Netbank Shut Down By The Compound Interest Paradox

Recently, Internet bank Netbank was forced into bankruptcy. Most of its assets were bought out by a larger competitor.

Netbank was a relatively small bank, with around $2.5B in assets. Large international banks like Citigroup have a market capitalization over $200B.

By law, Netbank was required in invest a large percentage of its assets in consumer loans and mortgages. We are currently at the end of the bust phase of the business cycle. The weakest debtors are forced into bankruptcy. This is a statistical necessity imposed by The Compound Interest Paradox. Right now, the weakest debtors are people with subprime mortgages. Netbank's government-imposed requirement to invest in consumer loans and mortgages, coupled with the Subprime Mortgage Lending Scam meant that Netbank was guaranteed to be forced into bankruptcy.

Netbank didn't go out of business due to its own incompetence. Government regulations prevented Netbank from properly diversifying its assets. Netbank lost due to a fundamental structural flaw in the economic system. Small businesses and small banks are discriminated against in favor of large corporations and large international banks. Many small mortgage lenders were forced into bankruptcy as well, or forced to sell big chunks of their business to large banks at a discount.

Large banks have the ability to survive longer during the bust cycle. They have a larger pool of assets and more diversification. Large banks have the ability to buy assets during the bust phase of the business cycle, and then hold onto them until the Federal Reserve bailout occurs. Large banks are currently receiving a massive bailout from the Federal Reserve in the form of an interest rate cut. Lower interest rates mean that all outstanding loans are worth more for the creditor. Lower interest rates are a massive subsidy to large banks. An increase in the money supply drives up asset prices. The assets confiscated during the bust cycle can now be sold for a huge profit. This subsidy isn't free. It's paid by everyone else as inflation.