Sir Bob Geldof to Front African Private Equity Fund.

In August 2011 Sir Bob Geldof became the'frontman' for a new $750 million private equity fund for investment in Africa.

The fund has been named "8 MILES", the distance between Europe and Africa.

The fund aims to be one of the biggest private equity funds to be invested in Africa.

The venture will be commercial rather than charitable.

Backing has been secured from the African Development Bank and The International Finance Corporation.
Several other investors are set to sign up.

Of all the imaginable combinations possible, Sir Bob Geldof and Private Equity getting together would have been the very last on the list.

One of the issue that Anti-Crisis Economics has not yet delved into is the effects that wayward investment into Private Equity, Stock Markets, Property Portfolios, Hedge funds etc has affected the developing nations of the world. This is possibly because it is the most difficult to put into words. However Sir Bob Geldof has brought us to this subject sooner than intended.

The problem with investment of savings, with the world banking system as it is today is that, the banking system vacuums up all those savings together and invests that money in whatever is the quickest and easiest way to get a return.

Unfortunately, the quickest and easiest ways to get a return on invested money with the current system are ways that do not generate employment. In fact this is what many of the banks' favourite investments have in common. The costs are low because of the scarcity of any man power. This leaves plenty of 'profit' to pay their own inflated costs...

Using past experience as a guide, the banks involved in lending and the private equity management company will require paying as well as investors in pension funds, and the bank account holders with accounts with the banks.

Basically what I'm saying is, the finance will be too expensive. The people of Africa are going to have to pay all of these costs on top of the actual man power costs of the projects being funded.

Of course I may have mis-understood the intentions of this private equity company. It maybe has no intention of setting up new projects which will be costly in the way of employment. It maybe they intend to use investment to buy up existing business in Africa and put their own label on it as if it had been dreamt up by themselves. Cost cutting measures could then be made to improve profits. Then more leverage from the banks involved could allow for the buyout of an overseas competitor. Then the doors could just keep on opening. I'm not saying this will happen, but its the trade mark of private equity as it stands today.

Sir Bob Geldof  may be the one to change the world, but for this to happen he will need to make the banks change the way they invest the savings of the ordinary people of the world before we can begin to bring back the optimism for Africa that Sir Bob Geldof generated in the eighties.

Landlords Set to Dominate Housing Market for Forseeable Future, As Home Ownership is to Fall to 1980's levels.

On the 1st September 2011, it was reported that the National Housing Federation (NHF) had predicted that;

Home  ownership will fall to levels of the mid 1980s.

High property prices, strict lending criteria from mortgage companies and the need for large deposits would lock millions of Britons out of the housing market.

London will be particularly affected by falling ownership. By the end of next year (2012), the number of Londoners renting their homes is expected to overtake the number of people who own their own homes for the first time in recent history.

In 2010 51.6% of Londoners owned their own homes, with the remainder renting.

It is predicted that by the end of 2012 the proportion of owners will fall to 49.9% as rising prices deter new buyers.

By 2021, the percentage owning their homes in London will be just 44%.

Across the U.K. home ownership is expected to fall to 63.8% in 2021 from a peak of 72.5% in 2001.
At present 67% of the U.K. population own their own home.

The average house price in England will rise by over a fifth over the next five years from £214,647 to £260,304 in 2016.

Oxford Economics produced these forecasts on behalf of the NHF.

 The NHF then goes on to say "Steep rises are forecast in the rental sector, huge social housing waiting lists and a house price boom.- All fueled by a chronic under supply of homes.

 House building has slumped to a 90 year low, plunging the country even deeper into the mire.

In 2011 just 105,000 new homes were built in England.

Plans for more than 220,000 new homes have been abandoned by local authorities since the government announced the abolition of regional house building targets last year.


These figures will no doubt surprise many people as it may not be clear as to where a boom in house prices is likely to materialise from. It is clearly not going to be from first time buyers getting a foot on the ladder.

One of the most notable figures here is that home ownership in London has actually been falling since 2001. This surely must bring the boom years into question. Back as early as the early noughties ordinary home buyers were fighting a losing battle against the landlords in the purchase of property in London.

Even though ordinary potential home buyers are many times in number compared to Landlords it is clear that the Landlords were able to buy up property much easier than the rest of us. Not so much because they had the money to buy the property but because of 'safety nets' which are in place for the landlords, such as housing benefits paying mortgages for the landlord. Obtaining mortgages was therefore easier, remains that way today and is unlikely to change without reform of the system of financing landlords or more general changes to regulations which control the pointless lending of money by financial businesses. 

The figures also show that without any doubt landlords and the banks' favouritism towards them was a major part of the boom years. For home ownership to be falling all these years means landlords have been buying up at least 50% of all the homes that have been going on sale including the ones that had just been built. What kind of a boom would cause less of us to be living in our own homes? It would have to a boom of the sort that only benefits a minority of the people.  

Arcadia to close 250 stores.

On 24th November 2011, Sir Philip Green owner of the Arcadia Group which owns BHS, Top Shop, Burton, Dorothy Perkins, Wallis etc announced that around 250 stores would be closed.

Reasons for the closures are a 38% reduction in profits. Pre-tax profits were £133.1 Million last year.

Philip Green and his Wife have an estimated worth of £4.2 Billion.

The Arcadia Group has 450 plus stores where leases expire in the next three years.

A Commercial lease is basically a property rental cotract which lasts usually up to ten years.

Unfortunately commercial leases and general costs of commercial property have been influenced by a couple of factors which are of interest to Anti-Crisis Economics....

The first is that many businesses like the Arcadia Group who aquire other businesses by borrowing from banks, soon after purchase (or acquisition ) of the company will sell off property owned by the business. This has short term benefits which include a sudden improvement in cash flow, an illusion that the company is performing better 'under it's new owners', then it really is. This is because sales of property will be added onto the profits for the company at the end of year accounts.

