If a club was to do it because they were sustainable, live off of the resources they generate themselves for their own success, then I don't think there's much wrong with it. If they then choose to spend the always finite they have signing up players to loan them out, more power to them.
With Chelsea though, they are just using their owner's money to sign players they don't have any real need for, so competitors can't get them. It distorts competition, unevens the playing field and they can still sign players for their first team too. So, basically, they can sign as many players as they want who they need, and if it looks like a rival is getting close they can also sign players they want too to keep them down.
There is blatantly something wrong with that. If Arsenal were doing it I wouldn't be anywhere near as annoyed.
Parma are doing what you suggest. They have about 200 senior players out on loan or playing for farmer clubs.
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