This post should be beneficial to those who struggle to understand qualitative and quantitative difference between lending with loan to deposit ratio below 100% and above (or equal) 100%.
A portal "Whose money?" published comments to my article "The largest heist in history". The comments were as follows:
"Whose Money? says:
This is a very interesting explanation of what has gone wrong - and the reference to assets hived off by Northern Rock suggests that those responsible for the present breakdown took great care to look after their own interests as their tampering caused the pillars of the debt-based financial system to come crashing down on millions of trusting people.
Mr Pytel, however, still believes that "if administered properly" the present reliance on debt to provide us with all of our non-cash currency "serves the economy and public at-large very well".
We disagree. The history of repeated risk-taking by banks in search of extraordinary profits suggests that there is no chance of ensuring stable underpinnings for the productive economy until we stop relying on private, profit-making businesses - which naturally have their own, very different, priorities - to provide the nation with its means of exchange and distribution.
Reliance upon continuous, and ever-increasing amounts of borrowing to keep money in circulation does not work. Again and again the alternation first of excessive, then of inadequate lending has led to boom and bust. Moreover, the productive capacity of the nation is distorted when bank lending favours money-making schemes over those which would actually increase the sum of real wealth.
It's time for a fundamental examination of how the economy works, and how best to provide it with money, with the aim of maximising beneficial production and spreading prosperity."
In response the following letter was sent to “Whose money?” Editor:
"Sir
I do appreciate publication of my article "The largest heist in history" ("Financial crisis? It’s a pyramid, stupid.") http://www.freewebs.com/whosemoney/newsandcomment.htm However I wish to point out to you that your comment below my article suggesting as if I were advocating "reliance upon continuous, and ever-increasing amounts of borrowing" is incorrect. I also completely agree with you that it would not work.
Let me recapitulate as it seems that you missed a critical technical point of lending:
1. With loan to deposit ratio (L/D) below 100% you do not achieve "continuous, and ever-increasing amounts of borrowing". Example,
- L/D = 90% gives you maximum £10 of debt for every £1 in circulation
- L/D = 75% gives you maximum £4 of debt for every £1 in circulation
- L/D = 50% gives you maximum £2 of debt for every £1 in circulation
- L/D = 25% gives you maximum £1.33(3) of debt for every £1 in circulation
- L/D = 0% gives you maximum £1 of debt for every £1 in circulation (no money creation)
2. With loan to deposit ratio above (or equal) 100% you indeed have "continuous, and ever-increasing amounts of borrowing" i.e. it can happily go to infinity. And very fast indeed if above 100%. This is what is at the root of the current crisis. This is what I am strongly against. Indeed it is a crime called a pyramid scheme.
The history shows that lending with loan to deposit ratio between 75% and 90% can be used to achieve healthy growth (and it does not bring about "continuous, and ever-increasing amounts of borrowing"). Occasionally it can be higher or lower: it should be controlled in the same way, as interest rates depending on economic conditions. Here there is a room for a debate.
You simply seem to argue for L/D = 0%, which I believe is going into extreme. (It is like assuming, that since every human can eat half a kilo potatoes a days, the world should grow that amount. Once you grasp this parallel you will understand that we have to live with an element of statistical approach, as otherwise it will be ineffective.) I will add that lending with L/D approaching 100% can also cause massive problems.
Lending with L/D above 100% is crazy and indeed a crime.
I believe you should be able to distinguish these two diametrically different scenarios: L/D below 100% and above (or equal) 100%. Lumping them under one description "continuous, and ever-increasing amounts of borrowing" is simply incorrect.
However I believe that not only did bankers behave irresponsibly or in a greedy way, but they were acting illegally and dishonestly. That is why I am calling for criminal investigation to the causes of the current crisis and prosecutions.
Please publish this letter below your comments to my article.
Yours sincerely
Greg Pytel
A portal "Whose money?" published comments to my article "The largest heist in history". The comments were as follows:
"Whose Money? says:
This is a very interesting explanation of what has gone wrong - and the reference to assets hived off by Northern Rock suggests that those responsible for the present breakdown took great care to look after their own interests as their tampering caused the pillars of the debt-based financial system to come crashing down on millions of trusting people.
Mr Pytel, however, still believes that "if administered properly" the present reliance on debt to provide us with all of our non-cash currency "serves the economy and public at-large very well".
We disagree. The history of repeated risk-taking by banks in search of extraordinary profits suggests that there is no chance of ensuring stable underpinnings for the productive economy until we stop relying on private, profit-making businesses - which naturally have their own, very different, priorities - to provide the nation with its means of exchange and distribution.
Reliance upon continuous, and ever-increasing amounts of borrowing to keep money in circulation does not work. Again and again the alternation first of excessive, then of inadequate lending has led to boom and bust. Moreover, the productive capacity of the nation is distorted when bank lending favours money-making schemes over those which would actually increase the sum of real wealth.
It's time for a fundamental examination of how the economy works, and how best to provide it with money, with the aim of maximising beneficial production and spreading prosperity."
In response the following letter was sent to “Whose money?” Editor:
"Sir
I do appreciate publication of my article "The largest heist in history" ("Financial crisis? It’s a pyramid, stupid.") http://www.freewebs.com/whosemoney/newsandcomment.htm However I wish to point out to you that your comment below my article suggesting as if I were advocating "reliance upon continuous, and ever-increasing amounts of borrowing" is incorrect. I also completely agree with you that it would not work.
Let me recapitulate as it seems that you missed a critical technical point of lending:
1. With loan to deposit ratio (L/D) below 100% you do not achieve "continuous, and ever-increasing amounts of borrowing". Example,
- L/D = 90% gives you maximum £10 of debt for every £1 in circulation
- L/D = 75% gives you maximum £4 of debt for every £1 in circulation
- L/D = 50% gives you maximum £2 of debt for every £1 in circulation
- L/D = 25% gives you maximum £1.33(3) of debt for every £1 in circulation
- L/D = 0% gives you maximum £1 of debt for every £1 in circulation (no money creation)
2. With loan to deposit ratio above (or equal) 100% you indeed have "continuous, and ever-increasing amounts of borrowing" i.e. it can happily go to infinity. And very fast indeed if above 100%. This is what is at the root of the current crisis. This is what I am strongly against. Indeed it is a crime called a pyramid scheme.
The history shows that lending with loan to deposit ratio between 75% and 90% can be used to achieve healthy growth (and it does not bring about "continuous, and ever-increasing amounts of borrowing"). Occasionally it can be higher or lower: it should be controlled in the same way, as interest rates depending on economic conditions. Here there is a room for a debate.
You simply seem to argue for L/D = 0%, which I believe is going into extreme. (It is like assuming, that since every human can eat half a kilo potatoes a days, the world should grow that amount. Once you grasp this parallel you will understand that we have to live with an element of statistical approach, as otherwise it will be ineffective.) I will add that lending with L/D approaching 100% can also cause massive problems.
Lending with L/D above 100% is crazy and indeed a crime.
I believe you should be able to distinguish these two diametrically different scenarios: L/D below 100% and above (or equal) 100%. Lumping them under one description "continuous, and ever-increasing amounts of borrowing" is simply incorrect.
However I believe that not only did bankers behave irresponsibly or in a greedy way, but they were acting illegally and dishonestly. That is why I am calling for criminal investigation to the causes of the current crisis and prosecutions.
Please publish this letter below your comments to my article.
Yours sincerely
Greg Pytel
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