Putin says US no better than Greece in handling debt

For once, Vladimir Vladimirovich Putin has nailed it. The author of this blog would not venture to suggest that Vladimir Vladimirovich is its posts reader, in particulat "Default: Greece first then US?" However the world should pay attention and consider "a US way out" as a real possibility.

Comment to ”The largest heist in history”

The sheer power to blow up the banking system of lending with Loan to Deposit Ratio greater than 100% is all too obvious. If we look at this mechanism ("The largest heist in history", or more rigorously in "Loan to deposit ratio and banks liquidity") which is an exponential growth of balance sheets (credit expansion), we easily realise that even if just one small bank in the financial system started doing that, it would still blow up the banking system by causing systemic liquidity shortage (credit crunch). It does not matter at all what exactly this bank would be doing: borrowing on the wholesale money market, issuing bonds, collateralising and selling its loans, etc, as long as it kept on lending with Loan to Deposit Ratio greater than 100%. The reason being, that if the financial system were not to be blown up, i.e. not suffer the liquidity crunch, the Money Multiplier could have grown to infinity in a very fast, exponential pace as a result of growth to infinity of the balance sheet of this bank. I.e. a single dollar of cash would be sufficient to ensure liquidity of any number (up to infinity) of dollars of this bank’s obligations on its balance sheet.

It is somewhat incredible that almost all analysts, commentators and, most importantly, those responsible for the financial system still ignore that. It is obvious that many are unable to comprehend it: "difficult maths and all that". But this process is simply too trivial. Therefore it is impossible that almost ALL decision makers in the financial industry are genuinely so incompetent that nearly none of them can understand it. Therefore it is very likely that they deliberately engineered such lending with Loan to Deposit Ratio greater than 100% in order to construct a giant global pyramid scheme designed to fleece the system of cash, like Albanian gangsters in 1996 – 1997.

Additional note:

Of course it seems rather implausible that, in practice, if only one small bank started lending with Loan to Deposit Ratio greater than 100% it would have been allowed to do so for long by its competitors. Basically such bank would have grown very fast from a small bank to a very large one and, ultimately, to the largest bank in the world many times over (technically up to infinity) its nearest competitor. And this would not have gone unnoticed. Other financial institutions, which in such system are necessary to co-operate in this process, for example, through wholesale money market, would most likely have stopped it.

(Incidentally, during the time leading to the current crisis, we saw such massive growth of small or medium size banks: Northern Rock, Royal Bank of Scotland.)

We saw prior to the current financial crisis, which was the sufficient cause of it, other banks simply joining in and also starting lending with Loan to Deposit Ratio greater than 100%. As such process became acceptable and widespread it turned the financial system into a giant global pyramid scheme. Before its collapse in the second half of 2008, it looked like an unprecedented growth of the financial sector: but it was nearly all bogus and was bound to collapse spectacularly like pyramid schemes in Albania in 1996 – 1997. Inevitable and easily predictable: no benefit of hindsight needed.

(Please note that lending with Loan to Deposit Ratio greater than 100% was the sufficient, on its own, cause of the current financial crisis, i.e. it guaranteed it. However it is possible that it is not the only problem of the financial industry.)

"Financial risk" - The Economist video

After a year and a half since the financial crisis errupted The Economist published the video on their web site titled "Financial risk" that touches upon the causes of the crisis.

It is pretty good, but still some way short of being adequately informative. Two key points are missing:

1. The author of the video does not explain why in the crisis the spread between the prices of Treasury bills and LIBOR grew to "unimaginable" levels and all, what he called, "assets" slumped together in a correlated way. It is obvious and it was easily predictable: in multiple deposit creation process with Loan to Deposit Ratio greater than 100%, the Money Multiplier keeps growing to infinity at exponential pace (very fast) and the risk of liquidity shortage (i.e. "credit crunch") becomes 100% in a finite time: in practice it means that in the presence of cash shortage banks cannot be lent money as the risk of not getting them back is very high and all assets dramatically lose value as there is not sufficient money going around to pay for them. What appears on the video to be discoveries were, in fact, trivial to predict prior to the crisis by any competent financier, i.e. with rudimentary knowledge of mathematics.

2. Considering the above the author of this video should have clearly stated that banks should accumulate cash to restore their capital reserves rather than strictly non-cash instruments/products. Otherwise the banks and the video author may get a nasty surprise that their capital might become little worth toxic junk if another liquidity shortage happens again. And it will happen again if banks continue to generate credit with Loan to Deposit Ratio greater (or equal) 100%.

Bearing these two points in mind, the video is worth watching. It clearly justifies the pyramid model of the current crisis presented on this blog.

Default: Greece first then US?

Yesterday Professor Joseph Stiglitz stated on BBC Newsnight, in response to a suggestion resulting from "speculators" (i.e. money markets) behaviour that Greece might default on its debt:

"The absurdity of these speculators is illustrated by what's happening in the United States: the spread, the CDS', the bets on a default in the US government are going up. Does anybody believe that US government is going to default?

