Banks losing money right, left and centre

Saturday, 09 August 2008 14:49
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The loss of money by the banks is a wonder to behold. How many boardroom members have lost their jobs as a result of this monumental blundering? Nobody in charge can really say they did not know they were taking a huge risk.

At the root of the trouble is that the banks have been lending money for people to buy land. LAND IS NOT WEALTH. The primary value of land is its rental, which is a residual value after all the other claims on production have been made, for example wages, the suppliers of actual physical capital, and tax. What is left over is rent. Land price is the capitalised rent; think of land purchase as the purchase of an income stream. Then there is a chunk added on, the expectations of future growth. That is the hope value, which is the bit that bubbles up every so often. No prudent banker would lend money on the strength of hope value, even if that value had been rising for years and years. But they do, and now we can see the result. Worse still, those who run the banks seem not to have investigated too closely whether the people they were lending to would be able to pay back the money they owed. Evidently they could not. It is all very interesting but one wonders how this level of stupidity could have spread into the highest levels of the business community?

Then there is the special case of Northern Rock, which has just been fed another £3 billion to keep going. It is strange how this money suddenly becomes available. It is about the same amount as the government made such a fuss about when the 20% tax rate was abolished. It would also pay, for instance, for a good length of high speed railway, or half a dozen city tramway schemes, of the kind that the government refused to support on grounds of cost. To put this in perspective, the cost of reopening the Uckfield to Lewes line has escalated from £6 million to about £100 million in the past ten years, but it is still negligible compared to the money that is now having to be shovelled into a pit because people who have been running the banks have ignored the most fundamental principles of banking.
 

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