In “The Rate of Return on Everything, 1870-2015,” economists Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan Taylor compare stocks, bonds and housing over the past century and a half. They find the return on residential real estate has been as high as or higher than the return on equity. As modern economies have grown and developed, owners of the ground on which we live have been steadily enriched.
“Urban land—not just buildings, but also undeveloped lots—is considered a good investment at a time when financial markets are shaky… Focus on desirable luxury buildings in New York—though we could have taken any of 25 or even 50 major cities in the world. In 2014, 54% of sales of real estate priced over $5m in Manhattan were made to shell companies—companies used as a front for other operations.”
… the desirability of investing in urban land… in a world where much land is dying—due to desertification, floods, mining, plantation agriculture, deforestation, or poisoning from mining operations.— “Who owns the city? How urban real estate became the corporate asset class of choice” by Saskia Sassen in CityMetric, 2016 August 8
“In most countries, the returns are comparable, and in some places such as France and Japan, housing has done much better. It’s much less volatile than stocks, too (though also much less liquid). So in order to address wealth inequality, it’s important to focus on land. Even after the rise of the modern corporate economy, unequal ownership of the most basic and ancient asset of them all is still creating big divisions in our society. [I]t’s landlords, not corporate overlords, who are sucking up the wealth in the economy,” wrote Bloomberg’s Noah Smith.
Where our overlooked land and our conspicuous money meet is at the bank. Banks make most of their money off mortgages. Consumer lending makes up the bulk of North American bank lending, and of this, residential mortgages make up by far the largest share. It’s mainly mortgages—payments for land besides buildings—that make FIRE (Finance, Insurance, & Real Estate) the biggest sector in the GDP.
Locations are valuable and often change hands (thanks in part to job transfers and to the high divorce rate); that turnover of that asset means more profitable business for banks. The higher the bids for land, and the more often land sells, the more banks profit.
Banking today consists primarily of channeling savings back to families to buy real estate. In advanced economies, banks resemble real estate funds: borrowing (short) from depositors and capital markets to invest (long) in assets linked to real estate.
Since 1913 (the founding of the Federal Reserve), nearly all of the increase in the size of the financial sectors in Western economies stems from a boom in mortgage lending to households. By contrast, financing the business sector has remained stable over the 20th century in relation to GDP.
Household mortgage debt has risen faster than asset values, resulting in record-high leverage ratios. Mortgage credit has generated financial fragility of household balance sheets and the financial system itself. Contemporary business cycles are shaped by the dynamics of mortgage credit, with non-mortgage lending playing only a minor role.
For all this land business to happen, there needs to be plenty of cash available. Bankers merrily make it so. During every period—about 18 years (see Ch 28)—of the business cycle, they gradually lower requirements for borrowing.
It’s become trite to note how, last decade, bankers dove into subprime lending. What’s not reported is how routine that is—they do something similar every cycle. And let’s not forget, they over-extend not just to starry-eyed home buyers but to the rich and powerful, too; real estate mogul turned president, The Donald, has been bankrupt six times. When bankers do this loosening of credit requirements, they may enrich themselves but at the expense of others; inflating land values makes crashes inevitable.
Further, banks gain every planting season when farmers borrow to buy seed, etc. Additionally, banks take property—which is half location— as collateral, then later for themselves in foreclosure. The old joke about mortgagors renting from lenders is pretty accurate. Banks also profit when consumers fall behind in their credit cards.
Banks gain, too, by brokering the enormous debts of governments, being a middleman selling bonds to other rich people and large institutions. One reason governments borrow so much is they recover rent so little. The federal government does not have to let broadcasters use the public airwaves for free, or timber companies log public forests and hard rock companies mine public land for nearly free, or land speculators snap up the land values at the exits off the interstate highway system, or … You get the picture. It’s a long list.
Who are those on the receiving end of society’s spending for assets never produced by anyone? A lot of people get a little but a few people get a lot. Much of our spending for … goes …
Rentiers have magnified their income by capturing not just rent but also interest on debt. The “oiligarchy” used oil rents to found banks: Rockefellers took over Chase, the Mellons launched Hannover’s which now is Citi. Warren Buffett bought the biggest block of stock in Bank of America and Wells Fargo.
It’s not just to profit that the already rich go into banking but also to control the spigot of credit and the issuance of money. Since winning that power from Congress over a century ago—despite the Constitution making Congress responsible for that function—bankers have raised interest rates. Headed the other way has been the purchasing power of the dollar: it has shrunk while federal government debt has swollen.
