Banking the rotten heart of capitalism?

Will Hutton writes in the Observer about banking scandals as lying at the rotten heart of capitalism. That was two years ago but other commentators keep on saying much the same thing. We disagree. The rotten heart of capitalism is the private appropriation of the rent of land, something which Hutton and most other commentators never talk about. Without it, the banking scandals could not happen.

The standard banking model is the creation of money at no cost, for land purchase. The banks use this created money to purchase land which is then leased back to the “borrowers” for the duration of the loan. The “interest” paid by the borrowers is, mostly, nothing other then rent of land.

It is a smoke-and-mirrors business which makes it hard to see what is going on. But if the preconditions are not removed, no amount of bank regulation will prevent repeat performances.

Banking regulation would not have prevented the bubble-bust. There are underlying forces in the economy that someone has to address sooner or later. It is the underlying banking model that is flawed. The banking disease is the banking model referred to above. Functionally, the banks become land owners and the interest paid by the borrowers is rent. The system gives rise to a self-feeding speculative bubble as the prices paid for land are driven steadily upwards by the availability of credit provided for the land purchase, on the security of the value of the land titles themselves!

This creates the illusion of a flourishing market and more and more actors pile into the game. As the cycle advances, yields fall (as a percentage), to the point that the debt becomes unsustainable, at which stage any slight disruption will prick the bubble.

Regulation will not stop this, as these booms-and-busts – the cycle runs for about 18 years – have been going on during periods when there was tight regulation. It would take radical fiscal reform to stop the nonsense, and it has to be applied at the right time of the cycle. There is a window of opportunity at the moment, but none of the political parties have given any indication at all that they are aware of the problem and have the ability and determination to deal with it.

We are likely to see a boom in the mid-2020s and a damaging bust towards the end of the decade.