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?".

Sunday, 30 September 2012

Greg Pytel: Leader of the Opposition: sort out this mess, please

As reported by the BBC today, the Leader of the HM Government Opposition, Ed Miliband threatened to break up the banks unless they separate the retail banking from investment banking, ring-fence the consumers deposits from the risk of investments.

It appears that the Leader of the Opposition starts putting his finger on the problems with the banks. He seems to start understanding how damaging the financial industry in the current form is to the economy. However Mr Miliband still does not have a scooby. Investment banking practices, and the massive risks they pose to retail banking, are not the underlying cause of the current economic woes. It is actually a result. How to fix the banking system and what to do to bring the economy back on track was described well over two years ago, in June 2010, in "Prime Minister, sort out this mess, please". The Leader of HM Government Opposition is well advised to read it. If he understands it he will find that the separation of retail from investment banking is one of the five steps and is actually auxiliary (but recommended).

The underlying behavioural causes, rather than technical were described in "The largest heist in history", behind the current financial mess are the facts that a) the industry is uncompetitive consisting of "too big to fail" institutions and that b) the key decision makers are not exposed to the risks of their own decisions (so called "moral hazard"). This turned the modern capitalism system into its caricature, a kind of "communism for the rich" system with the financial industry living on massive state subsidies (e.g. implicit guarantees, quantitative easing) as a powerful oligopoly.

Therefore banks should be split into many and made into partnerships (i.e. a collapse of a bank would immediately and directly affect the decision makers). This proposal was first published in March 2011 "Regulating the financial risks". (It was also published on Stockopedia.) Subsequently over a year later these original ideas were, well, repeated in The Atlantic, "Free the Banks! The Case for Massive Deregulation of the Financial System", and only then they got some limited, still minimal, traction with more mainstream commentators (tweets, blogs).

It is really disappointing and worrying that those who run UK plc, and those who aspire to run it, do not understand such bare basics. Or maybe it is within their roles not to understand them? The mainstream media commentators, apart from rare exceptions, are not any different.

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