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?".

Thursday, 13 January 2011

How banks' role changed

Traditionally the banks' role was to be a risk agent between a depositors and lenders. Banks were talking deposits and were lending them making money on the interests rate difference between the two. This process was underwritten by banks capital which was risked by banks' owners in case they ended up with too many bad loans and the bank failed. In this case banks owners lost money and possibly some depositors. So on one side there was a pressure on the banks to be careful (as owners did not want to lose their capital) but on the other as there was a large number of banks (in the past) there was competition pushing the cost down and innovation up.

For the last couple of decades the number of banks decreased and they became too big to fail. As a result they were rescued by the government. Banks are no longer risk agents (underwritten by private capital). They became public utilities, huge oligopolies, whose business is underwritten by the state. And they behave as such.

The only way to restore a proper banks' role in the economy is to do what, quite likely, Margaret Thatcher would have done. In line with principles of free market, the banks should be broken up into much smaller enterprises so no bank is too big to fail and capitalise them by selling additional share if necessary. And these banks, indeed a large number of them, should be forced to compete against one another. Depositors will be able to buy an insurance policy against failure or a state may charge a levy on banks as such insurance. And like any other business, sometimes, one of those banks will fail. This will be a proper free market cleansing of weak business which is necessary for free markets to operate. Other banks will pick up the pieces to take over a customer book - a major value of any bank - of a failed bank and if this did not cover deposits of the failed bank the insurance would cover the rest.

The government has to understand such basics: if banking system is regulated properly, there are no banks which are too big to fail, it is not different than any other business.

"Financial markets" loan-shark mechanism at works

On 11 January 2011, The Financial Times published the following graphic:

The graph of 10-year government bond yields show that they grew considerably, manyfold, in the last 12 months. Yet nothing has happened in the last 12 months that was not predicted 12 months (or even longer) ago. For at least last 18 months the world financial situation (e.g. economic growth, banks liquidity, sovereign debt, etc) is going very well according to predictions. (It is a matter of judgement but one might say that things are going worse according to "plan".) Therefore 10-years government bond yields should be the same (or within a very narrow margin) now as they were a year ago. But they are not. In a nutshell the system works as follows:

1. In the past year governments were pressurised to cut public spending. Making such cuts creates a financial room for governments to spend more money on servicing the debt (i.e. pay more taxpayers money to the banks).

2. Then the so-called "financial markets" increase bond yields, which results in paying more taxpayers money to the banks. This was facilitated by public spending cuts.

3. Hence, in practice, what governments saved by making these cuts, is transferred to the banks by increased bond yields mechanism. In fact it is more: as the FT graph shows the government debt keeps growing which creates yet more pressure for further public spending cuts. Littles doubt, once they are made the bond yield will be increased further. And the process will be repeated.

It is not a sophisticated financial mechanism. It is not innovative at all. It does not require a "successful" (as the British Prime Minister Cameron called it) financial industry. No need of well qualified bankers to implement it. It is the most classic loan sharks' strategy: primitive no-brainer.

Incidentally it was predicted in "The largest heist in history", an article written over two years ago, that this was the direction the financial industry would go unless governments took a decisive action.

Tuesday, 11 January 2011

Euro is dead

A single currency is not simply about having the same notes and coins in circulation. A key part of a single currency is having the same interest rate on all sovereign debt, in the same way as there is a single central bank's interest rate. Quite often this argument was used to sell the single currency project, Euro, to the public in some countries of somewhat lower credibility than Germany or France. At present, there is no more single sovereign debt interest rate in Euro-zone: for example, German debt attracts much lower rate than Greece's.

The governments must face the fact that the sovereign debt markets decided and Euro-zone governments confirmed it by not introducing a single Euro-zone bonds (i.e. underwritten by all Euro-zone governments collectively): the Euro is not a fully fledged currency any more. It is dead. Now we are dealing with Euro which is a fudge of a single currency. Whether the next step would be to become a single currency again or the Euro-fudge keeps disintegrating is the question for 2011. The inklings are that the latter is very likely to be the case as Germany are unlikely to guarantee debt of other Euro-zone countries such as Greece, Ireland, Spain, Portugal, Belgium, Italy. The list is quite long indeed.

However it is highly likely that European politicians will keep repeating that the Euro is safe and it is business as usual. For an experienced psychiatrist-counsellor this will not come as a surprise. It is called a denial syndrome. For example, some close relatives of a dead refuse to accept this fact for a long time. Indeed this was how the French Finance Minister, Ms Christine Lagarde, came across on the last week's BBC Newsnight.

Sunday, 9 January 2011

Happy New Year 2011, Prime Minister (and sort out this mess, please)

It is somewhat nauseating to listen again and again about forthcoming massive bankers' bonuses, like in today's Prime Minister's interview on the Andrew Marr Show. The public is entertained continually with bankers' bashing exercises and anti-financial industry "hate campaign". It is all PR stunt to divert public attention from the grim financial reality of the 2011.

The current situation is bad it will get worse this year. Greece and Ireland were "rescued" last year. Portugal and Spain are next in line for such financial markets "benevolence". The UK time will eventually come too. And then the US'. Indeed as last week it was reported on BBC Newsnight Ben Bernanke started seriously hinting possible insolvency of the US. Well done, Mr Bernanke but this is nothing new and you may well wish to read (again?) a nearly two years old piece, "A US way out?", to realise that it may produce rather stunning outcome.

All western countries are waiting to be "rescued" (read: "fleeced") by the "successful", as today David Cameron has called it, financial industry. Indeed the Prime Minister showed today a mind-boggling art of squaring a circle: on one side he believed that the financial industry was lending irresponsibly (to a point that it brought about the financial crisis) but at the same he believed that it was a successful industry.

The reason for all these banks "rescue" campaigns is that the money multiplier remains huge and there is no way out of this mess without massive inflation or debt write offs (defaults), or both. The question is who is going to get hit: the banks are shifting direct loss consequences from themselves upon taxpayers. This is what the rescues are all about. Yet no mainstream media or pundits, politicians or experts dare to answer two questions: "what are the money multipliers of major western currencies, US dollar, Euro, Pound Sterling, etc?" and "what should the money multiplier be in order for the financial system to be solvent"? The answers to these questions may produce some uncomfortable truth: the western world is bust and is simply rolling over its problems. The banks are part of it. They are "rescuing" countries in order to help their insolvent balance sheets (i.e. they are rescuing themselves) shifting direct liabilities upon taxpayers (mainly hardworking middle classes)

In reality massive bankers' bonuses, whilst morally repugnant and even a rather dishonest way of funnelling taxpayers money to financiers' coffers, are a smokescreen, a PR stunt that suits the government and banks, designed to cover that the financial system is bust. It is buying time but this cannot keep going on forever. When your house is on fire you are not going to complain that someone is stealing small items from it. Therefore rather than talking, again and again, about the bankers' bonuses "Prime Minister, sort out this mess, please".