A better world is possible - Global Commons Institute

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Copyright Bruce Nixon 2010. All rights reserved. This electronic copy is provided free for personal, non-commercial use only. www.brucenixon.com Tony Blair continues the process, privatisation by stealth, introducing competition and business concepts into public services, health, education and prisons. Mutual savings banks, building societies, banks and insurance companies become PLCs, raising capital by borrowing on the financial markets. Former members are tempted by shares and windfalls. Banks merge and small savings banks and mutual societies are swallowed up by big banks. Ownership of companies becomes more remote as they are taken over and larger and larger transnational corporations are formed. Changes in ownership become more frequent. It becomes a game like Monopoly, without responsibility for people’s needs, work or lives. Larger means more remote from communities and their needs. The advent in the 1980s and 1990s of Private Equity not publicly traded or listed on a stock exchange, the boom in “leveraged buyouts”, "corporate raiders" and "hostile takeovers". “Leveraged buyouts” impose huge indebtedness that bears down on companies and leads to deteriorating terms for employees including their pension schemes. Western countries export manufacturing to developing countries and the UK economy becomes too dependent on retail and financial services. We cease to know how to make things. Some areas of the country become deprived waste lands. Boom and Bust: The Hi-tech bubble is followed by the housing bubble. Self-regulation by banks and corporations becomes the credo. Slowly, Britain’s once admired employee pension schemes have been eroded, in some cases raided. The beginnings of the banking crisis and global recession After intense lobbying Congress repeals the Glass-Steagall Act that had separated commercial banks (that lend money) from Investment banks (that sell equities) to prevent conflicts of interest. This was a catastrophic error. Gordon Brown took away the regulatory powers of the Bank of England giving them to a weak FSA. Banks start lending irresponsibly and their senior people start awarding themselves huge bonuses based on short term earnings. Banks are next allowed to increase their debt-to capital ratios which inflate the housing bubble. Tax cuts and lower interest rates add further fuel to the fire. Incentives such as stock options encourage top management to adopt short term attitudes; huge bonuses for bankers encourage risky investments. Complicated instruments such as derivatives – “weapons of mass destruction” as Warren Buffet calls them - are created by banks; these make supervision difficult. “Gambling” becomes widespread. Securitisation – “rocket securities” - is the next innovation, invented in USA and adopted by Lehman and Northern Rock. In both cases, under a certain kind of arrogant leadership, it leads to meltdown. “Subprime mortgages” are offered to poor people who have little chance of being able to keep up payments and the resulting large scale defaults and foreclosures precipitate the crisis. These developments and the complexity of inter-bank lending lead to a complete lack of confidence within in the banking industry and the so-called credit crunch. On both sides of the Atlantic, particularly in USA and UK, flawed incentive structures, an inadequate regulatory system and inadequate supervision e.g. USA credit rating agencies and the UK Financial Services Authority (FSA) allow a situation to develop that they were designed to prevent. Takeovers by Private Equity investors increase leverage (indebtedness), hence ultimately increasing costs, and reduce the availability of company information. “Structured finance” is used by bankers to put billions and billions of $s and £s in offshore havens, many in British crown colonies like Antigua, the Bahamas, British Virgin Islands, Barbados and the Caymans, to avoid billions in tax. The US and Western economies become dependent on cheap goods and huge borrowings from thrifty China, Japan, India and Saudi Arabia. USA and UK have become hugely indebted to these countries. 22
Copyright Bruce Nixon 2010. All rights reserved. This electronic copy is provided free for personal, non-commercial use only. www.brucenixon.com Consumer and business borrowing reach unprecedented levels. UK and US government borrowing debt reaches unprecedented levels too. Before the bubble bursts UK house prices, particularly in the south east, reach the highest levels. Housing becomes increasingly unaffordable for young first time buyers and essential workers. Governments bail out the banks whilst banks continue to hold lavish parties and meetings and pay out money to shareholders. Failed bank bosses still collect huge settlements. The taxpayer will pay. Meanwhile there has been a massive collapse of confidence, leading to recession, job losses, further defaults on mortgages, damage to pension schemes, major falls in the value of equities in the stock markets which damages rich and poor. The bail outs do not actually result in essential lending to businesses because the banks have made too many bad loans. The FTSE 100 index (cut will have) recorded the worst annual performance in its 24-year history when markets closed on New Year’s Eve 2008, notching up a near 33 per cent decline. Nikkei index in Japan closed at its lowest in 26 years. In early March 2009, whilst the recession continued, the Bank of England cut its interest rate to 0.5%, the lowest in its 315 year history, and the Bank and UK government agreed to use “quantitative easing” to put £75bn to £150bn extra money into the economy. The world is now in the midst of a recession with incalculable consequences. But it could prove to be a blessing! Notes: for full definitions of these terms go to Wikipedia. Hedge funds “A hedge fund is an investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of investment and trading activities than other investment funds and pays a performance fee to its investment manager”. Wikipedia – Hedge Fund. Leveraging “Leveraging in finance, or gearing, is borrowing money to supplement existing funds for investment in such a way that the potential positive or negative outcome is magnified and/or enhanced. Financial leverage (FL) takes the form of a loan or other borrowings (debt), the proceeds of which are (re)invested with the intent to earn a greater rate of return than the cost of interest. Wikipedia –Finance. Private equity “Private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange”. Wikipedia –Private Equity. Securitization is a structured finance process that distributes risk by aggregating assets in a pool (often by selling assets to a special purpose entity), then issuing new securities backed by the assets and their cash flows. The securities are sold to investors who share the risk and reward from those assets. It is similar to a sale of a profitable business ("spinning off") into a separate entity. Wikipedia – Securitization. Short selling “Short selling or "shorting" is the practice of selling a financial instrument that the seller does not own at the time of the sale”. Wikipedia - Finance. An unbalanced economy was created, that eroded our ability to make things, took away pride in doing well by doing good, destroyed communities, de-skilled people and created massive insecurity. Amongst the legacies of the Reagan/Thatcher era, is a huge infrastructure problem which, in USA, Barack Obama is now seeking to address. In UK, using Private Finance Initiatives (PFIs) and Public Private Partnerships (PPPs) to address this legacy has added to and disguised the debt burden. Do privatisation and these devices provide value for money? These crucial questions remain unanswered. Government has not published evaluations, not ones I am aware of, as to whether the privatisation of railways, health services, hospitals, prisons and schools, their construction and refurbishment, London 23
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