This company performance illusion will be a beneficial factor for all the following reasons;
1) Improved profits will be beneficial if the owner wants to sell a company either complete to a Private Equity Management Company.
2)Improved profits will boost potential share price if the company is to sell shares.
3)Improved profits will improve potential for raising capital from banks for further company acquisitions.
4)A sudden, but temporary cash flow improvement.

Sir Philip Green has sold off property owned by his businesses and to add to this, he has recommended to other big businesses that they should do the same in order to increase share holder divdends.

Sir Philip Green has sold off property owned by the Arcadia Group for any of the above reasons. The problem is that these benefits are only short term as Philip Green has found out to his own cost that selling of property ( and then renting it back ) means you lose control of the future costs.

Due to investments in property financed by banks, commercial property rents will continue to rise. This will have an inevitable affect on businesses which sell off their property. They will be closed down or atleast close down outlets where leases can not be agreed upon.

You may think that the free markets economy would adapt to this quickly to prevent closures on such a scale occcuring like those about to affect the Arcadia Group. Unfortunately, the way that the initial investors are so distanced from their actual investments ( in fact they do't know what their money is being invested in) they are unable to react in a way which would improve the situation. Banks have been lending money to property tycoons to buy up commercial property from many business like Arcadia. This is only adding to the for ever mounting problems being caused by the banks. If the initial investors with investment accounts or pension funds were told that their investment was actually going to be used to create problems for us all including the closure of shops and adding un-necessary costs to businesses the investor may choose a more sustainable type of investment.














 

TATA to British Industry

On 2nd December 2011 the media announced the 'mothballing' of Llanwern Steel Works in Wales. It has been blamed by its owners Tata Steel on the current Eurozone crisis.

However, there may be other factors in the Way Tata finances its expansion which may have contributed to this closure and also the Tata group's plans for the future.

In August 2007, Tata Steel Bought U.K based Corus Steel. The cost was 12.9 Billion U.S. Dollars. The biggest ever acquisition by an Indian company.

Many companies in this industry have not grown due to their superior product or management but due to their ability to borrow vast amounts of money to buy other companies. In doing so conveniently eliminating competition. Tata Steel is one of many of these companies.

Immediately after completing the deal Tata were in debt to the tune of around 10 Billion U.S. Dollars as a result of the deal. Of this total $6.14 Billion dollars was with U.K. Banks.

Tata were only able to finance this deal as they could feed off the needs of investors into shares via their pension funds and investment accounts who were just trying to save for the future. The banks willingness to lend the money to Tata was because of the availability of money to be leant which belonged to investors, With the added incentive of a few hundred million dollars interest per year plus the set up fees.

Although Tata Steel is cutting back in the U.K. it has big expansion plans else where;

1..India....Orissa-New 6 million tonne plant.
2..India....Jarkhand-6.8 million tonne plant.
3..India...Chhattisgarh-5 million tonne plant.
4..Iran                          3 million tonne plant.
5..Bangladesh               2.4 million tonne plant.
6..India....Jamshedpur- 5 million tonne expansion.
7..Vietnam                   10.5 million tonne plant.

Also of interest is that the Tata Group also own 50% of the recently constructed Dhamra Port which which is expected to handle 100 million tonnes of cargo per year.

It is likely that the debt which has been added to the british steel industry combined with what are clearly going to be lower costs at the new Tata plants is going to create market conditions which could affect the future of other British steel plants. Conditions which will have been contributed by Tata along with the banks that provided the initial finance.

You have to ask why does a company like Tata need to buy up steel companies like Corus and Land Rover when it is quite capable of setting up new steel plants and car manufacturing plants.

Should the British steel plants now owned by Tata close, this would very possibly lead to the closure of Land Rover and Jaguar, both owned by Tata. Tata have produced vehicles of the type Land Rover build for some time in India. Closing the British car plants would make business sence. You don't need entrepeneurial skills to work out that they could be produced cheaper in India than in the U.K. Tatas profits would surely increase, pleasing the banks no end  and encouraging them to lend again for buyouts.

By lending vast amounts of cash to multi-national companies the banks are creating what is an endless recession in the developed world. Until the governments work together to control the way banks invest our money while it is in their hands we will not see any significant improvement in the economy which has a positive affect on the lives of ordinary people. The only beneficiaries will be the managers of these companies and the bankers who make fortunes from the debt they burden the companies with. The interest on the investments which are paid to the individual investors is of little significance when weighed up against the damage being done by putting workers jobs at risk.

Most disapointing of all is that there will be workers paying into pension funds at Tata Steel and Land Rover who have been mis-led by investment companies and banks about the way the money they pay into their investment is used by banks, stock brokers, investment managers etc. The fact is many people have lost jobs in the U.K., the U.S., and many other developed countries as a result of the mis-use of these pension funds and this has contributed to the current crisis. Companies have been bought up by conglomerates in developed countries only to be closed down as the conglomerate owns similar plants where labour is cheaper, where health and safety rules are less stringent, and where there are generally lower standards of working conditions.

Democratic nations need to be run by Presidents and Prime Ministers who will prioritize the policing of the financial system. There are apparently regulators and Ombudsman which we are all paying for through taxes who are supposed prevent abuse of the system but they would appear to be highly over paid and totally un-affective. 
                        

How pension plans, savings & other investments can distort the value of anything. Homes, gold, oil,gas, shares and big businesses....1

Here is our first example of how the abuse of innocently invested money can distort values in the stock markets as well as the cost of many products and services we use every day including homes. In this particular example the victim is a business.

