AN OUTSIDE VIEW

Politicians from EU countries are meeting today to discuss methods of banking regulation to prevent a recurrence of recent events. But neither regulation nor supervision will work. If the problem is to be tackled, this must be at source. What has happened is a classic cyclic bubble. At the start of the cycle at the bottom of a recession, credit is in quite short supply. Nevertheless, banks lend money for land purchase, usually concealed at property or house purchase, but in which land value is a significant proportion of the total value. The money is lent on the value of the property as collateral. As time progresses and the economy starts to recover and with more of an assurance of income, people are more willing to borrow and lenders are keener to lend. This availability of funds starts to drive up land values. The banks, seeing land values rising, become ever keener to gain business by lending. This sets in train a positive feedback mechanism, with banks lending on the strength of l...