oldest Asset"

 Civilization held Hostage to Land

 

Mike Bird, the Wall Street editor of The Economist, has written a detailed history of the role of land in society in general and the economy in particular starting with the Babylonian Empire. He makes three broad generalizations about land: it is fixed in quantity, it is immobile and it doesn’t depreciate. Although land is definitely immobile, it is not really fixed in supply, and it can depreciate. The application of capital to land can increase its supply. Witness a good portion of lower Manhattan buildings sitting on landfills and provisioning of water to desert lands to make them productive. Phoenix is a clear example here. Although there are no depreciation schedules for land, the value of land has suffered long term declines due to changes in the broader economy and environmental pollution.

 

Because I once headed real estate research at the old Salomon Brothers, I found Bird’s narrative particularly interesting. I was a careful student of the Japanese real estate bubble in the 1980’s and I chronicled the real estate boom and bust in the United States from the early 80’s to its nadir in 1992. In the Japanese and the U.S cases the collapse in real estate values caused a debt crisis in both countries. As Bird notes the ability to borrow on real estate can put a real estate cycle on overdrive, both on the upside and the downside. The 1990 real estate bust turned out to be small change when a collapse in real estate values triggered the global financial crisis in 2008. On the other owner occupied real estate has served as collateral to fund numerous businesses, some of which have become quite large. Bird cites McDonald’s as an example.

 

If there is a hero in Bird’s book it is Henry George, the author of “Progress and Poverty.” An 1879 best seller. George rightly argued that much of the gains associated with rising land values are the result of improvements in society and are thus unearned. The landowner just sits there and takes advantage of the improvement in society and the economy. George’s solution was to tax perceived unearned increment away to fund the government. At the time he thought a single tax on land would suffice. His ideas became all the rage, and he was almost elected mayor of New York City on his single tax platform. Unfortunately, his movement faded away.  

 

Bird is very cognizant of the fact that in much of the developed world today the ownership land has become a major driver of income inequality. Simply put, those who have it are far better off than those who don’t and because the value of land is very sensitive to interest rates, the easy money policy pursued by central bankers since 2008 has sent land prices skyrocketing. In a real sense, we are living in a neo-feudal world that separates the landed from the landless.

 

Aside from discussing the history of land in the Anglosphere, Bird discusses land policies in China, Taiwan, Hong Kong, Singapore, Korea, and India with the all-time biggest bubble ever taking place in China. In his discussion of Asian land policies, he cites the work of Wolf Ladejinsky a U.S. Department of Agriculture staffer and later private consultant who was instrumental in creating the land policies in Taiwan, Korea, and India. To Bird, Singapore comes across a model where the government own the land and leases it to condominium developers that attaches pricing regulation to make the units affordable. As a result, Singapore has the lowest house price/income ratio in the developed world. Albeit it is a very expensive program.

 

In sum Bird argues that society is trapped by the high price of land. For example, policies that would lower the price of land to make housing more affordable would have the knock-on effect of lowering the wealth of existing owners and possibly triggering a financial crisis if those owners default. This policy bind will be with us for a long time.