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?".

Saturday, 13 February 2010

"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.

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