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?".

Tuesday, 31 July 2012

Greg Pytel: Below rock-bottom


We may have thought in the last four years that the financial industry reached rock-bottom. But in the last couple of months we clearly heard knocking from below and it looks the financial industry will fall even further.

First a well-known for years industry practice of LIBOR interest rate rigging was found its way to the mainstream media as if it was something out of ordinary. This is the logic of the financial industry, especially in the City, and it is inconceivable - at least to the author of this article but everyone has to make his/her own mind - that The Economist did not know it when they were publishing "Save the City" article.

Then there were comments and explanations from Barclays Bank which - for some reason - was singled out in the LIBOR scandal. Price or financial rate rigging of any sort is wrong in any circumstances under free market principles. It is dishonest. The only kind of rigging which is the exception from this rule is by regulation. But regulation is not an ad-hoc decision of a banker, politician or bureaucrat but an effect of a transparent democratic process safeguarded by the clearly defined regulations. It is hard to believe that those who were involved in or knew about LIBOR rigging did not understand such basics.

We also heard news about HSBC involvement in drug money-laundering and mis-selling of complex financial products. It provided more examples that the financial industry has degenerated into a primitive fraud machine based on deceit. Before the end of 2008 each of this news would have been a massive scandal. These days we all seem to accept that this is how the financial industry works.

The mainstream media do not even dare to discuss the underlying cause of the current financial mess, the real engine of the fraud machine, which is bringing the western economy down. It is worthwhile to look into it again and how it works.

Cautious conclusions, based on other fraud investigations, indicate that a bunch of quite (not that) clever financiers changed the banking system practice from "fractional reserve banking" (i.e. lending with loan to deposit ratio below 100%) to, what the author of this blog called, "depleting reserves banking" (i.e. lending with loan to deposit ratio above 100%, which technically and legally is a pyramid scheme).

"Depleting reserves banking" rather than accumulating cash reserves at every deposit – loan cycle, depletes them. To cover this up a lot of instruments and methodology were invented (so-called "financial innovations") giving an illusion that whilst banks' reserves were rid of cash they somehow still had the reserves to cover for cash liabilities. This has nothing to do with whether cash is a paper or electronic record, but who is the guarantor of liability. Cash is guaranteed by a state. This is the key to understand this crisis: whilst capital reserves appeared to have been sufficient at the start of this crisis they collapsed in value as there was no sufficient cash on the market and only a state intervention prevented the financial system from a melt down.

"Depleting reserves banking" practice, peddled by fraudsters, need an army of incompetent "professionals" to run it. Incompetent to such a degree that they did not understand that this was a crude pyramid scheme that was bound to collapse. Hence a huge bunch of history, anthropology, other social sciences and, importantly, lawyers were employed as banks executives to execute heist designed that way. Typically these people's career in banking was very often based on hang-ups. A huge majority of them were very poor in maths in school and banking environment gave them a sense of massive self-importance. They became "masters of the universe" whilst many of their friends who were so much better in science at school were left behind in pretty poorly paid and mundane engineering jobs.

This mechanism was very important to the heist organisers. It created a mindless and incompetent army of financiers, like child soldiers in Africa. It also built a massive lobbying army protecting heist organisers from criminal consequences. This mindless lobbying army was also strengthened by the senior politicians who were given City jobs after the retirement. It is rather impossible to lock up thousands of influential thieves, most of whom did not even understand they were stealing. A lot of them still believe they were"creating value". Psychologically it is like prosecuting child soldiers in Africa. However this time we deal with the adults who should have known not to do jobs they were not suited for. Like a butcher should know that he cannot operate on humans: even taking appendix out which is a trivial surgical operation.

Is it then surprising that the UK economy is suffering from recession again, so-called a double-dip? Most politicians and mainstream media commentators appear to be surprised. This "double-dip" is a simple and easily predictable result of the way the economy is managed. Its is actually quite surprising that the recession is not even deeper. Are politicians playing stupid or are they really THAT stupid?

