REASON FOR SLOW RECOVERY OF THE UK ECONOMY FROM THE FINANCIAL CRISIS 2007-2009.
The United Kingdom economy was severely affected by the financial crisis in the period between 2007 and 2009. The crisis was as a result of banks over lending on real estate resulting mortgage default. Public confidence in financial institutions such as commercial banks was shuttered resulting in lack of savings in the economy. The commercial banks lacked customer deposits and could not offer the companies and businesses financial credit to finance their investment activities leading to a financial crisis in the economy. The government was forced to come up with policies that will solve the economic problem and reduce the impact of the financial crisis on the economy (Alesina, Favero & Giavazzi, 2019). However, the policies took time before having an impact in solving the financial crisis with many reasons behind the slower recovery of the economy. The United Kingdom government had to pump some money in the economy to increase the money supply. At that time of the crisis, the economy was at a recession and something had to be done to improve the level of economic activity.
The government gave a large amount of money from the national reserve to the commercial banks to facilitate borrowing. These commercial banks had huge deficits in their balance sheet due to mortgage default by borrowers. Instead of using the money to enhance money supply in the economy by lending businesses and companies, these commercial banks used the money to address their balance sheet deficit (Born & Enders, 2019, 2691-2721). The process of recovering the economy was consequently slowed. To repair the public confidence, these commercial banks decided to pay the customer deposits that was lost through bad debts. In the long run, the public started to save in the commercial banks and the bank deposit level was increasing but it took a lot of time. The financial crisis continued to affect the economy as the level of money supply in the economy was still very low. The investment level in the economy was rising but not so fast and the result was a slow recovery of the economy (Fernald, Hall, Stock &Watson, 2017, No. w23543)
Another reason that caused a slow recovery of the economy is the lack of annual production growth. The economy was not growing in terms of the production level creating a shortage of goods and a disequilibrium of demand. The input per employee was almost close to zero leading to an economic imbalance as a result of the shortage in production. In the following year, the economy started to slowly recover in terms of production and this as simply down to the fact that many people were willing to work. An increase in employment rate in the economy was not steady leading to a slow recovery (Alesina, Favero & Giavazzi, 2019).
Another major reason for the slow recovery was the austerity nature of the government policies to combat the financial crisis. The policies resulted in suppressed government spending causing a slower response of the money supply in the economy. The overall level of economic spending is also suppressed with a reduction in consumer spending and business spending. Consequently, the tax revenues reduced and benefits spending was growing (Bernanke, 2018, 251-342). The government focused on increasing the money supply in the economy by using quantitate easing to raise capital reserves of the commercial banks expecting them to lend businesses and companies and boost business spending. However, the financial regulators pressured the commercial banks to hold larger capital reserves and reduce lending so the commercial banks can improve their market share price (Born & Enders, 2019, 2691-2721).
The ideal solution for the government in the context of the financial crisis was to compensate the customer for the lost savings. It would have quickly boosted the public confidence and increase the money supply in the economy. Spending in the consumer level would have significantly increased leading to an increase in the level of economic activities. Quick recovery of the economy would have been enabled if the government focused on consumer consumption instead of an investment. By paying off the customer savings, the real income of the consumer would have increased pushing an increase in the aggregate demand of the economy (Fernald, Hall, Stock &Watson, 2017, No. w23543)
. By pumping funds in the financial institutions, the government enabled selfish bankers who were responsible for the financial crisis to address their financial defects and grow the value of their shares. The government was supposed to bring the bankers into account for their failures and crimes. Instead, the bankers were able to further benefit from the crisis by increasing the market value of their shares. Mortgage default resulted in the loss of customer deposit and the savers were not compensated for their losses (Varadi, O’Neill, Levina, Galletly, Burgess, Bridges & Aikman, 2018).
Another reason for the slow recovery of the UK economy was the lack of policy to deal with the rising rates of unemployment during the financial crisis period. The government was supposed to deal with unemployment head on to save the economy from the crisis but instead, the focus was on saving the financial institution. By creating job opportunities for the people, the government would increase the production level and consequently increase the economic activities. An increase in the level of production due to an increase in employment could have overseen a quick recovery of the economy. The aggregate consumption would have increased corresponding with the increase in the aggregate demand. An increase in the aggregate consumption would have resulted in an increase in money supply in the economy. The slow nature of the recovery of the economy was due to misguided priorities (Bernanke, 2018, 251-342).
In conclusion, the government of the United Kingdom could have reacted better and solve the financial crisis quickly if there was a proper analysis of the situation. The focus of the government should have to save the consumers in the economy. Financial institutions have a means of solving deficiency in their capital reserve. The lack of money in the economy was brought by the incompetent bankers’ decision of over-lending mortgage leading to loan defaults.
References
Alesina, A., Favero, C. and Giavazzi, F., 2019. Austerity: When it Works and When it Doesn’t. Princeton University Press.
Bernanke, B.S., 2018. The real effects of disrupted credit: Evidence from the Global Financial Crisis. Brookings Papers on Economic Activity, 2018(2), pp.251-342.
Born, A. and Enders, Z., 2019. Global banking, trade, and the international transmission of the great recession. The Economic Journal, 129(10), pp.2691-2721.
Fernald, J.G., Hall, R.E., Stock, J.H. and Watson, M.W., 2017. The disappointing recovery of output after 2009 (No. w23543). National Bureau of Economic Research.
Varadi, A., O’Neill, C., Levina, I., Galletly, R., Burgess, S., Bridges, J. and Aikman, D., 2018. Measuring Risks to UK Financial Stability.