If you are new to this blog, you are invited to read first “The Largest Heist in History” which was accepted as evidence and published by the British Parliament, House of Commons, Treasury Committee.

"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

This blog demonstrates that:

- the financial system was turned into a pyramid scheme in a technical, legal sense (not just proverbial);

- the current crisis was easily predictable (without any benefit of hindsight) by any competent financier, i.e. with rudimentary knowledge of mathematics, hence avoidable.

It is up to readers to draw their own conclusions. Whether this crisis is a result of a conspiracy to defraud taxpayers, or a massive negligence, or it is just a misfortune, or maybe a Swedish count, Axel Oxenstierna, was right when he said to his son in the 17th century: "Do you not know, my son, with how little wisdom the world is governed?".

Friday, 23 December 2011

Democracy on the ropes


(This article was first published on openDemocracy / ourKingdom website titled: "Capitalism no longer exists: it's communism for the rich" on 5 December 2011.)

From a free market, capitalist, laissez-faire perspective the state of the economy and the roots of the current financial crisis look far worse than Occupy London activists think. They criticise basic premises of capitalism: profit making, fractional reserve banking, fiat currency. But the fact is that the current economy and the financial system has nothing to do with them any longer. Capitalism as we had known it till the end of 20th century was turned into a global fraud enterprise, illegal under the existing laws. As recent events in Greece and Italy showed it is now threatening the very foundations of liberal democracies.

Doing a ponzi

In the 10 years leading to the collapse of 2008, the financial system abandoned the fiat currency and fractional reserve banking. This was the system were the money, as the store of value, was underwritten by individual countries and multiplied in a controlled way from currency to broad money. Instead, the financiers and bankers started practicing a depleting reserve banking technique: a mechanism that replaces the currency, i.e. fiat money and legal tenders in the banks' reserves (in terms of their ratio) by papers generated by the banks themselves.

The typical loan-deposit ratio had always been below 100%, for every £1 deposited, the amount lent must be less than £1. With each cycle of lending and deposit the amount “created” tends to zero: the overall impact on the money supply is finite and measurable. And yet, in 2007 UK banks loan-deposit ratio was 137%. In other words the banks were lending out on average £137.00 for every £100 paid in as a deposit. This thereby increased the broad money to currency ratio with an exponential, run away pace; creation didn’t tend to zero, but to infinity [for a fuller account of this process please see The Largest Heist in History]. Because of the latter this mechanism is a classic example of a ponzi scheme, illegal under current laws and prohibited by regulations in all developed countries [for more analysis please refer to the publications listed below this article].

Who did it?

For the last couple of years there has been a fiction creeping into the mainstream media - e.g. BBC, FT, The Economist - that somehow it was the democratically elected politicians who were really responsible for the current crisis. It is a plausible proposition but only in a sense that the politicians allowed the fraudulent and illegal practices to be developed and conducted by the financial industry. But the problem is somewhat deeper.

Before the banking collapse of 2008 governments borrowed a lot of money. But neither Greece's nor Italy's nor the UK's national budgets were deemed as unsustainable. In fact the private banks were all happy to lend to governments in the US, the UK and the entire Eurozone at very good rates. It was only after the financial collapse that started in autumn 2008, when the governments borrowed heavily to rescue the banks from a complete meltdown, that the governments' debts have become an issue to the financial markets. In a nutshell, the governments that saved the banks and financial markets from a meltdown by borrowing huge amounts of monies are now being attacked for having too much debt by the institutions they saved.

In the background there is an issue of links between the financial and political worlds. In the UK everyone knows that there are revolving doors between the Westminster and the City. It is considered normal that successful politicians become top bankers and that top bankers turn into politics. Top bankers also play a key role advising politicians in their fiscal decisions and on the regulatory policy towards the financial industry. Names like Tony Blair, David Laws, Sir James Crosby, Sebastian Grigg come immediately to mind. Until recently all monies lent to governments were willingly lent by the financial markets. All governments' borrowing decisions and decisions on the financial regulation were taken by financiers or on advice of financial experts. In this sense: politicians and financiers are the same people.

