The following are a list of ways you could contribute to an economic crisis.
These were all valid ways to create an economic crisis in 2007
What is remarkable is that after all the tax payers money going into enquiries to discover the cause of the crisis, non of the contributors below have been removed four years on.
Politicians like David Cameron and Boris Johnson are in their current posts due to promises which they made which were to pressure the banks into changing their ways.
It is time for the British public to be more careful about who the future leaders are.
1.......The Decision of the governments not to Police the behaviour of individual employees within the finance Industry.
This involves the selling of shares you don't own !
You borrow the shares off the owner so you can sell them. The reason being, you are expecting the price to drop......... So you are selling the shares while they are high in price. All being well, after you have sold the shares, the price drops and then you buy the shares back. You then must give the shares back to the originator of the shares along with the profits minus your own cut of the profits.
The problem is, when lots of shares in a business are sold in a short time. It will inevitably cause a downward trend in the price of those shares. So you could short sell a load of shares in the same company, owned by different parties, knowing that you could manipulate the market downwards for those shares. Hence, if you are clever enough, its difficult to lose......Notice how completely irrelevant a business, its executives and possibly loyal workers could be in relation to share prices whilst some one is short selling their shares!
There have been new rules to restrict certain aspects of short selling enforced by S.E.C and the F.S.A., since the financial crisis, so there is no doubt it was one of many contributors, but short selling continues today.
9.........Out of date Education.....
These were all valid ways to create an economic crisis in 2007
What is remarkable is that after all the tax payers money going into enquiries to discover the cause of the crisis, non of the contributors below have been removed four years on.
Politicians like David Cameron and Boris Johnson are in their current posts due to promises which they made which were to pressure the banks into changing their ways.
It is time for the British public to be more careful about who the future leaders are.
1.......The Decision of the governments not to Police the behaviour of individual employees within the finance Industry.
Recently, UBS, HSBC and Barclays have been fined many millions of dollars, all for completely different reasons. The problem is these fines will have little affect on the individuals who are responsible. In fact the individuals in many cases will have departed when these payments have to be made. You may just as well fine the customers of these banks simply for choosing the wrong business to look after their finances, because it is these people who will be paying the bill to the regulators involved. Interest rates on credit cards will rise and pension funds will suffer as a result of the losses to these banks, as well as many others to be fined over the LIBOR rate rigging.
Whilst the governments choose not to target the individuals in most cases for their crimes, there will be incentives for investment in illegal businesses by the finance industry, Ponzi schemes, and excessive risk taking with invested money. This is because there is little chance the individual will end up paying for the crime even in the event they are caught in the Act.
2.......Misunderstand a heap of invested money as a signal for demand of 'Bankster Trash'.
Stock brokers in the stock markets use invested money to buy stuff like shares in businesses, commodities, business debt, mortgage debt and government debt.
Stock brokers only buy stuff if they think the value of something is going to rise. This can be influenced purely by the fact that the money being made available to stock brokers is rising. The modernisation of parts of the world, and people from those locations opening bank accounts and saving money means that the pool of money being made available in the stock markets grows. This can influence the prices of homes, businesses and commodities purely as a result of stock brokers touting up the prices. However the reason for this is total nonsense as it has no genuine link to the product being bought. The price rises as a result of money sitting innocently in a bank account. The owner of the money doesn't want what is being purchased with it. The stock broker doesn't want the product. He only wants the profit when the product is sold on.
In the lead up to the economic crisis this growing heap of cash in bank accounts and investments was a major issue.
3.......The selling of debt throughout the financial industry................
This is definitely one of the major contributors.
If when you lend money to some one, you had to wait till the person you lent it to paid you pack, it would make you careful who you lent money to. You would also take more of an interest in what the loan was for.
Because of the demand for investment material, as detailed above in no. 2, it has become easy for banks to sell debt to other financial institutions. Before the financial crisis, all kinds of debt was rising in price as demand for investments caused the price to rise. This made it easy for the big banks to replace lent out cash to be leant again, again and again. Each time passing the risk of the borrower defaulting on the repayment of the loan. The problem is, although the bank has passed on the risk. The risk is still in the system and some one else is going to suffer if the borrower defaults. However, financial institutions found ways of spreading this risk by bundling and mixing up lumps of debt and giving them investable product names like CDOs (Collateralised Debt Obligation).
This is definitely one of the major contributors.
If when you lend money to some one, you had to wait till the person you lent it to paid you pack, it would make you careful who you lent money to. You would also take more of an interest in what the loan was for.
