The Bracken column is named after Brendan Bracken, the founding editor of The Banker in 1926 and chairman of the modern-day Financial Times from 1945 to 1958.

The consensus explanation for the global financial crisis is that reckless lending to high-risk borrowers in the US created the credit crunch. This personalises the crisis (bonus-driven behaviour) and simplifies the solution (more state regulation). But this diagnosis is false and the consequent remedy would not prevent the next property boom and bust.

For the past 200 years the market economy has been subjected to financial crises and recessions. To place the burden of guilt on a few bankers is to distract from the forensic analysis necessary if governments are to solve the structural problem.

The root causes of the current crisis are the incentives that encourage and enable people to speculate over land or property.

Matter of land

The problem originates with the unique characteristics of land as an asset. Because it is in finite supply, as demand increases during the business cycle, the rate of return on land-based assets increases.

The reverse happens with returns from other assets, which are more or less infinitely reproducible. So a rational investor would amend his portfolio to favour the asset that delivers the best gains in the long term.

Because land is tradable, transactions are facilitated through the credit-creating sector so banks are implicated in the process. This is not to suggest that they are victims, because they benefit from deals in land. But this chain of events does not begin or end with the financial sector, it is just one link in the process.

That individual bankers pocket bonuses which are ultimately funded out of land values is irrelevant if we are seeking counter-cyclical policies that are proportionate to the problem.

Genesis of Boom and Bust

Appearances change over time. In the UK, for example, land speculation in the 18th century was sparked by productivity from the construction of canals. In the 19th century, the railway revolution increased productivity, which raised land values and triggered a boom and bust cycle.

In the 20th century, beginning with the suburbanisation of towns in the 1930s, the private housing market became the focus of land speculation as this was the way to reap the largest capital gains from land.

In the 21st century, the economic rents from land will assume esoteric appearances but these will still crystallize in tradeable values in the land market. No amount of regulation of banks will prevent this, which is why the inter-governmental focus on tighter regulation of banks will fail in its aim.

One example of the analytical errors being committed, even by central bankers, is the way in which Sir John Gieve, deputy-governor of the Bank of England, is citing Spanish banking regulations with approval.

To his credit, he has acknowledged that monetary policy alone was never going to deliver sustainable growth, saying: "We need a third club in our bag which can directly dampen the financial cycle." ('Learning from the financial crisis', European Business School, London, November 19, 2008.)

Spain suffering

However, Sir John is not correct to commend Spain's regulations, which require banks to build a general reserve that can be drawn on in the face of recession. Despite Spain's provision - and the refusal of its banks to grant 100% mortgages to high-risk borrowers - the country is suffering from one of the deepest land-led crises in the world and has lost its AAA rating.

There is only one remedy to the structural flaw in the market economy. Fiscal policy must change incentives by taxing what Winston Churchill once called the "unearned increment" from land. This would allow government to reduce taxes on wages and profits, and would favour savers who invest in value-adding enterprises that create jobs.

Fernanco Scornick Gerstein is senior partner in the Madrid-based international law firm bearing his name, and president of the International Union for Land Value Taxation, a land and tax reform non-governmental organisation represented at the United Nations

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