Example 1:

   A tycoon buys a company with private equity money borrowed from a bank with a loan that is being initially paid for by 100,000 individual pension plans.
   A tycoon colleague with the help of another investment company could buy the same company later in exactly the same way. Only this time there are 120,000 individual pension funds. Even though the company may have changed little since the previous buy out, because the tycoon has as good as guaranteed the mortgage payments on a 20% higher amount (with the pension fund), the bank could be tempted into lending 20% more money.
   All the major players in this deal can benefit from it.
i)The private equity management company selling will benefit from a good profit from the sale of the company which will allow them to pay off their own mortgage on the subject company and leave a large profit that will have been relatively easily achieved.
ii)Both banks involved will benefit on the selling side of the deal and the buying side. The bank on the selling side of the deal will receive there mortgage completely paid off as well as an early repayment charge which will no doubt give bankers bonuses a boost. The bank on the buying side of the deal will receive fees involved in a new mortgage, as well as the interest which will continue to flow in. These could actually be the same bank, which would add to its vested interest in making this deal happen as double the fees would be received. .. You can see exactly why banks and private equity companies have struck up such a good relationship in the years leading up to the economic crisis!
iii)Individual investors will benefit from interest on their investments which is paid by the private equity management company when successful.

So there are no losers in this situation?
Well, there are, but you can see all about that in depth elsewhere in Anti-Crisis Economics.

Those directly involved in the deal can all benefit from the buyout deal, but unfortunately there are constraints on the buyout business which can become more restrictive on this type of 'business' with the passing of time.
   For the private equity buyout business to be successful, certain specific economic conditions are required. One condition is that there needs to be a growing amount of available money for investment into pension funds. If the total amount of money going into the financial system for these types of investments was to stop growing, it would affect the size of the loans that could be made available by the banks. This would make it difficult to sell big businesses at a profit. Basically when everyone who can afford a pension fund has one, and the rest of the population can not afford one, this business is likely to hit a wall. In this event pension funds invested in private equity  buyouts would suffer. However, whilst this may happen, bankers and private equity company staff will continue to collect their salaries even though bad decisions have been made on how the pension funds were invested.

   In the example explained above, a second pension fund has increased the value of the private equity subject company. The problem is the company does not have to actually improve its product or service or make any other changes to the business for this to happen. But in financial system that was based on reality, major changes in the purchased company would have been required for the value to grow this substantially. The first reason being that the company was in substantial debt after the first buyout, which should have de-valued it immediately.

NORTHERN ROCK ; The New Owners, The Virgin Group.

On 17th November 2011 it was announced that 'Virgin Money' were going to buy Northern Rock PLC for £747 Million.

Virgin Group is a British Branded Venture Capital Conglomerate and consists of more than 400 companies around the world.
A Venture Capital Conglomerate  borrows from banks to buy businesses which obviously increases the costs of those businesses as the debt for the buyout increases its costs until the finance is paid back to the bank.

Although it may be that Richard Branson has paid his own money for this bank the normal procedure would be to borrow 80% to 90% of the money from a bank and back the mortgage with a pension fund which would initially pay the mortgage. This would also remove most of the risk from Virgin Group.

As far as we are aware there are no rules which would prevent the Northern Rock Bank from providing the mortgage to Virgin Money to buy the bank.

Although the Bank will be in debt for some time, the price paid is judged by many to be a give away. If so the debt incurred will hopefully not become a problem for the new bank.

What is of more significance to us is how the new bank will operate.

The failure of Northern Rock was blamed mostly by the media on Sub-prime Loans. But what was not made quite so clear by parts of the media was that the debt for the U.S. sub prime loans had also been mixed with other types of U.S. debt which for some reason has had far less publicity. This debt included debt linked with Private Equity Buyouts. The problem with Private Equity Buyouts is that it adds costs to a business often without adding any benefits to the business.

-In the run up to the crisis, many businesses which were owned by private equity management companies in the U.S. were running into problems due to the debt they were burdened with. Due to the way that banks mix up debt, mortgages were being affected by failures in private equity and other precarious investments in banking. Endowment type mortgages were failing as a consequence. (Endowment mortgages are funds where your mortgage does not immediately pay for your home, but will pay for other business investments instead. The return on this investment should then pay your mortgage unless of course these investments should go wrong.-Anti-Crisis Economics explains why these investments go wrong!). In addition to this, many people were losing their jobs as companies managed by private equity management companies were going out of business.-Some had sub-prime loans, but if they still had their job they would still be paying their mortgages. 

The future of the Northern Rock Bank must be to learn from the mistakes of the past. Linking the business of putting roofs over peoples heads of ordinary working people and their families to the pointless and            un-sustainable re-mortgaging of businesses and property portfolios as well as investing in 'casino banking' in the stock markets is what led to the bank having to be bailed out. It was not caused by lending money to buy homes for the working people and families of Britain.

We would therefore wish good fortune on the Virgin Group and the new bank. But we do hope that the bank gives priority to the needs of the British people in the way of mortgages for people to buy their own homes as opposed to the kinds of investment which contributed to the crisis which has been high-lighted in Anti-Crisis Economics.

The Shocking figures in Private Equity 'Buyouts' in the months that lead up to the Financial Crisis.

   In 2006 British based Private Equity management companies raised £34 Billion for investment in company buyouts. This is almost 4 times the total for 2003. This money would be used as the equity or deposit on a buyout deal. The figures lent by the banks would be something in the region of 8 times these figures. Figures from the  British Venture Capital Association.
The United states figures for the same type of business however dwarf the U.K. In the U.S. £24 Billion raised for Private Equity investments in 2003 increased to a staggering £152 Billion in 2006.(Again this would form the equity or deposit in a buyout deal).

   In 2007, the big international lending banks were unable to off load $300 Billion of loans to private equity financed companies. This means basically that the stock markets would not buy the debt from the bank in the form of 'stocks' which is the normal procedure for banks to off load debt along with any risk. The cash can then be used for new deals. (It might be worth noting that this is a totally un-sustainable unless the bank of England was generating new cash at the same rate that the banks could invest it otherwise a cul de sac would be reached when the day would inevitably come when there would be no money available to buy the banks debt!)

