Prof. Reuven Brenner | On February 6, 2013

As we saw in my previous columns, the recent financial crises rhymes strongly with the one John Law and the Japanese government managed to engineer. Though in different ways, they were all “land-based”, drawing on the misperception that there is necessarily something “real” about increases in prices of immobile assets.

Just as Law and the Japanese government forgot, so did the Federal Reserve and the US Treasury, when letting financial institutions accommodate large expansions of credit – based on “real estates”.

It’s here that the distinction lies between this past “bubble” and what was labeled as the Internet-related one, and why the recent one will take much longer to correct. Whereas Internet shares could not be leveraged through bank loans and government guarantees, “real-estate” was – and banks and governments fueled the folly. This is why the paper loss with Internet shares, though amounting to trillions, had no significant effect, whereas the present one will be taking long years to overcome.

By looking at the crisis of sovereign debts through the “immobile” versus “mobile” prism, we get a better insight too. After all, such debt is “land-based” too, backed by national governments’ ability to tax people living in its territory (mother- and father-“lands”, take your pick). But what happens if the talent from these lands – what I often call “the vital fews” – move, be it abroad or through evasions?

The “land” stayed the same, but the ability and incentives to create wealth, and the part of such wealth that would be taxable – has diminished, as Italy, Greece, Spain – and now France – show.

How does one verse in the famous Lorenz Hart Bewitched, Bothered and Bewildered lyric go?

Burned a lot, but learned a lot,
And now you are broke, so you earned a lot
Bewitched, bothered and bewildered – no more.

Indeed, it appears that the “immobility” prism and its language bewitched the world for far too long. Perhaps by shifting to the “mobility” prism, the choices we face today could come in far sharper focus. A land-based credit system means that a real estate crash as opposed to, for example, a dotcom crash wreaks havoc with the entire financial system and not just with the portfolios of some investors; it’s effects are longer lasting. This leaves government, which are also in some sense a land-based revenue model grasping for higher tax revenues. The immobile stay, but the mobile who are among the vital few leave, and take with their tremendous wealth generating powers elsewhere, to the detriment of the country which they leave behind.

A version of this article originally appeared on Asia Times Online.  The article draws on Brenner’s Force of Finance (2002) and “Unsettled Civilization“.

Prof. Reuven Brenner

Reuven Brenner holds the Repap Chair at McGill’s Desautels Faculty of Management, serves on the Board of the McGill Pension Fund and is member of its investment committee.

He worked with Bank of America, Knowledge Universe, EEN, Bell Canada, Repap Enterprises and with investors in Canada, Mexico, the US and Europe. He has been involved in the private equity markets as partner in Match Strategic Partners, has been investing in start-ups across Canada, as part of an “angel group,” and also created his own start-up, “e-mortal.com.” He has also been serving on boards of companies and institutions.

He was expert witness in cases covering anti-trust, bankruptcy and financial matters. In other spheres, Quebec’s government asked him in 1995 to be member of a commission whose mandate was to examine all aspects of Quebec’s possible separation. He was also asked to testify before US Congressional Commissions and Canada’s Senate’s Banking and Finance Committee, and worked with Poland’s central bank during the recent crisis.

His recent books are A World of Chance (2008) and Force of Finance (2002). His regular columns appeared in Forbes, The Wall Street Journal, Asia Times and other financial press around of the world. Forbes’ journalists put two of his earlier books in their all time recommended list, and Forbes Global dedicated a cover story, titled “Leapfrogging,” to his works and endeavors. Brenner also received the Killam Award (1992), the Royal Society elected him as “Fellow”(1999), and he received a Fulbright Fellowship Grant (1976).

Brenner was born in Rumania and immigrated to Israel in 1962. He served in the Israeli army between 1966-69, during the Six-Day War, and again during the 1973 Yom Kippur War. The Fulbright fellowship brought him in 1977 to Chicago, after completing his PhD at the Hebrew University and working at the Bank of Israel, where he received the First Prize from Israeli banks (for work with Saul Bronfeld, designing indexed securities). He lives in Canada since 1980. He is fluent in English, French, Hebrew and Hungarian.