The $840bn bailout of US banks provides the US Treasury with a unique opportunity. Will the as yet unnamed new Federal agency (which we will call the Bailout Agency), charged with the responsibility for selling off the bad debts of risk-bending bankers, use this money to reduce the chance of future boom-busts to occur?

This could be a reality if the whopping $840bn dollars (more than spent on 5 years of the Iraq war) was used to switch the 3 million odd sub-prime borrowers over to a Community Land Trust model of land ownership. The Trust could become a department of the Bailout Agency.

The new system would see the former sub-prime lenders paying a yearly Site Fee to the Trust based on the earning capacity of that site. This would allow land valuers, those who many argue are the front line to the realistic economy (vis the desk loitering economists and their mathematical models) to adjudge what someone on an average wage in an average location could earn in that locality.

This would ensure a number of things. Firstly, land would assume a value that was based on reality rather than speculative profitability. Business could then find locations where rents are realistic. Employment could grow and with that wages. The tax base would expand as less is spent on rent, more on investment, wages and consumption. Now, instead of millions of dollars going in interest to banks, 2/3 of that would go to the Trust/ Bailout Agency to repay the $840bn.

More importantly in the long run, this would reduce the speculative largesse that the easy profits in land banking deliver. Remember, the bursting of the land market is always the key indicator for any recession. It is the pursuit of the low-risk economic rents in land speculation that always drives an asset bubble and forces it to pop when the irrational exuberance for speculative profits outweighs what wage earners realistically earn.

A CLT model will act to short circuit this game. Why? With 3 million mortgages switching over to this form of repayment, the Site Fee is great enough at 3 – 5% to ensure that all sites are used effectively for the community’s good. Speculative vacancies aren’t possible. Land is used for living.

At present we hear reports of ghost estates like Baltimore where visitors can drive for 5km’s of boarded houses without seeing a single person. Then boom – around one corner you see former residents living under a freeway, in cardboard boxes.

The Bailout Agency (BA) threatens to prolong this situation if we have ‘more of the same’ in economic policy. Under the typical 2 dimensional economic model we endure today, the BA will have to hold these empty Baltimore homes empty until they find someone willing to pay a price even close to what the original bank initially loaned money for. This may take years for wages to return to this level. Japan endured a 16 year recession because of similar un-economic, monopolistic behaviour.

In the meantime the cardboard crew grow sick and disillusioned, turning to crime to make ends meet. Jails grow. The privatised operators (FYI – 1/4 of the world’s jailed population live in the US – home of the free!) of those jails earn more profits. The US economy stagnates.

The alternative is the CLT model. Land may drop in value more quickly, but remember, everything is relative. So the Site Fee encourages land values to drop back to what locals can earn from living in that house and working in the neighbourhood. The community can be re-built from the ground up.

Commercial sites become cheaper, seeing more self starting entrepreneurs, the pride and joy of the capitalist system, start up. In time competition for labour sees wages rise. Total taxes paid increase too. Site fees start to rise, but at a much lower rate than previously because speculation/ property flipping has become un-economic. This reduces the ability for another bubble to occur.

As the government realises how steady ad unobtrusive this form of revenue raising is, the expansion of CLT’s spreads throughout the US such that the regressive sales tax and tax dodging income tax is abolished and replaced with a system of Site Rentals.

Such a system also reduces the need for the wads of regulation some are calling for the banking sector, as we remove the carrot that created all these ‘creative’ financial tools. Lets get sensible and learn from these mistakes.