onsdag 30 april 2008

Mervyn King and the greedy bankers

Mervyn King, Governor of the Bank of England, has criticised banks for having caused the present credit problems, blaming it on a culture of greed and recklessness. He in turn has been criticised for letting down the City with these comments, which were described as "unhelpful".

First and foremost, it is better for the City of London's reputation if mistakes are acknowledged. But whilst the conduct of the bankers is the immediate cause of the current problems, underlying these is the set of circumstances in which such conduct is seemingly worthwhile, at least in the short term.

In an electrical or engineering system, positive feedback loops lead to runaway conditions and consequent instability. The banking system interacts with the land market in precisely the same cyclic way, but on the rising phase of the cycle, all seems to be going well and there is nothing to indicate that there could be trouble ahead. In other words, there is no feedback other than the occasional warnings by commentators who get branded as prophets of doom.

To deal with the root cause of the problem it would be necessary to collect, as public revenue, a substantial proportion of the rental value of land through a system of land value taxation. If this was in place, bankers would not be tempted imagine that the capital value of land would just go on rising and rising, and that it was safe to keep on lending to purchasers on the security of the puffed-up selling prices of land.

King should do more than just blame the bankers. The underlying circumstances that put the temptation in their way must also be addressed.

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