Thursday, October 1, 2009

Pundits are getting it all wrong?

Narrow banking: barking up the wrong tree

It seems that many pundits in the financial community, top experts like John Kay or Martin Wolf, top press like the FT, are unable to get their head around the fact that the current financial crisis was caused by a global pyramid scheme. As a result they debate the ideas like 100% reserve banking and take them seriously. Traditionally these ideas have been associated with alter-globalists, tree-huggers and loony-lefties. It seems that the world has gone rather mad. 100% reserve banking will take us centuries back, making credit very expensive and only because bankers committed a crime of building a pyramid scheme and "experts" are unable to understand it and the fundamentals of fractional reserve banking (and related concept). In the alternative it may also be a cover up strategy.

Posted by ant @ 11:41 AM (1775 views)
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17 thoughts on “Pundits are getting it all wrong?

  • mark wadsworth says:

    Hang about, while Martin Wolf does not appear to know all too much about the day to day mechanics of banking and accounting, he has been saying for years that this whole business whereby China builds up huge foreign reserves and then lends it back to us was going to go horribly wrong one day; he has often mentioned that all these cheap loans just pumped up property prices rather than the real economy (which the Chinese were busy hollowing out); he seems moderately in favour of fixing banks by debt-for-equity swaps, and, coming from a different angle, he is also a Land Value Taxer.

    All he needs to do is to put 2 and 2 together and realise that having LVT would prevent property price bubbles (i.e. pyramid schemes) and hence that credit would HAVE to flow into the real economy, or at least it would flow indirectly into government coffers as tax, so enabling other taxes to be reduced. This is the DBC Reed patented economic plan, and it seems as good as anything else.

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  • I agree with your comments on Martin Wolf. Surely respect for this, but this is nothing more than a common sense, widely expressed but not well justified, written in a nice style. One would expect a more expertly opinions published in the FT.

    I think you mean LTV rather than LVT (loan-to-value ratio rather than Leasehold Valuation Tribunal :-). Anyway down to the point: maximum LTV would be a step in a right direction but it would not prevent property price bubbles or any other form of a pyramid scheme. Pytel explains this very well in:

    http://gregpytel.blogspot.com/2009/04/turner-review.html

    In terms of liquidity loan to deposit ratio is the key.

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  • Ant
    – LVT: Land Value Tax
    :o)

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  • mark wadsworth says:

    Ant, I meant “Land Value Tax”!

    All these regulations on income multiples and loan-to-values will surely fail. A bank is perfectly entitled to make a guesstimate about your future income, i.e. if you’ve just been taken on as a trainee solicitor, your salary might be £20k, but the chances are it will be £40k in a few years’ time – and LTV restrictions are idiotic, because, if you think this through, it would be illegal to take an unsecured loan, credit card etc.

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  • Land Value Tax, hmm… interesting idea. If it has to be paid in cash, then it may just work, but it also implies more state. Well, we cannot have it all.

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  • Land Value Tax, hmm… interesting idea. If it has to be paid in cash, then it may just work, but it also implies more state.

    I don’t know why people keep talking about this – it ain’t gonna happen!

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  • ant,
    It doesn’t imply any more state than the current council tax + business rates: that’s the beauty of LVT!

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  • drewster,
    no argument. It was more like a philosophical reflection, especially if LVT were replacing Council Tax

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  • mark wadsworth says:

    UT, it will never happen, unless people understand it and explain it again and again to other people.

    Ant: “especially if LVT were replacing Council Tax”, correct, to have the slightest chance, it would have to replace Council Tax less Benefit/Discounts, Business Rates, Capital Gains Tax, Inheritance Tax, TV licence fee, Stamp Duty, Insurance Premium Tax, VAT on domestic fuel etc etc. That way there would be relatively few winners or losers on Day One.

    With a roll-up option for pensioners, of course – i.e. if land values are going up at 5% a year and the tax is 5% or less of capital value, then the nominal cash value when you die is no less than the nominal value when you retired – a bit like having cash in the bank and spending all the interest. Or just say to your heirs – hey, if you want to inherit the house, you’ll have to pay my LVT for me! And even if the LVT eats into the capital value a bit, so what? Where do pensioners think the money for their state pension comes from? A pensioner couple would have to live in a huge mansion for the annual LVT to come even close to wiping out the cash value of the state pension.

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  • @MW
    LTV replacing business rates? All the virtual internet companies would be run tax free. Music industry too. There is more to the economy than just land.

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  • Mark,

    It won’t happen, because the people who have the most influence in politics will have the most to lose, regardless of who is in power.

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  • refusetobuy,
    – Business rates are levied on organisations that occupy non-domestic premises; it’s not the only tax a business faces.

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  • mark wadsworth says:

    @ Refusetobuy “There is more to the economy than just land”??

    Firstly, that is neither an argument for or against taxing land values – labour and enterprise are the largest part of the economy and in a perfect world they would NOT be taxed. Conversely, fags, booze and petrol are a small part of the economy, but because demand is price-inelastic and because they have exterrnal costs, that’s a good reason for taxing them.

    Secondly, land values do not drive the economy, the economy drives land values (increase in land values are windfall gains)

    Thirdly, you would be amazed at how important and hence valuable location values, and the permission to do what it is what you want are. If people can trade in non-physical goods over the internet, then good luck to them – that’s what it’s all about -efficient use of land! But CDs are still sold in High Street shops (and land values on the High Street are usually very high) so it’s all linked together somehow.

    PS, are you perhaps confusing “Business Rates” (a flat tax on rental values i.e. not a million miles from LVT) with “corporation tax”?.

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  • the number cruncher says:

    refusetobuy

    LVT is more than land – the economic concept is also about taxing all of mother nature’s little gifts such as the airwaves and internet, that covers the new industries. Also it would cover raw materials and energy.

    Low tax would stimulate innovation increasing the new information industries at the expense of more polluting and resource hungry industries – which is a very good thing.

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  • refusetobuy,

    “Business rates” are just like council tax, only for offices / shops / factories / other non-residential property. If you’re running an internet company from your bedroom or garden shed, you don’t pay business rates. Business rates are completely separate from corporation tax and all the rest, which is based on profits.

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  • Ah yes. I am confusing Business Rates with Corporate tax. I’m not a tax expert.
    Not sure about replacing Capital Gains Tax with LVT, because CGT is applied to all assets, not just property. Maybe just replacing property CGT.

    LVT does share costs out according to how much of the land you take up. I wouldn’t want it to replace all tax though.

    It also depends what the tax is going to be spent on. I don’t see why labour and enterprise would not be taxed a perfect world. For example, the tax from enterprise could allow more money to be spend on universities, helping increasing enterprise.

    If LVT is more than Land then it isn’t called Land Value Tax

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  • the number cruncher says:

    Land Value tax also covers all the value of land such as mineral wealth and the concept was drawn up before the things like taxing bandwidth or radio frequencies. It has a long economic tradition: It is hated by the idol rich and loved by progressive hard working people who want a real vibrant economic framework and an equitable society.

    Some web site for you to learn about this great economic concept:

    http://en.wikipedia.org/wiki/Land_value_tax
    http://www.landvaluetax.org/
    http://renegadeeconomist.com/

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