   In  the Spring of 2007, the U.K.s biggest private equity deal prior to the financial crisis took place. Kohlberg Kravis Roberts (KKR) bought Alliance Boots (The company that owns Boots Chemists) for £11.1 Billion. Of this total £9 Billion was mortgaged by major banks.
   Due to the safety nets involved which protect the banks, these types of deals could continue as routine procedure and have done for a number of years before the banking crisis surfaced.
 Those safety nets include;
1... Pension funds are first in line to pay the mortgage on the company, so they take on the risk should the company fail after taking on masses of debt after the buyout.
2...The initial money involved in financing the mortgage does not belong to the banks as this comes from deposit accounts and other types of 'high' interest bank account. So here there is still no risk to the bankers themselves. The risk to these savers is however restricted due to safety net three.
3...Safety net 3 is one we have all contributed to in the years since the banking crisis surfaced. This comes into affect when a large bank runs out of money due to its investments turning bad (Many are bad to start with).  This is where a national central bank such as the Bank of England will bail out banks who have insufficient funds to continue operating as a bank. Although this should be an event which should occur only in exceptional circumstances, for most of us, those exceptional circumstances will be hard to find with today's banks. When I say exceptional circumstances could justifiably cause this event I refer to an Act of war or a national natural disaster. The 'events' that lead to the banking crisis however were none of these. The bail outs by the bank of England, Bank of America, and other central banks have been as a result of every day investments in 'business'. What is more incredible, is that this 'business' after all the turmoil it in-questionably has caused continues today.
  
   In addition to the safety nets involved in the Private Equity business, the following is also a factor which would encourage lending by banks as the purchased business is likely to 'add value' to its self in the future. The reason for this has absolutely nothing to do with the actual product or service offered by the business. The reason is that otherwise innocent investors into pension funds need to be fed buy investments. What would otherwise be idol money, is pumped into businesses which then obviously over values those businesses. But this doesn't matter to the private equity management companies as long as they know there are other private equity companies with growing amounts of cash which must be invested. If they don't invest this money the pension fund investor will stop investing as there will be know interest to pay to the investor. This is a no go area for these types of investment company. You simply do not sit on heaps of invested cash, even when there may seem not to be any thing of good value to buy. This provides Private Equity Management Companies with good opportunities to sell a company at a good profit.
   There is an other factor which contributes to the confidence that large banks have in lending money for big business buyouts, and one that gives the private equity management companies a Plan B. This is that if a private equity company is unable to sell a company to an other buyout company it can be floated on the stock market. In the stock market, stock brokers are in much the same situation as the private equity management company who has stacks of money which belongs to individual investors to invest which simply must be invested ... in something. Therefore companies off loaded by private equity companies who may have sold off many of the assets of the subject companies will still make a profit or at the very least cut their losses so they can go on to more lucrative deals. The secret of all this success basically comes down to the fact that the money the stock brokers will use to buy up these off loaded de-valued businesses is not their own money so they need not go into to much detail of justified values of companies and shares. The money they use belongs to investors with high interest  (Relatively speaking) bank accounts. In the case of the Private Equity Management Company (Buyout Company), the money they invest is not their money as it belongs to the investors into individual pension funds. The money provided by the banks for mortgages for buyouts does not belong to the banks as this to belongs to investors with bank accounts. All in all the individuals earning millions and in many cases billions of Pounds, Dollars or Euros are taking on very little of the risk involved in these deals.
   As a conclusion to this, you would have to say that the people involved in these deals though directly linked with the profits involved find themselves completely detached from any losses that may be incurred as these are passed on to other parties not directly involved in the deals.This has clearly had an affect on the lack of responsibility by the bankers in lending the vast amounts of money to business which will often de-value any product or service of a company along with the company its self.
   As above I mentioned that the secret to the success of the bankers (And the bankers themselves have been individually successful financially regardless of the crisis) , Private Equity Management Companies and the Stock Markets is down to the fact that they never use their own money. Its pretty much a case of 'Heads' the banks win and 'Tails' the economy and the rest of us lose. May be the secret for the solution in preventing a future crisis is in how individual investors in pension funds, deposit accounts and other types of individual investments choose to invest their money in the future.

Banking, Economics & the Media 1.....Capitalism.

There are many words in banking and economics which vary in meaning depending on a persons knowledge of the subject. Capitalism is one of these words.

The people who believe it to be a good thing are those who immediately benefit from it. Examples of those who immediately benefit from capitalism are ;

Bankers, Private Equity Management  (Buyout) Companies, Hedge fund managers, Property Tycoons, Stock Brokers and Bankers.

Unfortunately many of the rest of us also believe capitalism to be a good thing, but this is because the media has misled the public on what capitalism today involves. (See Anti-Crisis posts on Private Equity (Buyouts), Stocks &Shares, Hedge funds ).

Much of the money used to fund capitalism is borrowed from banks. Therefore top bankers will report to the media what is likely to be a biased point of view, which is that ;"Capitalism is funding entrepreneurs so they can make the world a better place for all of us." Well, they would say this. They need the public to deposit money in bank accounts so they can use it to make money and boost bonuses for themselves. The problem here is that bankers have a vested interest here, and need the public to believe they are doing great things with our invested money. Otherwise we might stop giving it to them. All too often the bankers will be re-branded as economics experts by the media and their total lack of expertise (and bias) in real world economics will be forced onto the general public. Because it may be transmitted by a mostly respected media company, the public in general don't question the information given. Unfortunately, I have to mention the United Kingdom's highly respected BBC on this point. It seems that every time the BBC gets an expert point of view on the economy it comes from a so called economics expert but they are from some form of investment business. Due to the nature of a lot of the business (I didn't say all) which is being invested in by these investment businesses, to treat a representative of one of these companies as an expert is much like asking a demolition expert to design and build a palace! The BBC advertises the fact that it does not allow advertising on the channel, yet seems to have no hesitation in allowing representatives from investment businesses, hedge funds promoting their own business. It doesn't matter whether there is a boom or a recession, you know that a representative from an investment company is going to tell you that there are good opportunities for investment. If they said anything other than this  they would probably be sacked from the company they represent. So what is the point of them taking up air time and wasting our time?

