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, 22 September 2009

Borrowers are bailing out the banks

Yesterday's episode of BBC Panorama, "Banks behaving badly" showed a new and growing pathology of the financial system.

Last year the government stepped in and injected a lot of money, billions of pounds, to rescue banks from inevitable bankruptcy. The government control over the banks and their practices has been illusory to say the least despite the government being a large shareholder. Nevertheless the banks are very keen on to pay back the government subsidies and get out, completely and formally, of any ownership control. The government may get under pressure from the public and be forced to act in a way that the banking industry would not like. The current tension regarding bonuses is a gauging example. Having repaid the subsidies and financial help, the banks will be able to claim that their reforms worked and the government will be able to announce a success. Therefore any further government intervention could only destroy a revival of the financial system.

This is yet another organised scam. It is as primitive scam as the one that originally led to the current crisis (which was a pyramid scheme). This time banks have massively increased the margins on the mortgages (and other loans): a difference between a rate charged by a bank on a loan and Bank of England base rate. This is designed to give banks massive profits.

The banks are repaying the debt to the government by charging the public (i.e. taxpayers) far more than otherwise they would have done. Through the government actions, taxpayers bailed them out in the first instance. This however brought about rather unwelcome, by the banks, government's ownership. Now, with the government's blessing, the banks found a way to force taxpayers, who are banks' customers, to pay for the banks getting rid of the government's ownership control.

The banks behave like sharks. Loan-sharks. Once they taste the blood they will come back for more. Even when banks repay government subsidies with money extorted from taxpayers, which is a scam, they are very likely to continue with this practice. They will keep on making massive profits: but it will not be a profit in an economic sense. Banks will acquire a right, like the government's, to tax people. In practice it is a relationship like between low-life loan-sharks and their "customers" (i.e. victims).

It is very likely, that unless the ministers are dim, the government participates in this scam. It is far better, from popularity perspective, for the government to let the banks "tax" the public to pay for the costs of the crisis than to increase taxes. It is revolting however: the former is a licence for the banks to extort money from taxpayers and enrich themselves. The latter would be a genuine tax (within the government prerogative) retaining banks' ownership in the public hands. The key is that the government can blame (already unpopular) banks for the former, whilst the latter would not be exactly a vote winner for the politician in a run-up to the elections. Effectively, through banking system the government is introducing (not that) stealth tax to pay for the costs of this crisis, additionally making the public paying for it with the rescued banks’ equity.

Apart from obvious criminality of such arrangement, like any high taxes, it will impede economic development.

1 comment:

  1. Yep absolutely right I think that you hit the nail on the head. The taxpayer is bing taxed twice over this fiasco!