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?".

Friday, 4 June 2010

A short tale about a Bailiff and a Good Man (or a brief history of the current financial crisis)


Once upon a time, in a village, a Bailiff lived. He was irresponsible, greedy and whilst he was good in collecting other people's money he was not that that good in managing his business. So the Bailiff himself ended up in a deep, deep debt.

In the same village, at the time, a Good Man also lived. The Bailiff pleaded with the Good Man:

- please lend me some money, a lot of money or otherwise I will go bust. And if I go bust then the whole village will go bust as the debtors will be able not to pay their debt. You have to save me, you have to "save the world".

The Good Man was a… good man. Just that. Not necessarily wise. He turned to Bailiff's friends in the village for advice. They all told him:

- you must help the Bailiff or otherwise our village will collapse. You must "save the world".

The Good Man was not wise. That's why he was not rich either. A simple hardworking man. He did not have his money to lend. So he went to a local Bank. He put all his possessions, all what he earned and inherited, as security. He pleaded all his future income. He borrowed as much as he could. He invested them in the Bailiff's business. That was just enough for a short time as the Bailiff's debt was so huge. The Good Man was even proud and bragged that he "saved the world". But only just and for a short time.

In the meantime the Bailiff was paying himself a handsome salary. The Good Man, being under pressure from his family, inquired whether he could get more in repayments. He also suggested that it was rather unreasonable for the Bailiff to pay himself so much whilst he was in debt.

The Bailiff said to the Good Man:

- you are paying for my great talent as a bailiff. This talent is worth all that and more. If I have to stop paying myself that much I would leave the village and will find a job somewhere else. And the village will collapse.

Being not that wise, rather too optimistic about his income and having underestimated his financial commitments, the Good Man overborrowed. The Bank realised that he would not be able to pay back his debt. The Bank eventually got very anxious and decided to sell the Good Man's debt to a local Loan Shark. The Loan Shark, who knew all the tricks of the trade, decided to make a mint out of the Good Man. That's a loan sharks’ business after all. He started sending demands to the Good Man, making him pay as much as he could. And more. The Good Man was starving. His family was starving. And paying. But his debt kept on increasing with penalties for late payments, additional sky-high interest, administrative charges, etc.

To enforce his "rights" and collect as much money as possible from the Good Man the Loan Shark hired… the Bailiff. And the Bailiff was thriving proving to be a man of many talents indeed.

======

For those who still not get it:

1. The Bailiff are the financiers and bankers (especially investment bankers).

2. The Good Man are taxpayers (represented by our democratically elected governments).

3. Friends of the Bailiff are all kind of consultants and advisors that work for governments.

4. The Bank are the financial markets.

5. The Loan Shark are the hedge funds, offshore funds and many shadow banking institutions.

6. The Good Man investment in a Bailiff's business is called "stimulus package".

7. The Good Man costs cutting and saving to repay the loan to the Loan Shark is called "austerity package".

… and so on.

14 comments:

  1. Dear Sir

    I got it the moment they bailed out the banks, the question is, how will this be corrected? There appears to be no capability to arrest and charge banks for running pyramid schemes, particulary when they are based on the housing market, which most people have a heavy stake in.

    We all know whats been going on, but the authorities appear to be unable to bring the culprits to justice, or provide an alternative system. In the meantime, the fallout continues to grow.

    ReplyDelete
  2. Indeed we are being fleeced by the financial industry in the same crude, primitive way, but on far larger scale, as Albanians were fleeced by their own gangsters in 1996 - 1997. In Albania, many of those gangsters got prosecuted.

    I think we should all make representations to our democratically elected representatives, the MP's. If they, in their hundreds, got the representation from hundreds of thousands, if not millions, protests from us (against being robbed) they would pay attention.

    Otherwise we may just resign to continue being fleeced. The next generation will be used to it. So the largest heist in history will continue.

    It's really up to us.

    Best

    Greg

    ReplyDelete
  3. i like it. simple. a clear analogy. i will share :)

    ReplyDelete
  4. nice little story. But tell me...anyone if you can. Where the hell does the "money" thats moving around the world come from? You work, your boss pays you. Where does your boss (or any other company/business) get their money from? You get my drift? keep following the money trail and you will never find the real source, it's all a big con by the big greedy "new world order" to keep us mere mortals down and in our place. Read Naomi Klein's "SHOCK DOCTRINE" but be warned, its not good news and it'll make your blood boil.

    ReplyDelete
  5. Hi sledgegulper,

    this is explained in my post: http://gregpytel.blogspot.com/2010/03/money-creation-and-circulation-economy_13.html (please note that the volume of money on the market that circulates in the economy is increased by central banks/governments through open market operations).

    Actually fiat money in itself is not a big con. Like almost anything in life with commercial aspect it is risky (but traditionally the risk was managed effectively) and it may be turned into a con (being presented as a legitimate commercial failure, materialisation of the risk). This is what happened in the run up to this financial crisis.

    Your argument helps criminal bankers. You are not going to win an argument that a commercial risk has to be eliminated. It is impossible. Your argument gives a cover to bankers who say that their crimes were actually legal actions that failed and some, like you, do not like them in principle.