    One reason could be to create a smoke screen over the real capitalism that is being funded by our financial system. The capitalism I am talking about is not the funding of genuine entrepreneurs. In fact these people are no doubt losing out to the kind of businesses which capitalism is now funding. This type of capitalism ;

i)   Costs many thousands of jobs throughout the world.
ii)  Puts big businesses at risk due to massive debts incurred due to investment.
iii) Home costs become inflated due to investment in homes by property tycoons.
iv) Costs of vital services increase uncontrollably due to the nature of investments.

Combined, the effects of the above increase inflation, decrease our standard of living for most except for the wealthy. Unemployment increase due to the rising costs which need to be covered by employers wages. Taxes increase due to higher welfare costs.

If an economics 'expert' tells you his view on the current economy is that there are very good opportunities for investment in businesses, the chances are that he is encouraging investment into 'business' which is going to make us all worse off.

..The Media....
   Until the media takes its responsibility more seriously, the majority of us will be left with the distorted illusion we are being brain washed with. If so we will never see a real end to the current economic mess we are in. We will simply have to be satisfied with some demolition experts wall papering over the cracks in a collapsing economic system.

Banking, Economics & the Media 2.....Privatisation.

   The media has had a dominant effect on the way we understand economics as the media generally takes the point of view of the bankers, the politicians. These types of people are good at manipulating the media for their own purposes. This then can give them the power to generate a false perspective of economics. But it is one for a number of reasons they continue to generate. As part of this manipulation the media also gives a positive spin to privatisation.
   Privatisation is where governments use investors money to buy services which had already been paid for by tax payers. A similar situation would be like handing over a house you had bought to a landlord so he could charge you rent at whatever rate he decides for the rest of your life. There is no benefit to the public in this. Any MP trying to convince us we will be better off as a result of privatisation is just passing us off with the standard government spin. Businesses that are privatised are predominantly paid for with borrowed money (Shares are basically borrowed money with the dividend as interest). All of us will be paying the interest on these borrowings for the rest of time.- even though we paid for the services outright in most cases while they were in control of the government. The door on privatisation needs closing and locked for good. All the U.K. governments of the last decade have joined hands in misleading its public on this. If they would only tell us during their election campaign I am sure they would never get the most important job in the nation. Having said that,  the media seems to spend a lot of time trying to convince the public that we will be better off for privatisation. The media seems to spend too much time repeating the waffle of politicians, bankers, and people who are in businesses who will benefit from deals which are involved in privatisation, but spend little time analysing the actual effects of such deals on the public.
   Privatisation does however help explain the governments loyalty to the stock markets, and no doubt makes the government a load of cash along the way. This would explain why U.K. and other National TV companies pummel their viewers on what is going on in the stock markets. Stock markets provide an almost endless stream of cash to pay for national owned services that the governments of the world want to cash in on. They therefore need to encourage that money which originates from deposit accounts, ISAs and other types of investment to keep providing fuel for the stock brokers to keep pumping up the prices of all businesses including the privatised ones. Banks and Stock brokers will do OK too.
   As mentioned above, selling off a home which you have paid for outright, to a landlord, so he can charge you what he wants for the rest of time, including long after you have retired would only make economic sense to some one who had been educated at the wrong school or to a fool. Privatisation is exactly this, but only in this case it involves a national company we have all paid for, instead of your home.
   The reason why governments have got away with this up to now is because the media has not carried out its duty in informing the public of what privatisation is really about. Also, in education, A levels in economics don't recognize problems created by privatisation, or in fact the stock markets or anything else which is being dealt with by 'Anti-Crisis Economics' such as Private Equity. The media and the world re-knowned education in the U.K. is letting us all down as far as economics is concerned and is beginning to appear as if it is intended to mislead us. Ofcourse it may be that all the TV reporters, newspaper columnists, politicians and bankers have all received out dated information through their economics degrees, which may be has not been up dated for twenty five years. If so, then the best thing David Camerron can do is get his economics up to date as this is not Hogwarts, its planet earth 2011.    

Boom & Bust 1...Bankers say we can't do without it. The truth is we could. Bankers won't make as much money without it!

   We are told by economists and bankers that boom & bust is about as controllable as the weather. But maybe the bankers at least  have a reason  for wanting us to believe this.
   A free market economy is all about a seller being able to sell a product at the highest price they can get a buyer to pay. This wouldn't be such a problem if we all paid out only our own money. But the way things are today, some of us can borrow some money, some can't borrow any, and some involved in what we shall call capitalist business can borrow a phenomenal amount from the banks. When I say phenomenal amount I mean billions of dollars, euros or pounds.
   This is where it may be difficult  to see why boom and bust is some kind of uncontrollable phenomenon. The reason being that the billions being lent by the banks (when they are lending) are simply funding the boom itself. Property businesses (via shares and private equity) are being paid for with borrowed money.

Why are these people borrowing money to buy these properties and businesses?
Because they can not afford to pay for them otherwise!

