Entries Tagged 'finance' ↓
January 22nd, 2008 — finance
there is a saying if one person dies it is murder, if hundreds of people die it is mass murder and if it is thousands of people it is an act of God.
If a single mother gets £20 a week benefits she is a ’scrounger’ If you avoid paying £1000 tax, you are a tax dodger But, if you are a wealthy banker who gains loan guarantees of £55bn you are just the Chairman of Northern Rock.
To be fair, the government does have a real dilemma about Northern Rock. Basically due to bad loans the bank had a shortage of cash. To secure the liquidity of the bank, Northern Rock had to borrow from the Bank of England and then also secure loan guarantees from the Government. What this means is that if the bank defaults, on its loans the Government will step into pay them.
The government wanted to avoid Nationalisation of the Bank and sell it off to a private sector bidder. Its motives for doing this are mainly the political stigma of ‘nationalising’ and to a lesser extent looking after Northern Rock Shareholders.
Nationalisation involves the Government taking control over its assets and assumes responsibility for running the bank. This option would have been bad for Northern Rock shareholders who would have got very little compensation. However, the route of nationalisation was also seen as the best way for the government (taxpayers) to get its money back. Personally, I don’t have a problem with Nationalisation, whilst it is bad luck for shareholders, this is the risk of investing in companies who use poor business plans.
Goldman Sachs plan for Nothern Rock
Under the Goldman Sachs plan the government loan to Northern Rock would be converted into a loan (bond). This bond would be bought by private individuals, but, to make it more attractive, the Government will underwrite any loan defaults. If bought out, Virgin or Olivant would be responsible for running the bank, with the government probably taking a 10% stake in lieu of its loan guarantees. It is not nationalisation, but, it is a public private partnership, where most of the guarantees come from the government. In theory if Northern Rock becomes profitable then the taxpayer will receive dividends, but, in practise the cost of propping up the bank may be more than the return.
Nationalisation would have meant the bank’s debt would be on the Government’s balance sheet, but the public finances would have benefited 100% from future Northern Rock dividends.
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January 10th, 2008 — finance
Readers Question from:Trevor Downer. Glasgow. From what little I know the theory of Economics appears to have very little scientific basis. Two “experts” will give two different answers, add a third “expert” and yet another answer is provided.
Can someone explain to me why there is no easy answer to the problem of the Northern Rock Bank?I presume that the 26 billion pounds loaned by the government is the amount that the bank owes, including interest, to lenders to the bank. I presume that this money has been loaned by the bank to borrowers that have the assets that are equal to that amount and will return a greater amount over the agreed loan period.
This suggests to me that the simple answer would have been to close the bank down, for the government to pay that sum directly to the lenders and have the borrowers make re-payments directly to the government, thus, no losers and, over a long period, large gains for the government, ie, us the taxpayers.
Have I gone wrong somewhere? Where have I gone wrong? An explanation would be appreciated.
Firstly, you are absolutely right about Economists. Put 10 in a different room and you will get 11 different answers (or so the joke goes)
It is an interesting question.But, I think that if the bank is closed down i.e. made bankrupt, it is hard for the government to get its money back. Because if you declare bankruptcy there is no requirement to pay back your debtors. If the bank closed down it would be difficult for the government to get its money directly from the borrowers. Continue reading →
January 9th, 2008 — finance
Monetary Policy used to be the preserve of the Government. The Government would change interest rates to meet its various economic objectives. At different times the Government would give priority to:
- lower inflation
- Higher growth
- Targeting exchange Rate
- and even balance of payments.
For example, in the early 1980s, the Thatcher Government increased interest rates to reduce inflation.
In 1987, after a stock market crash, interest rates were cut to boost economic growth. In 1992, interest rates were increased to 15% to try and maintain the value of the £, which was then in the Exchange Rate Mechanism ERM
Arguments for Central Bank Independence
- It was argued that the governments tended to make poor decisions about monetary policy. In particular they tended to be influenced by short term political considerations.