There is only one key divide: the private sector pays much more than government, indicating where the loyalties truly lie. Therefore even if one accepts that the politicians borrowed too much money to fund their budgets it was at the advice of the financiers regardless. No one can possibly imagine a layman politician taking a decision to borrow tens of billions of dollars, pound or euros without taking professional advice from a financier, effectively an approval. Even the UK government was advised on the meltdown of the financial system by private financiers: BlackRock, Citi and Credit Suisse. There was no limit to the systemic conflicts of interest.

Doing a Scargill

The financial system, which still operates - from technical and legal perspective - as a ponzi scheme is at its limit. To keep it going it needs additional amounts of liquidity which can only come from the taxpayers. But taxpayers are not prepared to suffer ever more austerity measures in order to subsidise the banking and finance industry. To advance their interest the financial markets started changing democratically elected governments, in Greece and Italy, replacing the prime ministers with... bankers. Modern democracy in Europe is effectively being dismantled.

This situation is in many ways very similar to the collapse of the heavy industries in Britain in the 1970's. The management and trade union barons were demanding ordinary middle class taxpayers keep subsiding heavy industries as somehow indispensable. Now the financial industry is doing the same: their leaders terrorise the UK government in the same way as Arthur Scargill back in the 1970's and 1980's. The only difference is that Scargill and the trade unionists were fighting for jobs and livelihood of workers in a bona fide industry. The financial industry captains are fighting for multimillion pound remuneration in an enterprise which degenerated - from a technical perspective - into a global criminal enterprise. The British heavy industry of the 1970's became inefficient and unsustainable and had to collapse. The current financial industry, having been turned into a classic ponzi scheme - is also unsustainable and will collapse. The longer the governments support it, the more spectacular the eventual collapse will be.

The financial nomenklatura

The Occupy London protesters should focus on demanding the prosecution of the financiers under the existing laws, as fraud was committed by thousands on a global scale. Instead they are more concerned with old style left-right debate: capitalism as evil and socialism as salvation. This is irrelevant. Capitalism exists no more. It was replaced by a giant fraud enterprise akin to the old communism system. Communism for the rich that is.

In the Soviet style communism, which collapsed in 1989, the ruling class, nomenklatura, did not own capital. These apparatchiks were purely beneficiaries of running the countries. They had no long term interest in managing the countries wealth properly but in deriving short term benefits for themselves. Profits belonged to the few and losses were suffered by many. The capital was owned by the entire societies, and the entire societies suffered the consequences of the mismanagement and thieving of nomenklatura.

Very similarly now, to a great extent, the bankers and financiers do not own banks and financial institutions. They are owned by pension funds, saving policies and endowment policy holders, and even by governments and taxpayers. Effectively, the tax-paying middle class who saves and invests owns the financial industry which is in turn under the management of the bankers and financiers, the nomenklatura of the 21st century. And, like in the Soviet style communism system, these financial apparatchiks are not accountable to anybody but only interested in short term gains and squeezing as much as possible from anyone who has any money and cannot escape: by and large middle class taxpayers.

Heading for a meltdown

In the 1980's some reformers tried to make communism work better. They failed abysmally as they could not change the pathological habits and practices that had been instilled. No doubt there are reformers now, like Dr Vince Cable, who try to reform the current version of communism (for the rich). But the reformers have little joy. It looks clear that the financial system, like the old communism before it, is heading for a meltdown.

Whether this meltdown will take the shape of the Czechoslovakian "velvet" revolution of 1989 or, as in Romania, a far uglier version, only time will tell. Both are still optimistic scenarios nevertheless. The financial crisis that had started with the Wall Street collapse in 1929 ended up ten years later with the World War Two. It is impossible to tell whether history will repeat itself. But considering carefully the scale of the current financial crisis and the way it is managed by the world leaders, there is no particular reason to feel overly optimistic.

7 comments:

  1. Please elaborate on the link between the 1929 crash and WWII. If I understand your statement "The financial crisis that had started with the Wall Street collapse in 1929 ended up ten years later with the World War Two" you're implying that the financial crisis lead to WWII. However if memory of my high school history serves me right - it was the huge reparations demanded of Germany by the victorious allies after WWI that lead to the bankrupting of Germany and out of the economic chaos in Germany rose Hilter. Is that not correct?

