Financial Cycles and Building Booms: A Supply Side Account

Abstract

In this paper, I undertake a reexamination of recent cycles of boom and bust in the US commercial property markets. I apply aspects of the post-Keynesian investment theory developed by Hyman Minsky to understand the causes of hyperextended building cycles, with particular attention paid to the 1980s boom. Periods of rampant overbuilding are found to be rooted in the distressed conditions of the commercial banking sector, which drove the banks to annex the commercial property markets as outlets for surplus credit capacity and to offset declining rates of profit. I explore how the existence of commercial property at the intersection of markets for space and markets for capital assets introduces distortions into the capital supply process and exacerbates tendencies towards overproduction and crisis. Conditions prevailing in the 1980s are contrasted to the current economic expansion, and the performance of the commercial property markets through 1999 is analyzed, to distinguish further the key control functions exercised by the commercial banks over market outcomes.