Because of the demand for investment material, as detailed above in no. 2, it has become easy for banks to sell debt to other financial institutions. Before the financial crisis, all kinds of debt was rising in price as demand for investments caused the price to rise. This made it easy for the big banks to replace lent out cash to be leant again, again and again. Each time passing the risk of the borrower defaulting on the repayment of the loan. The problem is, although the bank has passed on the risk. The risk is still in the system and some one else is going to suffer if the borrower defaults. However, financial institutions found ways of spreading this risk by bundling and mixing up lumps of debt and giving them investable product names like CDOs (Collateralised Debt Obligation).
4.......Big business Buyouts.........
Big business buyouts are a major part of investment banking.
When a large company buys another company, it will borrow the majority of the money (80-90 %) from banks.
However the costs of these buyouts are substantial.
Some of these costs can be recovered due to the extra market dominance the combined companies will have over competitors. Other savings can be made such as combining administration from the two companies to one office. Reducing costs of executives and employees.
This can often work though even when it does, it may be temporary as the banks may finance a similar merging of two bigger competitor companies.
The important thing to understand here is that the banks think they can justify putting companies into major debt, when putting the two companies together would not actually require them to borrow a fortune from the banks. They could combine resources of the two companies without a bank needing to be involved.
The reason it has become standard procedure is that;
a) Banks allow executives of these companies to furnish themselves with pay increases which can be funded by the debt, whilst the debt may be leant against one or other of the combined companies. It's one of the reasons why executive pay has risen so dramatically as compared to ordinary employees. Though it may be the employees will pay for the extravagant pay of the executives when the company collapses under debt and jobs are lost!
b)As mentioned in '2' above, there is a mountain of cash which must be invested in something. If the investment banks stopped this so called 'investment in business' prices of other types of investment would probably rise, or oddly enough, the housing market throughout the world could get a much needed boost as the surplus cash would have a use.
Due to mergers and buyouts, banks effectively put themselves on the 'pay rolls' of these companies. When we pay for products and services provided by the companies, we are also paying bankers bonuses. Bonuses which in many cases are not justified !
Big business buyouts are a major part of investment banking.
When a large company buys another company, it will borrow the majority of the money (80-90 %) from banks.
However the costs of these buyouts are substantial.
Some of these costs can be recovered due to the extra market dominance the combined companies will have over competitors. Other savings can be made such as combining administration from the two companies to one office. Reducing costs of executives and employees.
This can often work though even when it does, it may be temporary as the banks may finance a similar merging of two bigger competitor companies.
The important thing to understand here is that the banks think they can justify putting companies into major debt, when putting the two companies together would not actually require them to borrow a fortune from the banks. They could combine resources of the two companies without a bank needing to be involved.
The reason it has become standard procedure is that;
a) Banks allow executives of these companies to furnish themselves with pay increases which can be funded by the debt, whilst the debt may be leant against one or other of the combined companies. It's one of the reasons why executive pay has risen so dramatically as compared to ordinary employees. Though it may be the employees will pay for the extravagant pay of the executives when the company collapses under debt and jobs are lost!
b)As mentioned in '2' above, there is a mountain of cash which must be invested in something. If the investment banks stopped this so called 'investment in business' prices of other types of investment would probably rise, or oddly enough, the housing market throughout the world could get a much needed boost as the surplus cash would have a use.
Due to mergers and buyouts, banks effectively put themselves on the 'pay rolls' of these companies. When we pay for products and services provided by the companies, we are also paying bankers bonuses. Bonuses which in many cases are not justified !
5.......Lending to Landlords in Preference to ordinary people who want to own their own home...........
The banks lending to landlords to increase their property portfolios in the lead up to the crisis was a major part of the housing boom. In the years that led up to the crisis, in the U.K., landlords though clearly in the minority were buying up a large proportion of the homes that were going on sale. As rent charged by land lords does not reflect the cost of buying the property, tenants are paying a much higher price for their homes. In many cases the cost is so high, there is no job available which pays well enough to pay the rent and other costs of living. Working people who are renting their homes are getting hit twice by the landlords. Once for the increase in costs of their own home. Then again for paying higher taxes for the people who have been effectively pushed out of their potential job as a result of rising rent. Therefore paying unemployment and housing benefits.
David Cameron promises growth. Save your breath Pal ! The landlords will eat it up as soon as it appears with increased rent charges because of governments sherking their responsibilities and not regulating this economy wrecking business !
