Comments on: Guest Blog by Hawkeye – Potemkin Firewalls

By: Carol

Carol — Sat, 18 Jun 2011 23:02:53 +0000

@forensicstatistician

You might to take a look at Fred Harrison's prophetic 'Boom Bust: House Prices, Banking and the Depression of 2010' (2005). In this he precisely predicted the UK house price peak as end 2007. I knew of this for many years before, yet didn't really believe that the bubble could blow so large for that length of time. His 1983 'Power in the Land' also predicted the latest and previous peak.

I'm not sure I agree with all the analysis (you've got to have a relaxation of credit controls to create a house price bubble) but when he produces such results, you've got to take the man seriously.

By: forensicstatistician

forensicstatistician — Sat, 18 Jun 2011 13:04:36 +0000

Mark / Carol

I'd not connected Land Tax and banking stability before, so would be good to see either of you outline a full post on this, at some point.

TMMblog

Whilst I'm sympathetic to the notion of fully reigning in fractional reserve banking, I'd say the first step is to ensure that the FRB practice that did work reasonably well for 100-200 years (i.e. Originate & Hold) is reinstated. Then to restore the proper situation of allowing bad lenders to collapse - at the moment we just keep sweeping bad lending under the carpet (see latest post of mine on this topic).

The current system is FRB squared! We first need to remove the second derivative layer!

wirplit

The current accepted wisdom is little more than a front for political agendas. As my post on "Irresponsible lending" shows, there is almost no moral or intellectual justification for state sponsored debt pimping!

- Hawkeye

By: TMMblog

TMMblog — Sat, 18 Jun 2011 09:48:48 +0000

It seems to be the problem is more fundamental – perhaps we should be reconsidering fractional reserve banking. After all, it's been around for a long time and there have been recurrent financial crises. What could be worse?

By: wirplit

wirplit — Fri, 17 Jun 2011 11:41:04 +0000

Interesting...

"It was argued and widely accepted during the pre-crisis period that diversifying exposure to credit risk through securitisation made the financial system more stable…the events of the financial crisis showed the opposite.” (ICB Calls for Evidence Paper 2010, Section 2.9)"

could almost be the perfect coda for the whole mess...
So what is being ..."argued and widely accepted"... right now by just those same commentators and front men? The conventional wisdom as Galbraith called it must be a little shaky right now.

By: Mark Wadsworth

Mark Wadsworth — Wed, 15 Jun 2011 22:32:05 +0000

To be fair, this idea coupled with the idea of "bail in not bail out" (aka debt-for-equity swap) is a good idea. They could nail it down by making it simply illegal for banks to invest in other banks (which I think they do in Canada and Spain).

But underlying all this is inflated land values - if you solve that problem*, then banking problems largely melt away. And nail it down with a bank asset tax (not a transaction tax - that causes more problems than it solves).

* Land Value Tax will sort this out overnight.

By: Carol

Carol — Wed, 15 Jun 2011 21:50:14 +0000

I think that the 'art' of assessing credit risk has been degraded by the use of land as collateral. During the boom period land values soar and the risk of default becomes immaterial when the loan is backed up by property/land. The lenders are onto a sure-fire winner, until… Could banks be weaned off this baby food, do you think?