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.)