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.