måndag 24 december 2007

The forthcoming financial crash

People who criticise reckless lending by the banks generally fail to mention that this lending has been mostly used to fuel a speculative land price bubble, which closely resembles previous credit-fuelled land price bubbles occurring in 1990 and before that in the early 1970s. Indeed, these boom-bust cycles, based on the foolish assumption that land values will go on rising indefinitely, appear to be disrupted only by major wars, as records show them as having occurred with roughly the same 18 year frequency throughout the nineteenth century.

Whatever measures are taken to stave off a collapse, it is bound to come, and things will eventually pick up after that, though not without a lot of people getting hurt on the way. How can a recurrence be avoided, some time around 2025? Some commentators suggest that what is needed is more regulation. But this will not prevent a recurrence. For one thing, history shows that regulations tend to get dismantled when most needed and detailed circumstances vary; they cannot cater for every eventually. It is the underlying cause, surely, that needs to be dealt with - the finance of land purchase and consumer spending using speculative future land value as collateral. Like a plant feeding only on its own roots, the growth cannot continue indefinitely. Fiscal changes are needed which will make it pointless to speculate on land value and impossible to borrow against. The banks would then need to finance themselves by providing genuine services instead of creating money and lending it at interest on the collateral of bubbled-up land values.

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