Bill Powell explains the reason for the financial crisis, and how to get to the root cause.
Bill Powell Said:
I am a member of ‘Action for Land Tax & Economic Reform’ (ALTER) and help run their stall at Lib Dem Conferences. ALTER is one of the groups behind this event.
It is estimated that 70% of the money that circulates is created in the form of loans ’secured’ against ‘property’. They circulate as money until the loan is paid off. If loans stop the money money in circulation dries up. That’s what happened. That’s the origin of the credit crunch.
The bubble came about by banks enticing people to take on higher and higher loans with more and more ‘affordable’ payment terms, e.g. interest only, self-certified income, low teaser (aka ‘fixed’) rates for a couple of years. They competed with each other until the loan to earnings ratio became unbelieveable. Then the bubble burst!
The amount that an individual can borrow is income divided by interest rate. So, as rates fell borrowers became over extended. So did the banks when borrowers stopped paying. The £$ values were more than either borrowers or banks could stand.
Land Value Tax would stop the process in its tracks. LVT would take some of the borrower’s income. There is then less that the banks could capitalise. In that way LVT could stabilise 70% of the currency that circulates.
It would also provide public revenue, raised on the locations most able to bear it, and this would enable other taxes to be reduced.
So that’s the way to prevent another property bubble. It doesn’t tell us how to get out of this mess though. Maybe see Chris Cook for a different form of finance.