The fact that US government can print money, you can bet [on it], or whether there is inflation. But to bet on a default in the US is utterly absurd." [Starts at around 13:25 into the programme.]

With the greatest respect to Professor Stiglitz, I would not dismiss the "speculators" behaviour that easily as "absurd". They are not poor people working in an irrational way. In the past their behaviour was a really good sign of the forthcoming events (including governments' intentions). Do we remember how the Bank of England was building the "firewall" in September 1992 to protect the pound and how it eventually ended? And who made and who lost the money? That what the Germans appear to be doing now. Good luck to them! To answer Professor Stiglitz' question directly: "Does anybody believe that US government is going to default?". The author of this blog believes that there is a realistic risk of this happening, growing with every dollar borrowed by the US government. For more read "A US way out?"

New Labour: could it have been worse?

In today's Daily Mail Mrs Margaret Cook, the wife of late Robin Cook, the Leader of the British Parliament House of Commons who resigned in protest against Iraq War in 2003, wrote a tribute to her late husband for taking such stance. Anyone who follows British politics knows how hard, for personal reasons, it must have been for her to do so. And how sincere and reflective must it be. Be in no doubt, despite having been in a shadow of her late husband, Mrs Cook is an intellectual in her own right.

Mrs Cook expressed her take on the ongoing Chilcot Inquiry into the circumstances of the Iraq War in 2003. She wrote:

"Wriggle and obfuscate as they have done at the inquiry, those former ministers and aides who have given evidence have only been able to cover their backs partially.

For we now know that they either followed blindly and willingly into the conflagration or they saw the folly, but failed to speak out.

Some have pleaded that, in retrospect, they made 'honest mistakes'. For people in high and responsible places, there is no such thing."

Many believe, including all eminent international lawyers including Mr Philippe Sands QC, that starting the Iraq War was not only a "folly" (which has been obvious without any benefit of hindsight) but also a crime. Mr Jeremy Paxman remarked on BBC Newsnight, that – apart from "Tony's mates" like Lord Falconer - he could not find any lawyer prepared to argue for legality of the Iraq War. By lawyers' standards there are almost always arguments "for" and "against" in any case. Therefore this amounts to quite a conclusive judgement.

The author of this blog has argued since its inception nearly a year ago, that the current financial crisis was also caused by the crimes of financiers (and quite likely regulators and some politicians) who engineered and operated, or allowed to do so, a giant global pyramid scheme. This financial scam is designed to rob middle classes off their savings and investments and distribute it amongst individuals who effectively (not notionally like, for example, pension funds or unit trust and endowment client-investors) control the financial industry. This has already been dubbed "socialism for the rich", a somewhat natural progression for Islington and Notting Hill New Labour’s "Bollinger bolsheviks".

Calling criminals in high places criminals is a taboo. The mainstream media did not come round to a conclusion that both individuals who decided to start Iraq War as well as individuals who are responsible for the global financial crisis (through a pyramid scheme) must be held accountable for their actions in a Court of law. "Not only must Justice be done; it must also be seen to be done." Accepting "honest mistakes" of politicians who dragged the country into the Iraq War is as foolish as blaming the financiers' greed and stupidity for the current crisis. These are all not acceptable, and to some abhorrent, but at the end they are legal. Therefore this attitude of ostensible criticism by the mainstream media is designed to vent the public anger at the same time allowing war criminals and fraudsters to escape justice (and, of course, preserve their ill-gotten wealth). We should not be surprised if we even see effigies of politicians and bankers being hanged or burnt if it all helps them escaping being brought to book. Financiers will be happy to organise such events (no doubt, they will even make money on them).

Here we are now. But hopefully politicians, our democratically elected representatives, especially a new intake in the British Parliament and there will be quite a lot of them after the forthcoming elections, will take more robust view on both issues.

Spectacularly started New Labour's era of British history appears to be coming to even more spectacular end. Taking a long term perspective, 100 - 200 years after we are all long gone, and our children and grandchildren too, a New Labour period is likely to be judged as a time of crime and stupidity: Britain run by war criminals and financial fraudsters. We shall be in no doubt that future generations, who will have to pay trillions of pounds for New Labour’s rule and maintain memorials of those who fell pointlessly in the illegal Iraq War, will be too benevolent or naïve in looking for excuses.

On the election night on the 1st of May 1997, at a dawn of New Labour era many of us sang "things can only get better". And even those who did not (like this blog's author), had genuine hopes and were well-wishers. But, still going through the Iraq mess and the financial destruction, could it actually have been worse?


PS. Since this article was published, on 7 February 2010 Alistair Campbell, Tony Blair's media guru gave interview on Andrew Marr Show. Compare this interview (especially after 4:20 of the recording) with an interview he gave on 27 June 2003 on Channel 4 News (especially after 3:20 of the recording). It is quite clear there is something he is worried about. What is it? Any clues please post in the Comments section below.