11 comments:

  1. A comment from Interested observer (that I deleted by mistake):

    Greg,

    I don't believe we can keep on saying that we are surrounded by incompenents and thieves for 4 years with no change. Its clear that no one in power wants to end this system as its keeps them and their families in a higher standard of living than the general population. Is highlighting the problem enough anymore? We know that politicans, media and bankers are colluding to prevent the population moving to any type of new monetary system. I just hope someone doesn't come along promising the world on a platter with great oratory skills a la 1930s

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    1. Highlighting the problem is not enough. But someone has to do it. It is interesting that you mention the 1930's. I think there is a significant risk that the history will repeat itself. In the same way as the financial crisis that started in October 1929 ended with the World War 2 ten years later, it looks increasingly likely that we are currently heading for something big, even bigger as in 1939 nuclear weapons were not around. The politicians are completely oblivious to such risks (which are so obvious to anyone who knows basics from history). Intellectually they appear incapable of understanding it.

      Best, Greg

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  2. Surely these QE plasters that politicians & central bankers alike are liberally applying to every economic illness - do themselves, follow a law of diminishing returns?

    If I give a gambler money to pay off his debts and he just uses the money to gamble his way into further debt, who am I kidding that absolving him of responsibility will works *next time*.

    They just seem to be repeating what Gordon Brown did in the first place, rather than trying to prevent & reverse a collapse proper, just push it forward in time enough so that hopefully it happens under someone else's watch.

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    1. If not for QE in Britain, we would have been in far worse shape than the euro zone in terms of liquidity. QE is a public debt issued by stealth. (QE gives the banks free cash, this is what the European banks do not get.) But QE has its massive costs. For example the concept of saving a pension is gone as no one in his (or her) right mind would ever consider paying into a pension scheme). And what happened to annuities? QE is also storing problems for the future: printing money never works. The question is when it is going to blow up, i.e. when the so-called "financial markets" come to a conclusion that it is time to cash out on the UK. And it is likely to be big.

      Best, Greg

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    2. Well this is kind of what I mean, you can either try to put the fires out and deal with the terrible result and rebuild, or keep fuelling it an ensure everything burns beyond repair in the long run.

      In a system where, due to numerous factors, too high a percentage of disposable income became apportioned to banks, I do not see how giving money directly to them to further tip that balance (especially with the inflationary pressures that come with it) - was ever a good idea.

      I'm sure it is very outspoken and unpopular to say, but I simply do not believe the end game of any of these actions will result in a better outcome compared to allowing collapse in the first place, instead they are just pushing it to the future and ensuring the inevitable collapse is all the more devastating than it would have been had it been dealt with differently.

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  3. Fractional Reserve Banking works fine at the start of a credit cycle when real world opportunities exist as a result of innovation and new energy/production sources. The fundamental problem (and Governmental Quid Pro Quo) is that the monetary excess store of value is a Government bond (debt), which is NOT a true balance sheet asset. This is the true deception and one that is exposed at the end of a credit cycle (as now).

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    1. Hi Brian

      Depleting Reserve Banking (which is what the banks are currently doing) is infinitely riskier (it is a pyramid scheme from technical and legal perspective) than Fractional Reserve Banking (which could be very risky and I agree with your comment). Check up this:

      http://gregpytel.blogspot.co.uk/2010/03/computational-complexity-analysis-of.html

      Best wishes

      Greg

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  4. My question is: how long can they keep it up? This is the crucial thing. When does it all come to a grinding halt?

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    1. Hi Schweik

      It took ten years to bring to a halt the crisis that started in 1929 (that crisis ended with WW2). No idea this time, but it is unlikely to go on forever.

      Best, Greg

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  5. libor fraud announced just before the Olympic games- how convenient,a?

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    1. Hi Mishoni

      Indeed very convenient. But it still may not help. See my next post: "Guantanamo Camp: a new lease of life?". Thanks for inspiration.

      Best, Greg

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