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?".

Monday, 25 January 2010

Financial terrorism

Traditionally terrorism has been based on asymmetry and disproportion between terrorists' demands and consequences of their actions, which were inevitable or extremely difficult to prevent, in case their demands were not met. A demand could be of a financial nature or a request for freeing of already convicted terrorists' comrades, or some political or social demands. A threatened action was typically disproportionate either by its sheer scale, or by an outrage it was designed to cause.

During the current financial crisis banks and other financial institution started playing "the terrorists' game" with the taxpayers. It all seems to have started by accident. At first, by engineering a massive global pyramid scheme, the banks were robbed of cash and were on the verge of collapse. This threat of collapse, with unimaginable consequences, pressured governments to come up with rescue packages. Effectively taxpayers started subsiding the financial industry. This is not to say that shareholders or owners benefited from this. This was not the game of the financial establishment. The beneficiaries have been the individuals, quite a large number of them, running the financial institutions: the industry "captains" and other "top financial talent". As mentioned, they engineered pyramid schemes paying themselves massive amounts of money in the process, not surprisingly almost exclusively in cash, not some kind of innovative financial instruments. It questions whether they believed in the first instance that they were legitimate financial products or they were just designed to funnel out the cash. This led to liquidity shortage resulting in near-collapse of the banking system. The erstwhile shareholders of these institutions lost some of their holdings as governments and other investors stepped in.

The financial industry "captains" continue to play this simple game with governments. They have learnt that they are considered as "too big to fail" and governments will rescue them. Now they also terrorise governments that if they do not pay themselves generously enough the so-called "talent" might leave the financial sector. Some governments seem to accept this nonsense as they feel terrorised by a thought of a prospect of the collapse of the financial system. Sometimes it even looks like a case of a Stockholm syndrome.

The truth of the matter is that the financial system appears to be operated in an illegal way. Firstly, a situation of allowing any institution of any kind (apart from rare exceptions like an army) to grow and be considered as "too big to fail" is in breach of any competition principles. Institutions that are "too big to fail" have monopolist grip on the market as they have a free insurance against failure, underwritten by taxpayers. This stifles smaller competitors, which are not "too big to fail" and creates insurmountable costs of market entry for any prospective new players. As a result productivity decreases and the industry becomes a hotbed of business pathology. It is an absolute contradiction to any free market principles and capitalism. The anti-trust case of Standard Oil looks like a child's play. The financial system resembles the communist world from its dying days.

Secondly, the financial industry became a classic form of a pyramid scheme. As a result it is impossible to ascertain whether the recently reported banks' profits are real ones or they are bogus and are the signs of yet another pyramid collapse similar to what we observed in September 2008, January 2009 and summer 2009.

Thirdly, receiving subsidies from taxpayers, to such a massive degree as the financial system got, is considered illegal under the European Union legislation. If in the US it is technically legal, one can assume that it is only the case because such taxpayers' subsidies were unthinkable in the past. Above all, public subsidies are anticompetitive and discriminatory to businesses that do not receive them on the same scale.

It is clear that taxpayers and governments must wake up to the fact that they are being terrorised by the financial establishment. The banks must be broken into much smaller businesses. The test is that each of them must be well below the mark of being "too big to fail". Each of the banks must be capitalised by holding cash reserves belonging to individual shareholders risking their loss in cash in case their bank collapses.

The financiers, with regulators and possibly some politicians, must face justice for causing the current crisis by engineering a global pyramid scheme. The prospect of having them languishing in jail and the wealth gained confiscated must be real. This would not be an act of revenge but of elementary justice. This would also be a deterrent for the "surviving" and future financiers making them less inclined to defraud the owners of smaller banks that should emerge from this crisis. As such smaller banks would not be "too big to fail", the balance will be on the owners to employ the management honest and competent enough that would not ruin a bank. If they do not, they, as the owners, may be held at ransom, terrorised. But the taxpayers will not be.

1 comment:

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