Wednesday, June 17, 2009

Henry George Has Been Proven Right

John Lanchester has a useful article in plain English in the LRB on the 'global financial crisis'.

At one point he makes a statement that nearly everyone recognises is correct but the full significance of which I dont think has been understood:

What links all these companies – and all the other companies and institutions around the world which have been felled by the credit crunch, from the Icelandic banks Glitnir and Landsbanki, the Belgian bank Fortis, the Irish bank Anglo Irish, Northern Rock which started it all, and all the other institutions that are currently in trouble – is that gigantic holes have appeared on the left-hand side of their balance sheets, where assets are listed. Those assets are for the most part linked in one way or another to the collapse in property prices in the US and elsewhere.

In other words, land speculation (the land boom and bust) is the cause of financial panics and crises and the subsequent general economic depression, as George argued more than 100 years ago.

Lanchester point out that banks by their nature have very large balance sheets and small equity compared to other businesses. (Is this the same as saying they are highly leveraged institutions?) It does not take much for them to become insolvent. But land busts typically see land values crash by 20, 30, 40 percent or more. In other words under a system of private property in land where money is loaned with land value as collateral the banking system is a disaster waiting to happen.


Karl said...

beautifully said Bernard, great to see other blogs linking to you

Bernard said...

Thanks for the comment and the link, Karl, I hadn't noticed that one before.