Banks are the most common type of organization that controls the shares of the 299 biggest global corporations. Financial institutions—banks, financial companies, insurance companies, or mutual and pension funds or trusts—owned the majority (68.4%) of shares in these dominant corporations. Financiers control the corporations.
And while it’s profitable, stable, and influential to control corporations, don’t lose sight of the fact that banks make most of their money from mortgages.
BlackRock, founded and operated by the current generation of Wall Streeters, held or controlled 6.1% of the assets of companies. At the end of 2017, they managed real estate, stocks, and other claims priced at over $6 trillion. BlackRock and Capital Group, which grew up with LA, have both wide influence across many companies and deep influence, often being the top or the second-ranked shareholder.
The largest 30 shareholders (out of more than 2,100 share controllers) owned or controlled some 51.4% of the assets of the 299 companies—1.5% of shareholders controlled 51%+ of shares. These 30 shareholders were made up of 21 private-sector shareholders and nine public-sector (that is, government-owned) shareholders.
US-based very large corporations accounted for 29% of the 299 companies. Six of the top ten private shareholders were based in, or at least originated from, the US. So did ten of the top 21.
The top eight shareholders each held shares in more than half of the top 299 corporations. Eighteen of the top 21 shareholders each held shares in at least 100 very large corporations.
BlackRock, Vanguard, and State Street are the biggest owners of the 4th biggest bank, CitiGroup. Vanguard, BlackRock, and other index funds own about 30% of REITs (real estate investment trusts), the tax-protected investor funds that own many of the nation’s offices, shopping centers, apartments, hotels, warehouses, data and storage centers, and of course their very valuable locations; $1 trillion is invested in REITs. Vanguard is by far the largest owner of REITs.
After the housing bubble popped, millions of Americans lost their homes. Private-equity firms led by Blackstone quickly bought tens of thousands of homes at deep discounts, most of them out of foreclosure. Blackstone—which spun off BlackRock—became the largest single-family home landlord in the US, with 50,000 properties.
BlackRock, Vanguard, and State Street have nearly $11 trillion in assets under their management. These Big Three have become the largest shareholder in 40% of all publicly listed firms in the US. They are the largest single shareholder in almost 90% of S&P 500 firms, including Apple, Microsoft, ExxonMobil, General Electric, and Coca-Cola. The Big Three exert the voting rights attached to these shares. They vote for management in about 90% of all votes at annual general meetings, while mostly voting against shareholders proposals (such as calls for independent board chairmen).
Who owns The Big Three? All three own each other. Big chunks are also owned by big banks. What real persons own them, it’s hard to find out, but undoubtedly the 1%. The true ownership of shares is hidden by the use of “nominee” or “depository” organizations—such as the Depository Trust Corporation in the US.
Even if their first fortune was not made in land, they soon invest in land. Zuckerman, Gates, et al own entire islands. Gates owns thousands of acres in Arizona, Florida, and Pennsylvania. Lesser rich buy up farmland as a safety deposit box. The Dreyfuss Fund (the family of actress Julia) owns prime downtown locations in most major American cities, along with other family funds. Very few families own very much prime land.
Owning the best is not the only thing the rich have in common. The ties that bind are their marriages, the nepotism, the old school ties, the interlocking directorships, the interlocking stock ownership, the offices held, the ties to politicians, etc. The super rich do meet at hideouts like the Bohemian Grove. The Rockefellers' Trilateral Commission seems to have decided the world’s fate. While their sources of great fortunes varies, on key issues they present a united front. Who dug this up? G. William Domhoff of UC Santa Cruz.
This article is Part 12 of a series highlighting the forthcoming book, “Bounty Hunter: a gadfly’s quest to know the worth of Earth,” by Jeffery J. Smith. To date, the experts have not risen to meet the challenge. Indeed, some have even stood in the way. Yet the payoff for knowing this datum is huge.
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JEFFERY J. SMITH published The Geonomist, which won a California GreenLight Award, has appeared in both the popular press (e.g.,TruthOut) and academic journals (e.g., USC's “Planning and Markets”), been interviewed on radio and TV, lobbied officials, testified before the Russian Duma, conducted research (e.g., for Portland's mass transit agency), and recruited activists and academics to Progress.org. A member of the International Society for Ecological Economics and of Mensa, he lives in Mexico. Jeffery formerly was Chief Editor at Progress.org.