   One of the biggest factors as most people will be aware shortly after the crisis surfaced in 2008, of the price a high value item can be sold for today is the amount of money a bank will lend to buy it today.
   In the case of a house purchase, a bank may agree to lend the money to buy a house partly because in a years time it expects the house to have risen in value. But a major part of the reason why it might be valued at a higher price in the future will have to be that the banks will lend more money to buy it. As long as bankers keep increasing the amount of money to buy properties and businesses they can create the criteria for a 'boom'.
    But this makes a nonsense out of the 'science of economics'. If the banks suddenly all started lending money, and then property prices began to rise and businesses began to increase in value (as a result of increased activity in the private equity buy out business) would that mean we are out of the recession and straight into a boom?... It seems just a little bit too easy doesn't it?
   The banks would be happy as they would be making lots of profit from the increase in business. Investment representatives would probably be telling us through the media that job prospects are good and there would be jobs created.
   An illusion that the recession is over could therefore be created quite easily, but would this really end the recession?
No. The reason is that the only sector which will have really improved is the financial sector. The apparent boom hasn't materialised because we have more money as we are out of recession, but is merely because the banks have started lending more money.
   In this situation, the construction industry will receive a boost. But part of this, in fact the majority will be down to speculators or property tycoons. At the moment (2011), landlord s are buying more properties than all genuine home buyers combined in the U.K. Due to 'safety nets' associated with  landlords as opposed to the rest of us this is likely to continue.
   So basically when the banks do start lending again, it is unlikely to be because of the end of a recession. It will be an illusion that will be created, which would be fine if we all benefited, but only a few will benefit. The property tycoons who they will happily lend money to, to buy more properties and the banks themselves who will make profits from lending. The losers will be the tenants (who have been increasing in no. without much media notification since 2003) who will have to pay inflated home costs, and also tax payers who will be paying the rent of the unemployed and retired. Costs to businesses will rise due to our increased housing costs and taxes due to welfare costs. Those who can afford to buy their own homes will pay more and maybe work longer hours and make other sacrifices to pay for them along with paying the increased taxes.

   The question has to be asked. How much of the last boom was an illusion created by the banks, and how much of this so called boom was representing an improvement in all our lives. Many would look to statistics such as GDP to back up the fact that a boom has occurred, but each time stocks and shares change hands, each time money is lent to business and property tycoons for billions of dollars for their investments (which many will have a negligible actual product if any at all- See other articles in Anti-Crisis), and all kinds of other financial movements were taking place during the last "boom" which would have increased the GDP in the U.K., the U.S. and any where else big in the finance industry. You have to understand that the movement  of money does not necessary mean there will be a product of that transaction. And hence this is one of the major problems of economics today and the reason for 'Anti-Crisis Economics'.

Banking, Economics & the Media 3.....The Stock Markets.

   Anyone who either reads the business pages of news papers or watches televised business services such as that broadcast by the U.K.s BBC, at various times throughout any week day are bombarded with details of the stock markets, and little else where businesses are concerned.. Many people will read the news papers or watch the programs in the belief that the information gathered from them will give them an insight into how the economy is doing. After all, much of our economy is dependant on how businesses are performing . Unfortunately any one who believes this is being totally misled. Whether the presenters and columnists are trying to mislead the public, or they have just been misled themselves into believing the 'information' they broadcast to us is probably dependant on the individual broadcaster or columnist. However to the dismay no doubt of many investors, share prices in the stock markets can go up and down for a number of reasons which have absolutely nothing to do with the performance of the business they relate to. Also, often a business journalist will pass off a rise in share prices as an improvement in the economy. This is absolute nonsense.Values of businesses are determined by stock brokers. Stock brokers will use any reason which will trigger off other stock brokers  to buy shares in a company. Also, the money they use to buy the shares is not their own, as it belongs to the investors into pension funds and ISAs and other types of investment account. Those investors are not representative of the economy. This is because the less wealthy do not have a pension plan or a mortgage, therefore no endowment, hence no investment for stock brokers to invest. The money stock brokers use is unlikely to come from the less wealthy in the economy. Share prices could therefore rise as a result of those with pension plans increasing their investments. Okay, so then maybe when there is an increased amount of money in the stock markets as a result of increased investment in pensions (This could happen during a property market slump, when sales of property is re-invested ). It may reflect an improvement in the amount of savings the wealthy half of the economy are able to invest. That's great, but the thing is this is not business news, because no business had anything to do with it. But some ones shares will go up in price regardless because there is a pile of money which needs to be invested, and there is not much point in putting it into property at the moment (2011). If you are unemployed and the media tells you that employment prospects are growing because share prices are rising, don't pin your hopes on any major improvements in finding a job.

So why would the BBC and other similar international broadcasters and news papers give you this, what seems to be misleading information?
There is only one simple answer to this. Our financial system and the stock markets (that is the world banking system and stock markets), though flawed, are treated like a religion by many bankers, politicians and the media, which all thrive off this industry. It is also vulnerable. To merely question it adds to its vulnerability...
The current financial system has stumbled along fairly unchanged for many years, because the bankers, politicians, and the media have convinced the public that it worked and created good for all. Unfortunately, events that first surfaced as far as the general public are concerned in 2008 and have had continuing devastating affects on the world economy ever since are showing no signs of improving. Stock markets are very prominent whenever there is bad news about the economy. Maybe it is time for individual investors to decide the destiny of their investment instead of simply handing it over to bankers and stock brokers to invest in quick gain, short term investments. Ofcourse if this happened, that is if the public were to find a way which could help them to invest  money in a safe place and where it could help people to build new homes thus creating jobs without going through the stock markets, this would create new market conditions for the stock markets to operate within. There would be less money for all the stocks shares and there would be the inevitable down turn in the sacred stock markets. But then, isn't the free market economy that is always promoted by many media provided so called 'economists', 'business experts', 'investment advisers' and bankers all about making your own choice? The Stock Markets are potentially vulnerable to what is apparently their biggest selling point. A free market. Which would explain why there is an army of spokes persons in all areas of the media to defend them.

Were Sub-prime mortgages to blame for the banking crisis or have the banks singled out one 'player' to protect the management from further scrutinization?

