Impact of Ongoing Financial Crisis on UK

Topics: Monetary policy, Economics, Keynesian economics Pages: 11 (2108 words) Published: July 30, 2014
Impact of Ongoing Financial Crisis on UK
Introduction:
The ongoing global financial crisis that have shaken the economic conditions of various countries made its own way to affect the economies from middle of 2007 and has been carried on into the year 2008. In these days the world has witness the fall of many stock markets and the collapse of mammoth financial institutes. At the same time the government of the most developed economies had to start the rescue programme for the revival of the financial systems. This crisis was nothing but the burst of an economic bubble that had been showing an upswing. The sub-prime of the European mortgage market collapsed smashing down the previous housing boom in American economy and it brought about a raffle effect around the world especially the countries which had higher degree of economic connection with the American economy. (Shah 2009) According to the World Economic Outlook, published by International Monetary Fund on 8th October 2008, the world economy was approaching towards a severe economic downturn due to the most severe economic shock since the “Great Depression” of 1929. Fund anticipated a decline in global growth (basis: purchasing power parity) by 3 percent in 2009. (Shah, 2009) The Crisis and the British Economy:

In January 2009, the world economists predicted that among the highly developed nations UK would most adversely be affected by this recession. The grim picture represented in the IMF outlook reveals that the economy of England has been contracting by 2.8 percent which is more than twice of the anticipated rate. (“UK Will be Hardest Hit by Global Recession”, 28th January 2009) The matter of fact is that for the last decade the growth performance of UK has been centred towards three sectors: housing, finance and public sector. All the other sectors have been contracting during those years of economic upswing. The major employment generating sector in Britain is the service sector (81 percent) and the service sector is dominated by the financial sector. The financial sector contributes £344 billion each year. The unique combination of efficient institution, least government regulation and agile workforce has made the financial sector of Britain a paradise for international finance. During the last decade the financial market was growing by a booming housing market and speculation. After the global credit crunch it comes to broad daylight that neither saving nor increase in earning has been the cause of growing housing market; rather it was financed by debts. Within the period 1997 to 2007 there was a gargantuan rise in personal debt from £503 billion to £ 1.4 trillion (more than double). Due to the sub-prime crisis faced by the US financial sector the UK high street banks have faced huge loss and that has seriously affected the lending operation of UK banks in the wholesale money market (the market where financial institutions borrow and lend to each other) causing a liquidity crisis and the major driving sectors of British economy have been choked off. The bubble bursts. (“Britain and the Global Financial Crisis: Issues Explained”, 22nd February 2009) Let’s consider the economic consequence of the liquidity crisis following the credit crunch. To check it out we may take the help of the macroeconomics of product and money markets. The main logic is as follows: a fall in money supply causes an excess demand situation in the money market. That would be followed by an excess supply situation in the bond market. Consequently the bond price would fall causing a rise in the interest rate. Interest rate rise causes a decline in the private investment. (Samuelson 1969, p. 394) On the other hand a fall in money supply causes a decline in the purchasing power in the hand of people and hence the consumption would also decline causing a deficient in demand. (Baumol 1972, p.371) A deficiency in the effective demand would cause the producers to cut their levels of...

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