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  2. Hi Skopq,

    Many thanks for commenting on my article.

    I would add that, in the 1930's, Hitler and the German elite came to the conclusion that it would be cheaper for them to kill the creditors (prepare for the war and win it) than to pay them off. But Germany was also a part of the global economy at the time, a significant country trading with others, and indeed it did not act alone. It was a part of Axis Powers (Germany, Italy, Japan and a number of others not that frequently mentioned).

    I could not explain in a brief article, and even in this much shorter comment, on the web of relationships that linked the global financial situation at time with the outbreak of the WWII. And for that reason I wrote in a way that does not imply direct and 100% causality in every aspect (as indeed it would be a bit too far) of the process starting with the 1929 Wall Street crash and ending with the beginning of the WWII. In fact I do not believe it was a deterministic process at the time. (And there were many situations when it could have been averted. But this is another big subject of writing an alternative history.)

    Please read my observation again:

    "The financial crisis that had started with the Wall Street collapse in 1929 ended up ten years later with the World War Two."

    Please do not put more semantic to this sentence than it is in it. It means exactly what it states.

    Best

    Greg

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  3. When you say elected politicians are not to blame I would point you to this comment that I have lifted from James Delingpoles blog.

    solterrasa

    12 hours ago
    That is incorrect. The Sub-Prime lending that lead to the banking crisis was in fact implemented in the 1990s by a Democrat controlled US Congress under a Democrat US President, changing the rules that controlled the government owned Freddie Mac and Fannie May lending institutions. By requiring those organisations to lend to people who would previously have not qualified, or in siutations that would previously have been rejected, all in the name of allowing greater equality of outcome in the housing market, other banks were forced to do the same to compete, and so we got to where we are today.

    Had the banks not been forced by the Democrats to compete with the government owned lenders giving out cheap and unsustainable loans, the crisis would most likely never have happened. And house prices would probably be lower.

    This is not a failure of right wing ideology at all, instead it is a failure of left wing interference in safe banking practices.


    this to me says that political interference in banking had a lot to do with the outcome.

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  4. Hi Maturecheese,

    Thanks for your comment. Let me clarify: I do not think I stated that the elected politicians are not to blame. What I stated was that quite often elected politicians and financiers are the very same people (bankers who turned into politics or politicians planning to embark on career in the financial industry). As you can expect to make more money by far in finance than in politics you can now consider issues such as probity, integrity and conflict of interest when you are subjected under lobbying by the financial industry. So in this sense elected politicians are clearly to blame.

    Furthermore, from psychological standpoint, many politicians are also like African child soldiers whose urges are satisfied by their contacts with the big and rich world of finance (private yachts, jets, islands, etc.) Hence it is a bit like with African child soldiers who are too blame for what they are doing but if you want to eradicate the problem you have to eliminate adult commanders who control these child soldiers.

    I hope it is clear.

    Best, Greg

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  5. WWII was started when the UK offered a war guarantee to Poland to protect a piece of land (Danzig) which Chamberlain believed to rightfully belong to Germany so forget all the "Hi(story)tler Channel" crap. Those documentaries have turned WWII into a religious cult for the 20th and 21st century Godless.

    What IS remarkable however, is how Germany turned its economy around between 1932 - 1935. The question to ask is how? If you can find the answer, without relying on your secular religious cult (WWII propaganda), then you might be on to something.

    If not, then don't bother posting as the "Hitler Channel" will do it better than you anyway.

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  6. Communism for the rich and use of socialism to protect capitalism. The world is becoming a strange place.

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  7. Hi Sadie Vacantist

    For some the WWII was started in the beginning of 1938 with Anschluss (Germany's annexation o Austria). For others with Germany's partition of Czechoslovakia in 1938 - 1939. For other, especially many Russian, with Germany's attack on the Soviet Union in 1941 (as till then Soviet Union was Germany's ally). I think you take a bit too simplistic approach: WWII was not declared with an announcement that "WWII is starting right now" but it was a series of conflicts that encompassed many countries in the world that developed in time.

    But generally I think you try to read too much into what I wrote about WWII parallel.

    Best, Greg

    ReplyDelete