söndag 16 september 2007

On the rocks

There is lots of comment on the Northern Rock affair again today in the Sunday papers. Now there are calls for regulation.

The next great crash is unstoppable. It will probably come in a couple of years' time. It is too late to do anything about it. The time to have acted was some time between the previous one of 1992 and 2005. The best analysis of the process is by Fred Harrison, who successfully predicted the crash of 1992. Harrison has now demonstrated that the boom/bust cycle, which recurs about every 18 years, is due to the interaction of the land and financial markets. Harrison's prediction is for 2010. Read Harrison on the next great crash

The Northern Rock affair shows the process in actions. Their imprudent loans have been helping to stoke up house prices. But, and this seems to go unremarked by the politicians and pundits, it is not house prices that have been stoked up. What has been stoked up is the cost of land. And the stupid lenders imagine that land is solid wealth and safe collateral.

LAND IS NOT WEALTH. Everyone needs to understand this: politicians, economists, people who work in finance, journalists, and the man in the street.

This is indeed an area where governments should intervene. Lenders should not be allowed to advance loans using land as collateral. But a direct prohibition is not the way to do it.

The whole process which causes these cycles and the associated problems could be prevented through the right tax reform. If land was subject to an annual tax based on its rental value at market assessments, the entire crazy roller-coaster of land-price boom and bust would come to a stop.

How to tax land values

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