   The reason which has been credited with being the cause which began the banking crisis was what is known as Sub-prime mortgages which originated in the United States. These are the lending of mortgagaes to less than wealthy home buyers. Lending money to home buyers is one of the purposes that people would associate with banking, and a purpose that would be an acceptable use of invested money. It may also be a socially acceptable excuse if this really was the main cause of the banking crisis.
   Using this as an excuse seems rather convenient as many other 'types of business' banks are lending money to would seem less socially acceptable. Also at the time when the banking crisis surfaced, the main priority, and understandably so would be to prevent people withdrawing their investments and creating termoil in the stock markets. For this a sacrifice would be worthwhile, and if you could put part of the blame on home buyers who they took pity on, not being wealthy enough, then all the better.
   The fact is that in the United States much of this money was actually paying for new homes. Employment was being created while they were being built. This would have spread wealth. In fact building homes is the last thing that would cause a banking crisis or recession. In comparison to the U.K.,the U.S. was building more homes in relation to the number of mortgages. What was happening in the housing market in the U.S. was far more sustainable than what was happening in the U.K. In the U.K. a larger proportion of morgages were for older homes. Lending to buy ready built homes is less economically sustainable than lending for new homes as there is no employment generated on the purchase of an existing home. In short, mortgages alone would be more likely to have caused economic problems in the U.K. than the U.S. Many of the U.S. home buyers did not have high incomes and so may have been paying a higher interest rate to cover the increased risk. It would seem though unfair that these people should be paying higher interest rates for increased risk when the banks were actually increasing the risks of default themselves through other areas of 'business' they had been (and still are) involved in, which have had major implications on the economy. These are Private Equity, Stock Markets, Hedge Funds & 'Property tycoons'. Most of the home owners who lost their homes in the U.S. could be still paying their mortgages today if it wasn't for these economy under mining investments by the banks. These investments caused inflation, job losses and business closures. The U.S. government reacted by increasing interest rates. This then lead to the inevitable house reposessions and collapse of the housing market. We therefore believe the sub prime domino was one that was pushed by a number of others which the banks will have less willingness to explain.
 (See other Anti-Crisis articles on Private Equity, Stock Markets, Hedge funds & Property Portfolios). 

Private Equity- Some of the illusions uncovered!

One type of investment which all the big banks are involved in is Private Equity. It is the buying of whole companies in order to sell at a later date at a profit. There are a number of problems with private equity buyouts.

1...Borrowed money: Usually 80% to 90% of full purchase price!
The majority of the money used for private equity buyouts is borrowed from banks.- Mortgaging the company obviously increases its costs until the loan is paid back. The dept could potentially put the company out of business.

2...Maintaining profits; Even with the added debt which has added to the costs?!
These companies are bought to be re-sold within a few years. For this to happen it is vital that profits are maintained if not increased. This can be a major challenge when you consider the costs have just gone up as a result of the interest and other costs of the borrowing to purchase the company. To achieve this there are customary redundancies and then an increase on the work load of the remaining staff. Also in the majority of cases there will be assets of the company sold off. The sold assets will generate cash to quickly pay off some of the debt, so helping stabilize the company, at least for the time being. A private equity management team may claim it is selling off loss making parts of a company to the media,but they will generally do this as a matter of course in order to recoup as much cash as possible shortly after the buyout. Loss making or not, there could be more job losses here if sections of a business are closed down. Often property owned by the company will be sold and rented back adding to future costs of the company.However the accounts will look more healthy though this is likely to be short term.

3...Banks only too willing to lend.- Its only too willing as long as there is a safety net!
The reason why banks are content to lend to what many people  will seem like a pointless re-mortgaging of businesses is that the private equity company will have arranged an investment fund to pay the mortgage on the company. If the company was to go out of business, the outstanding mortgage would be paid by the investment funds investors. It is actually difficult for the bank to lose out here, and this is therefore a factor which affects the amount of money which has been lent by banks to this type of business.

4...Any gains from your pension plan or other investment are lost through rising prices of goods and services.
 There are however important points which any one who pays into an investment fund should be aware of. This is because at some stage prices charged to the public for the product or service are going to increase as a result of the borrowing by private equity companies to purchase businesses. For this reason, you will notice that private equity companies will favour businesses that they know the public depend on, so there is more scope for price increases in the future. Of course, private equity will not be blamed for the increase in prices. This would be blamed on changing market conditions. If lots of companies face this same problem and inflation rises as a result, the Bank of England will have to think up some new ideas as just increasing interest rates will only make things worse for all the companies in debt resulting in more price hikes.

5...Business closures and job losses, as well as your pension reduced.
Closure of major companies are a result of private equity.This is not always because the private equity management company has made a mistake. It may be because the company has been bought in order to be closed down. A factory in Britain could be closed down by a private equity company which owns similar factories in Argentina and China, where costs are far less. It is then quite easy to run the factory in the U.K. 'out of business' as it has its prices undercut by the two over seas factories. The private equity management company can then up production at the other two factories and very probably the prices too. In the situation that the U.K. company has gone out of business, the private equity company may not even pay back the bank the borrowed money to buy the purchased U.K. company which is now in receivership. In this case the investment funds which were arranged by the private equity company to back the mortgage would foot the bill for the outstanding borrowing, leaving the private equity management company and the bank unscathed. Often a cartel of private equity management companies will work together to buy a number of similar companies, but with the same result, that one or more will be closed down.

6...The Public are held to ransom by companies supplying every day vital products and services!
Private equity companies tend to target vital products or services that we all need from day to day. It is inevitable that buyout after buyout certainly in the case of energy companies, is going to increase the costs of these services so that many people will just not be able to afford them in the future. Regulating bodies that are formed to protect the public from the rising prices of some of these companies are powerless as the criteria for restraining these companies is based on excessive profits rather than the reason for their rising prices which is their rising costs (The debt they are burdened with).

   Private equity companies and banks take advantage of our need to save and invest for the future. Private equity companies also feed on our reliance on vital products and services. Unfortunately the interest on pension plans and other investments received by most investors will never off set the damage  the banks and private equity companies do by creating unemployment and more expensive products and services as a result of borrowing and other costs associated with buying businesses. Any investment which involves the purchase of a company should have benefits to the product or service to be produced and to its customers and to the economy before any finance from a bank or investment fund should be authorised.

'Buy to Let' Property Investments- They are not economically sustainable.

There are a number of problems associated with 'Buy to Let' property investments which cause economic problems.

1...There is usually no counterbalance to counter the return which is being made on the investment. This means there is little given back to the economy which is providing the return for the investor.