The banks lending to landlords to increase their property portfolios in the lead up to the crisis was a major part of the housing boom. In the years that led up to the crisis, in the U.K., landlords though clearly in the minority were buying up a large proportion of the homes that were going on sale. As rent charged by land lords does not reflect the cost of buying the property, tenants are paying a much higher price for their homes. In many cases the cost is so high, there is no job available which pays well enough to pay the rent and other costs of living. Working people who are renting their homes are getting hit twice by the landlords. Once for the increase in costs of their own home. Then again for paying higher taxes for the people who have been effectively pushed out of their potential job as a result of rising rent. Therefore paying unemployment and housing benefits.
David Cameron promises growth. Save your breath Pal ! The landlords will eat it up as soon as it appears with increased rent charges because of governments sherking their responsibilities and not regulating this economy wrecking business !
6.......Derivatives............
The justification for the existence of Derivatives is for the hedging of risk.
A simple type of derivative is a futures contract for a crop.
A farmer can with the help of a broker can sell a futures contract for a crop which will , all being well, be harvested in a few months time. The farmer will get a fixed price at harvest time, regardless of the success of the crop. Even if it is destroyed in a flood. The value of a derivative is derived from the value of the crop at harvest time.
The derivative removes all risk from the farmer, but the risk is held by who ever is holding the derivative at any time. If the value of the crop at harvest time is higher than that paid to the farmer, then the holder of the derivative will make a return. If the harvest is destroyed then a loss will be made.
Banks also use derivatives to protect themselves from interest rate changes in a similar way to the farmers protecting their income from bad weather......
A slightly more complex derivative is a Credit Default Swap. This is derivative which takes on the risk from a lender of a borrower defaulting on a loan. The holder of the derivative will gain if borrower pays up the debt, but could lose substantially if the borrower defaults.
Derivatives become even more complex with CDOs- Collateralised Debt Obligations. These are combinations of Credit Default Swaps which are packaged up together. They will be debt from a range of sources such as home mortgage debt, business mortgage debt originating from buyouts and private equity firms. The idea is that these enable investors to reduce risk by not putting all eggs in one basket.
The problem with these CDOs is that although they do spread the risk, the risk does not disappear. However, it encouraged banks to lend more and more money in the build up to the crisis. The even bigger problem was that to lend to more people and businesses, they had to become less fussy about who it was lent to, because all the most credit worthy people and businesses already had their share of debt.
In the boom that preceded the financial crisis lots of money was lent for corporate and management buyouts involving many of the worlds biggest companies. The most concentrated areas for these businesses being the United States followed by the United Kingdom. (The two countries with the biggest financial industries) This involved the lending of around 80% mortgage by investment banks for a large company or private equity company to buy another company. The problem is many of these investments were successful on a short term basis because costs were slashed after the take over with redundancies, closing of research and development departments and selling of important assets such as the property the businesses operated from. All this worked wonders for the balance sheets of these companies. The problem is this was short term. Once you have peeled the skin off an orange, you can't create the same illusion again and again, even if a bank gives $5 billion to try. There is going to come a time when the end of the road is going to be reached with these buyouts......and I think returns on pension funds is evidence that time is looming! The problem is, while Collateralised debt obligations exist, banks can get rid of risk. That risk ends up in pension funds and other types of investment including mortgage accounts. This is why I have "Your investment could cause an Economic Crisis !" written on the back of my jaguar. They did in the last financial crisis, they are continuing to contribute to the current economic crisis and will continue to do so. Probably until people take more control of their investments !
Although most of the national press never seemed to realise it, whilst sub prime loans were blamed for beginning the crisis, many of the people in the U.S. worked for businesses that had been involved in buyouts, and thus lost their jobs as the debt ruined these businesses. The employees mortgage payments therefore defaulted. Also the mortgages themselves were investments in other peoples mortgages and mortgages held by private equity companies and big companies that had bought out other companies. Investments that the sub-prime loans were invested in were failing because lots of big companies in the States were failing due to irresponsible debt put on them by the banks. The 'buyout business has however been protected by the financial industry by claiming that Sub-prime loans were the cause of the financial crisis. If these buyouts had been blamed for the financial crisis it could have jeopardised the whole of the business finance world including the future of the stock markets. As it stands, it looks like the home buying market has been near to sacrificed in order to save the more lucrative business finance world and stock markets.
The justification for the existence of Derivatives is for the hedging of risk.
A simple type of derivative is a futures contract for a crop.
A farmer can with the help of a broker can sell a futures contract for a crop which will , all being well, be harvested in a few months time. The farmer will get a fixed price at harvest time, regardless of the success of the crop. Even if it is destroyed in a flood. The value of a derivative is derived from the value of the crop at harvest time.