    Best Greg

    ReplyDelete
  6. To add to my comment above: because of acts of robbery we do not conclude that it is a failure of the concept of private ownership. We prosecute robbers. By the same token, this crisis was caused by criminals (by operating a global pyramid scheme), hence we should not conclude that it is a failure of free market and fiat money. Quite the contrary this crisis is a result of abusing these concepts in the same way as robbers abuse the concept of private ownership. Therefore rather than criticising free market and fiat money we should prosecute pyramid purveyors, bankers, financiers, regulators and politicians who helped them (in the same way as Albanians did with their criminal lot who perpetrated the same crime albeit on much smaller scale in 1996 - 1997).

    ReplyDelete
  7. The banks loaned the money to people to buy the houses in the first place. The banks had a presence in the market place (thru mortgagees) that helped push prices of homes stratospherically high. So isn't this the pot calling the kettle black?

    After all said and done if you were a home owner with a profit on the home (home loan) you bought, that was okay right? The bank got paid off when the sale of said garnered profit was realised. The reverse of which is where we all now find ourselves.

    I am not a banker but I suspect it was MAD (Mutually Assured Distruction) of all parties involved. So now we should all look in the mirrors tomorrow morning and say we were all part of the people gaming the system, only that when the music stopped, those that found seats walked away with a profit.

    Alas I suspect a lot more of us will not walk away with a profit this time around..

    JM

    ReplyDelete
  8. Hi JM, this would be correct if customers were responsible for ensuring proper banking practices (like relevant lending parameters). The fact the bankers scam suited many people for so long simply prolonged the scam. Nothing new: same thing happened in Albania in 1996 - 1997.

    Best

    Greg

    ReplyDelete
  9. The root of the problem is the global bubble of baby boomers now retiring who need "secure income" in retirement. Banks were meeting this demand by selling packaged mortgage products.

    Pensioners still need spendable cash. If it can't be obtained from the natural income from investments then they will have to disinvest and spend capital. This is the next phase as wealth destruction takes over.

    ReplyDelete
  10. Dear Dr Haywood, the point I would make to your comment is that I agree that "Banks were meeting this demand by selling packaged mortgage products". However these products were in fact based on a classic pyramid structure (same stuff happened in Albania in 1996 - 1997).

    That's why whilst the general conditions (government decisions, people demands, etc.) played an important role, it still does not absolve the banks for operating a scam (a pyramid scheme). When a mad gunner killed many people a few days ago in Cumbria we know by now that there were conditions that, very likely, motivated his action (tax investigation, "unjust" will). Yet no one dares to excuse the killer. The same reasonable argument about who is to balme must be applied to a financial industry.

    Best regards

    Greg Pytel

    ReplyDelete
  11. Hi Greg

    I agree. The Ponzi Scheme will collapse in the near future and this could occur in a matter of hours if there is a contagious run on the Banks. A possible scenario is explained here

    U.K. Faced ‘Bank Runs, Riots’ as RBS and HBOS Neared Collapse http://www.bloomberg.com/apps/news?pid=20601087&sid=aMfETcYI2t7Y


    Despite the immense implications of a “financial meltdown” this Bloomberg article is the only mainstream piece I have come across in 18 months, which describes what happens in the event of a financial meltdown. Why is there a dearth of official information on this subject?
    We should be building lifeboats by formulating survival and resilience plans.

    ReplyDelete
  12. Greg here shows a useful image of what has been going on and continues to go on - the result now is increasing - and ultimately unrepayable sovereign debt. I agree that in reality we are dealing with a criminal scam in its nature.

    However - this scam is now so large and so pervasive - even the wealthiest states (ie Germany) are preparing to cut back and force austerity on their populations.

    Mike Haywood points to descriptions of terrifying scenarios post meltdown - and there is no shortage of Tin-Foil-Hat Mad-Max type prognoses out on the net.

    However my question is this.

    Anyone who thinks about it knows that this debt will never be paid back - so more debt in the form of bailouts is added as that is the only response anyone seems to know to make.

    That is really a rather panic response.

    Is it not possible to look into the eye of the beast - realize that the whole edifice has to come down - and to plan for a post-meltdown future which avoids apocalyptic scenarios?

    Any politico or morally-minded individual in a position of some power who understands this, speaks out openly and gathers an international consensus - will surely be rewarded in the (not so) long term?

    ReplyDelete
  13. I see the following scenario (1-3 years)

    Countries impose austerity packages

    Consumption falls - unemployment rises - taxes fall

    Sovereign debt increases

    More austerity

    Huge numbers of people (mainly disgruntled middle classes) gather on the Net via blogs and forums & form an international action group.

    Action group pressurizes governments.

    Pressure increases.

    Bright sparks in power take note and works with action groups.

    Financial system transforms - legal tender abolished and new lets-type systems become legal everywhere deal with B2B and peer2peer exchanges of goods and services.

    Vast social changes - fall of capitalism as we know it.

    It happened in 1989 in Soviet Russia - but it needs someone with Gorbachev`s wisdom to start the process.

    ReplyDelete
  14. Great article Lot's of information to Read...Great Man Keep Posting and update to People..Thanks
    Asus Laptop

    ReplyDelete