Saturday doom and gloom

Alice Cook and Cityunslicker have already posted two excellent summaries of the current economic climate, which you ought to have read already. And as Ed Harrison points out, "Spain can't sell its bonds".

So what will happen next? Again, turning to Ed Harrison, there are four basic models: 1929, 1973, 1990 (Nordic) and 1990 (Japan). In re-nationalising Fannie Mae and Freddie Mac, the USA seems to be following the Japanese model, which basically means nationalising all the banks' debt problems and thus dragging things out for decades.

Our lame duck Labour government is going to do a 'scorched earth' and leave the Tories with a complete mess. But will it be 70s style complete chaos, a slow lingering Japan or a Second Great Depression? Answers on a postcard, please.
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So far, so bad. What's done is done. Question is, is there is a sensible way of putting an end to boom and bust?

The first thing is to establish the underlying cause. The problem with 'proving' things in economics is that there are so many different things in play at the same time; it is difficult to say what caused what. However, the speed at which things have deteriorated since the 'credit crunch' started hardens my belief that it's just not credit bubbles (i.e. reckless lending) that you ought to worry about - it's asset price bubbles (i.e. reckless borrowing).

You can't have one without the other - everybody knows that the Great Depression followed a period of ludicrous increases in share prices, and the 1990s recession followed a period of ludicrous increases in property values - in Japan more so than in the UK, where membership of the ERM and the high interest rates that followed German reunification nipped that particular property price bubble in the bud.

Some reckon that mortgage lending should be regulated and controlled more strictly, which IMHO is nonsense. Strict regulations always have unintended consequences - they are a sledgehammer that always misses the nut. Sure, the BoE has kept interest rates far too low far too long; and FSA supervision has been lax to the point of negligence. Which is an argument for scrapping the BoE base rate - the BoE ought to charge or pay market interest rates, and that's that fixed.

But what we should be looking at far more closely is the asset price bubble - more specifically property and land values (and it must have been clear to any sane human being that property prices had reached nearly double their sustainable level). And you can't regulate property values. All a government can do is introduce an annual ad valorem tax on current land or property values, which would act like a higher interest rate and keep land and property prices low and stable.

But, OTOH, the overall tax burden is far too high (in the UK, as in most countries). So, with my simplification-campaigner-hat on, all I can say is that all existing taxes that relate, however directly or indirectly, to land, property and/or wealth* should be scrapped and replaced with Land Value Tax or a Progressive Property Tax. As to how it would work on an administrative level, see article over at ConHome.

* Council Tax (net of Council Tax Benefit), Business Rates, Stamp Duty Land Tax, Inheritance Tax, Capital Gains Tax/Stamp Duty, the TV licence fee**, VAT on domestic fuel, Insurance Premium Tax, s106 agreements and 'roof taxes'. And all subsidies that relate to land and property (and which merely inflate values), such as agricultural land subsidies, Housing Benefit and the VAT zero-rating for new residential construction can go as well.

Rather conveniently, the total net revenues from these taxes is roughly equal to local government spending, ignoring LEA spending, so for this and a zillion other reasons, Land or Property taxes are the ideal kind of local tax.

** Let's not get into a debate about whether the BBC should be privatised outright.