More regulation will not cure the banking disease

Banking scandals are all in the news at the moment, and the solution being touted is more regulation. It can only scratch the surface of the problem. There are deeper issues here, as we have said many times before. One is the proper and improper use of credit. We would assert that it should not be used for land purchase or for the purchase of the land component of real estate. Credit should be linked to production. When land is purchased no production as taken place or will take place – it is merely a “release fee”. The credit is linked to no production.

A further matter is the charging of interest. The Campaign as such can have no view on this subject, but that this is problematical was recognised in biblical times (Leviticus 25) and put under restrictions. These were reiterated over the centuries, down to 1745 when the first Papal Encyclical, Vix pervenit, was issued.

Associated with these issues is another. When banks create credit for land purchase, with land being used as security for the loan, they are in effect becoming landowners for the duration of that loan. What is labelled and thought of as “interest” is in reality rent. Experience shows that this drives cyclic credit-fuelled land price bubbles and places the banks in the role of land speculators. As the cycle proceeds the ratio of land price to rent rises, with yields falling to the point of instability. This is what happened in the mid-1970s, the early-1990s and again a couple of years ago. Regulation of the banks will not curb the forces that drive this process.