East vs West – a tale of two rip-offs

Here are a couple of real scenarios for you to compare and use in your assessment of the way the world economy works. You need to be sceptical!

The Story from East of the old Iron Curtain

A private bank is set, takes money from depositors with aggressive marketing, sports sponsorship and by issuing debt securities (bonds). It opens lots of modern looking offices and carries on normal retail banking.

It also lends large sums without much real due diligence to businesses closely associated with the founder and his (it has ways been male in the cases I know of) friends. The owners of these businesses get large salaries and perks or even more brazenly loans that they will never repay and they quickly join the oligarch class.

Then the bank regulator discovers that the bank has billions in bad debts and is insolvent. It is now so large a supplier of services to the ordinary public that the only option is to nationalise it.

Result: People who pay tax as decent citizens have been robbed by a few crooks who now live elsewhere, ideally where there is no extradition treaty.

…and from the West

A flamboyant character and a few nerdy mates set up a company with a novel idea that attracts customers because it is priced so that it seems free, or very cheap. It may exploit others to actually supply the service that the founders ‘piggy back’ on, for example in the ‘gig’ economy, which keeps the price low, but even then it still makes no profits.

It pays other companies owned by the founders and their associates large fees for doing things that appear to be of very little value, or which would have been cheaper elsewhere. It also gives giving the founders bucket loads of share options at virtually no cost.

Offering a service at an unprofitable price will usually suck in customers because established businesses that need to make money to live can’t compete. So the user base grows and the company is able to borrow vast amounts from venture capitalists who are often investing other people’s money, but who expect to get paid back handsomely when the company is floated on the stock exchange.

The company floats publishing a prospectus that predicts losses for years ahead but a pot of gold at the end of the rainbow. The shares are bought at patently silly prices by institutional investors with the pension funds and savings of ordinary people and by small investors who like to play the stock market. The venture capitalists unload their stakes, as do the founders who now have huge shareholdings to sell – and go away with billions. This is sometimes called a Unicorn.

Over time the share price falls dramatically and in some cases the firm goes bankrupt or is taken over at a bargain basement price (possibly even by the same people that filled their boots when the stock market floatation happened).

Result: Millions of people who have been saving a bit of their hard earned incomes over years lose a chunk of their savings and a few youngish billionaires set up trusts in the Cayman Islands and other exotic places to avoid giving back anything to society by way of taxes.

You tell me which model you prefer. I think the Western model has the advantage of being more discrete – people actually keep feeding the scam willingly!