- Before an election, the temptation is for a government to cut interest rates. This increases economic growth, reduces unemployment and increases the political support of the party. However, this expansionary monetary policy may lead to inflation and boom and bust economic cycles. Therefore arguably, it is better to take monetary policy out of government’s hands.
- People have more confidence in the Central Bank, therefore this helps to reduce inflationary expectations. In turn this makes inflation easier to keep low. Continue reading →
January 5th, 2008 — finance
Money Markets are simply markets where highly liquid assets are traded. Money markets can involve financial and corporate markets for money. Typically, high volumes are traded between a few large financial institutions. They are a way of ensuring liquidity between banks and other institutions. The price of money is dependent upon the interest rate. This is effectively the cost of borrowing or lending money.
Money Markets can have a significant impact upon the wider economy. A shortage of funds in the money markets can cause higher interest rates for consumers or shortage of funds for lending. The global credit crunch of 2007/08 was related to a difficulty of raising funds on the money markets. Continue reading →
January 4th, 2008 — finance
The different Stock Market Indexes in the UK
- FT 30. This is the oldest stock market index in existence. It came into existence in 1935. It is an index of the 30 biggest and most important companies listed on the stock market. It is not size alone that leads to inclusion. A cross section of firms has sought to be included in the index. It started with an index of 100 in 1935. All shares count equally, it is not weighted according to market capitalization. Therefore, it acts as a sensitive barometer to the mood of the market. List of FT 30 Companies
- FTSE-100. The FT30 has been superseded in importance by the FTSE-100. ‘Financial Times, Stock Exchange top 100 list of companies. With 100 companies it gives a broader picture of the market sentiment. It is used as the ‘headline figure for the UK stock market. The FTSE-100 comprises 82% of market capitalisation. List of Companies in the FTSE-100 Continue reading →
January 4th, 2008 — finance
If you would like to invest in the Stock market, but, are worried about stock market volatility there are a few different strategies that you can take to spread the risk.
Tips on Regular Stock Market Investment
Don’t Panic after short term shocks.
If you look at the long term trends of the stock market, it never moves in a slow line. Be prepared for volatility, don’t get carried away by rising prices; but, don’t despair at days when the market crashes. If you panic sell any time the market looks to be falling, your investment will not work.
Regular Investment
Rather than invest all your money at one particular time, invest money each month. This means that you are less likely to have all your money tied up when the market is at the top. Even if the market falls, you can increase your investment by buying more each month; eventually the market is likely to rise again.
Use Pooled Funds
If you don’t want the hassle of choosing stocks, you can buy unit trusts and investment trusts. This is where professional fund managers spread your money across different assets and companies. These unit trusts tend to mirror much more closely the FTSE-100 and FTSE All Share. Continue reading →
January 3rd, 2008 — finance
In economics, the definition of investment is quite strict.
- Investment means an increase in the capital stock – Gross fixed capital formation.
When we buy shares or put money in the bank. This is not seen as investment, it is seen as a mere transfer of ownership – there is no increase in the productive capacity of the economy. Therefore ‘investing’ money in the bank is properly known as saving.
Financial Investment
- In common terminology we refer to ‘investing money’ in a bank. It is better to refer to this as ‘financial investment’ to avoid confusion.
Investor
- An investor is someone who increases the capital stock, or engages in ‘financial investment’
January 3rd, 2008 — finance
When weighing up what to buy and where to invest some speculators may wish to hedge against risky investment.
A simple way to engage in hedging is to buy a safe asset for every risky asset. However, some people may want to hedge against a particular investment. This can be done through using derivatives.
Hedging with Put Options
An example is using a put option. This gives the owner the right, but not obligation, to sell at a certain fixed price, before a certain date.
This means that if the share price falls more than the agreed price (striking price) then you can sell it.
Example, suppose you buy shares in ICI for 100p, hoping they will increase in value. To hedge, you could also take out a put option, which gives you the right to sell shares in ICI for 80p in the next 6 months. This means that if shares in ICI fall by 30%, the investor can sell at 80p. Continue reading →