   Usually, buy to let properties are existing properties, often many decades old. For this reason little or no employment is generated by this so called 'business' investment. To make an investment- i.e To put in an amount of money in purely for the purpose of getting more out, unless you are creating some sort of employment, is not sustainable within an economy. The investor is demanding more from the economy without giving anything back to the economy. This applies to any business or investment which does not create any or minimal employment. This is a very simple and very important economic fact. You can not take money out of the economy by any form of business or investment unless you are creating employment at the same time. Continuous investment in these negative businesses will damage the economy, increase living costs, create unemployment and eventually contribute to an economic crisis.

2...There are increasing costs mounting on the welfare system as a result of investments in homes by landlords.

   The rising costs of home rent become the responsibility of the tax payer when the tenant is unable to work. This could be for various reasons such as illness, injury or disability, but most likely due to lack of available suitable employment. The conditions for unemployment can be created by a rise in living costs which has been contributed to by landlords demanding the highest possible rent for their property. Living costs are also a cost for businesses as it is businesses which pay most of our living costs in the form of wages. If landlords raise the rent to a level which is close to the tenants maximum affordability level, added to other increasing living costs (some of these related to other types of investment), the tenants may find themselves in a situation where they would be no worse off not working at all.

3...Pensioners get left stranded.

   Another problem arises when the tenant reaches retirement age. Where a person does not own their own home, it is likely that the state will be paying the rent on the home from then on. If the landlords base their monthly rent on an employed persons income, it is inevitable that the tenant will not be able to afford the same level of payments after retirement. In years to come this will have a devastating affect on the economy. If landlords in the future are treated with preference above home buyers who want to buy some where to live (which is the situation today-2011- see elsewhere in Anti-Crisis Economics on how landlords have been dominating the housing market for some years),then they will be able to buy a growing proportion of homes in the future. The working population would become slaves, paying rent on their own property as well as future tax increases to cover the cost of a growing number of elderly people living in rented properties. The knock on effect will ripple through the economy. For people working now, but on a relatively low income, with other rising costs also added, with other rising costs also added, it is likely that many people will not be able to afford to work and cover the cost of their rented home in the future. It is also likely these people could be labelled lazy layabouts by politicians of the future.With the current government policies and banking practises, it is difficult to see how employers are going to be able to afford staff who are going to have to bare such a financial burden.  

Historic Banking "Grandfather rights", Is History influencing current banking policy?

   The banking crisis and resulting economic crisis has left people wondering how the banks could have created such a mess that we are all now paying the consequences for. We have found that the regulations within the banking system (atleast as far as the U.K. is concerned) appear to be vague, very few in number, and un-enforcable by a regulatory authority. Many of these 'rules' are many decades old, but where up-dated regulations would seem very necessary, changes have not been made.  It would seem therefore that there may be evidence that our current bankers are taking advantage of decisions made by bankers from the past, in the name of profit. There is clearly room for improvement, but for reasons only known to themselves  necessary updates to the banking sysem have not taken place, even in the crisis aftermath!

-Under "Bankers Rights" from the Banking Act 1979 the following statement can be found;

"Bankers may use funds deposited as it thinks fit."

Yes, this really is quoted as in the '79 Banking Act. Although this sentence wouldn't even appear to be very good English, the possiblities which are left open to bankers by this clause are prettty worrying for all of us and would go some way to explaining why we have the current financial crisis.

A more suitable replacement clause to the one in question could go something like this;

"Bankers may use funds deposited in any way which benefits both the investor, the business to be invested in and the economy."

If bankers used this as the model to build the banking system around, we could be looking at a completely different finance system today. The reason for this is that a lot of business that banks are involved in would not fit into the criteria of the 'new' clause. Explaining in detail this business is one of the aims of Anti-Crisis Economics, details of which you can see elsewhere on the site.

   Going back to the 'Rights and Duties', also stated in the Banking Act 1979 is that Banks can give financial advice or investment management services and facilities for arranging the purchase and sale of securities. However, there is no detail on the actual advice that should be given to customers. Without specific details on the advice, it looks like the banks are given the right to advise customers to buy their own 'investment products'. There is a major problem here because one of the problems we believe has caused the banking crisis and other major problems with invested savings over recent decades is that the public do not really understand what is happening to their invested money. If they did they would probably invest it some other way or buy a safe to keep it in where it could dono one any harm. (Please read elsewhere in Anti-Crisis Economics on Private Equity, Hedge Funds, Stock Markets and Property Tycoons).

This next statement is also from the Banking Act 1979;

"The banker customer relationship has been largely left to implied contract, the terms of which have been developed by judicial decisions over the years (i.e. by case law). The term implied contract means there is no written agreement between the bank and its customer, and their relationship is simply based on what has happened between the bank and its customer in the past, and the decisions that the courts have made when the banks have been sued for failure to fulfil their implied obligations."

-This particular statement appears to protect the banks from almost anything. It would appear that the bank would be unlikely to ever go to court and you would only win if somebody had previously been successful in challenging a similar breach.
The Banking Act 1979 goes on to say the following;

"The banks responsibilities towards their customers have largely been dictated by case law, as have their rights, and it is therefore necssary to look at individual cases when considering these rights and duties."

-This statement suggests that case law may dictate what their rights and duties are but it doesn't specifically say it would be enforced by the past decisions, but will treat each case individually. In other words even if customers have one cases in the past, it doesn't necessarily mean an individual will win a similar case in the future.
   The point to notice about even the "implied" bankers rights and duties is what seems to be a lack of duty to invest favourably from an economic point of view. In fact, reading between the lines, the banks seem to have given themselves the right to invest customers money "as they see fit" even at the expense of the economy as long as it is profitable for the bank.

The Banking Act 1979, although thirty two years old would appear to be setting the standard for todays U.K. banks. However, to make things a whole lot worse, the U.K. banking system is the one that many of the countrys of the world have used as a standard to set there own banks by.
Just one final point;
'The Bank of England has statutory immunity against negligence claims.'