The derivative removes all risk from the farmer, but the risk is held by who ever is holding the derivative at any time. If the value of the crop at harvest time is higher than that paid to the farmer, then the holder of the derivative will make a return. If the harvest is destroyed then a loss will be made.
Banks also use derivatives to protect themselves from interest rate changes in a similar way to the farmers protecting their income from bad weather......
A slightly more complex derivative is a Credit Default Swap. This is derivative which takes on the risk from a lender of a borrower defaulting on a loan. The holder of the derivative will gain if borrower pays up the debt, but could lose substantially if the borrower defaults.
Derivatives become even more complex with CDOs- Collateralised Debt Obligations. These are combinations of Credit Default Swaps which are packaged up together. They will be debt from a range of sources such as home mortgage debt, business mortgage debt originating from buyouts and private equity firms. The idea is that these enable investors to reduce risk by not putting all eggs in one basket.
The problem with these CDOs is that although they do spread the risk, the risk does not disappear. However, it encouraged banks to lend more and more money in the build up to the crisis. The even bigger problem was that to lend to more people and businesses, they had to become less fussy about who it was lent to, because all the most credit worthy people and businesses already had their share of debt.
In the boom that preceded the financial crisis lots of money was lent for corporate and management buyouts involving many of the worlds biggest companies. The most concentrated areas for these businesses being the United States followed by the United Kingdom. (The two countries with the biggest financial industries) This involved the lending of around 80% mortgage by investment banks for a large company or private equity company to buy another company. The problem is many of these investments were successful on a short term basis because costs were slashed after the take over with redundancies, closing of research and development departments and selling of important assets such as the property the businesses operated from. All this worked wonders for the balance sheets of these companies. The problem is this was short term. Once you have peeled the skin off an orange, you can't create the same illusion again and again, even if a bank gives $5 billion to try. There is going to come a time when the end of the road is going to be reached with these buyouts......and I think returns on pension funds is evidence that time is looming! The problem is, while Collateralised debt obligations exist, banks can get rid of risk. That risk ends up in pension funds and other types of investment including mortgage accounts. This is why I have "Your investment could cause an Economic Crisis !" written on the back of my jaguar. They did in the last financial crisis, they are continuing to contribute to the current economic crisis and will continue to do so. Probably until people take more control of their investments !
Although most of the national press never seemed to realise it, whilst sub prime loans were blamed for beginning the crisis, many of the people in the U.S. worked for businesses that had been involved in buyouts, and thus lost their jobs as the debt ruined these businesses. The employees mortgage payments therefore defaulted. Also the mortgages themselves were investments in other peoples mortgages and mortgages held by private equity companies and big companies that had bought out other companies. Investments that the sub-prime loans were invested in were failing because lots of big companies in the States were failing due to irresponsible debt put on them by the banks. The 'buyout business has however been protected by the financial industry by claiming that Sub-prime loans were the cause of the financial crisis. If these buyouts had been blamed for the financial crisis it could have jeopardised the whole of the business finance world including the future of the stock markets. As it stands, it looks like the home buying market has been near to sacrificed in order to save the more lucrative business finance world and stock markets.
7........Short Selling............
This involves the selling of shares you don't own !
You borrow the shares off the owner so you can sell them. The reason being, you are expecting the price to drop......... So you are selling the shares while they are high in price. All being well, after you have sold the shares, the price drops and then you buy the shares back. You then must give the shares back to the originator of the shares along with the profits minus your own cut of the profits.
The problem is, when lots of shares in a business are sold in a short time. It will inevitably cause a downward trend in the price of those shares. So you could short sell a load of shares in the same company, owned by different parties, knowing that you could manipulate the market downwards for those shares. Hence, if you are clever enough, its difficult to lose......Notice how completely irrelevant a business, its executives and possibly loyal workers could be in relation to share prices whilst some one is short selling their shares!
There have been new rules to restrict certain aspects of short selling enforced by S.E.C and the F.S.A., since the financial crisis, so there is no doubt it was one of many contributors, but short selling continues today.
8........Privatisation .........
Privatisation is taking a business owned by the state, and therefore already paid for by hard working tax paying people and then selling it to investors. Much the same as selling a house you have fully paid for to a landlord, who you will pay rent to for the rest of your life. (The difference is you won't receive a load of cash when a business is sold off as the government will get it although you helped pay for it). You will pay rent (sorry, I mean the costs of the business) for the rest of time at the amount that the 'landlord' of the business wants you to pay!
The buyout world contributed to the financial crisis as lots of private equity debt became toxic whilst many American businesses were collapsing under debt originating from buyouts. Many of these businesses started off as state run industries. As soon as any state owned business is privatised it immediately goes into debt. This is because they are never bought for cash. Instead they are used for fodder for pension funds. Banks will lend the money on the condition the pension fund will pay the mortgage off, irrespective of how well the new company performs. Usually the debt does not cause too much problems when first privatised, but this is clearly because the government (at least in the case of the UK) sells at a price which will allow the business to continue problem free at least until it is well clear of the hands of the government. Obviously any mishaps that would occur shortly after privatisation could back fire on the government. The problems often arise after the second and then third buyouts of the same business. Each time it is refinanced and the price and debt goes up each time. Not so much because of the success of the company, but because pension funds and banks need feeding with new business and their desire to get involved touts up the price of these businesses! Eventually, the effects of the debt that is put into these businesses will be felt by the customers, as the costs of the debt will be added to retail prices. Privatisation did contribute to the financial crisis but it has had a much more worrying contribution to the the much bigger world economic crisis.
This graph shows that although wholesale prices have been blamed for rising consumer prices, there is something else influencing the upward trend in electricity prices in the U.K.
Would this have happened if the industry had not been privatised?
Privatisation is taking a business owned by the state, and therefore already paid for by hard working tax paying people and then selling it to investors. Much the same as selling a house you have fully paid for to a landlord, who you will pay rent to for the rest of your life. (The difference is you won't receive a load of cash when a business is sold off as the government will get it although you helped pay for it). You will pay rent (sorry, I mean the costs of the business) for the rest of time at the amount that the 'landlord' of the business wants you to pay!
The buyout world contributed to the financial crisis as lots of private equity debt became toxic whilst many American businesses were collapsing under debt originating from buyouts. Many of these businesses started off as state run industries. As soon as any state owned business is privatised it immediately goes into debt. This is because they are never bought for cash. Instead they are used for fodder for pension funds. Banks will lend the money on the condition the pension fund will pay the mortgage off, irrespective of how well the new company performs. Usually the debt does not cause too much problems when first privatised, but this is clearly because the government (at least in the case of the UK) sells at a price which will allow the business to continue problem free at least until it is well clear of the hands of the government. Obviously any mishaps that would occur shortly after privatisation could back fire on the government. The problems often arise after the second and then third buyouts of the same business. Each time it is refinanced and the price and debt goes up each time. Not so much because of the success of the company, but because pension funds and banks need feeding with new business and their desire to get involved touts up the price of these businesses! Eventually, the effects of the debt that is put into these businesses will be felt by the customers, as the costs of the debt will be added to retail prices. Privatisation did contribute to the financial crisis but it has had a much more worrying contribution to the the much bigger world economic crisis.
This graph shows that although wholesale prices have been blamed for rising consumer prices, there is something else influencing the upward trend in electricity prices in the U.K.
Would this have happened if the industry had not been privatised?
9.........Out of date Education.....
10.......Press & Media -The finance industry's ability to manipulate them to mislead the public......
11......The vested interest of governments not to interfere with the finance industry- This vested interest, we are all suffering for............
12...... Not changing the system even when you know it is wrong
13......Justifying the financial system purely on the jobs it creates within the financial industry without accounting for the hundreds of thousands of jobs in other industries which the financial industry has cost.
14......Politicians not being held to their promises which get them the votes to get elected in the first place.
15......Governments using the wrong measures to control the economy.
16......Rating debt, using Credit Rating Agencies who get paid commission on the debt they rate !
The better the ratings they dish out, the more debt they will get to rate!......
17.....Regulators like the F.S.A. and S.E.C. being paid proportionally to the profits of the finance industry.
18....Sub-prime Loans....These got most of the blame, but I think you will have gathered by now that there was a good deal more going on that also contributed to the financial crisis and the continuing economic crisis four years on.
14......Politicians not being held to their promises which get them the votes to get elected in the first place.
15......Governments using the wrong measures to control the economy.
16......Rating debt, using Credit Rating Agencies who get paid commission on the debt they rate !
The better the ratings they dish out, the more debt they will get to rate!......
17.....Regulators like the F.S.A. and S.E.C. being paid proportionally to the profits of the finance industry.
18....Sub-prime Loans....These got most of the blame, but I think you will have gathered by now that there was a good deal more going on that also contributed to the financial crisis and the continuing economic crisis four years on.
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