Economic policies of the UK on overcoming global financial crisis of 2008 - Essay Example

? The UK Economy The UK Economy The UK economy got hard hit by the global economic crisis just like every other economy all over theworld. After not less than 15 years of strong but progressively more unbalanced escalation, the UK economy contracted sharply throughout the crisis; nonetheless, other advanced economies also got affected. Fortunately, the UK happens to be one of the world's foremost economies thereby being well-placed in benefiting from the recovery of the global economy due to the strengthening of UK's economic, as well as the trade links together with China. Although, in the second half of 2009, the UK economy began growing once again, unemployment within the UK continues to be well below the levels within the US, as well as the euro-zone. As a result, re-balancing the economy, while at the same time, returning to sustainable growth of the economy happens to be the Government’s overriding main concern (Ciro 2012, p.11). In March 2011, the Government published its “Plan for Growth” along with the Budget; this plan had four ambitions: creating the most competitive system of tax within the G20 group of key economies; making the UK the best place within Europe for starting, financing and growing business; encouraging investment, as well as exports as a key to a more balanced economy; and finally creating a more educated workforce that happens to be the most flexible within Europe. Amongst the measures announced by the Government is a lessening in the tax rate on the profits of businesses; an internationally competitive tax rule governing multinational organizations; tax enticement for company investment; an embalm of deregulation particularly for helping small businesses; additional investment within infrastructure, science, vocational training, research and development; as well as the creation of 21 latest enterprise zones (Goodstadt 2011, p.22). Financial crises are not a new thing; as a matter of fact, the world of finance flags down the invention of the wheel over, time and again, in most cases, in a slightly more unbalanced version. In every few years, there happens to be a financial disaster of some kind somewhere around the world, with the UK being amongst the countries hard hit by the most current ones. Every crisis has a unique cause, as well as characteristics; however, the following are typical amongst the factors responsible for generating this disaster: overshooting of markets; rise in credit; excessive debt leveraging; incorrect view of dangers; a country’s capital flight; off-balance sheet procedures by banks; macroeconomic policies that are non-sustainable; deregulation with no appropriate system of supervision; and latest financial instruments utilized in an inappropriate manner. The distinctiveness of the current disaster is that it happens to be a combination of a financial crisis coming from one of the largest world economy, i.e. the USA, with a universal downturn. The present financial crisis got triggered by the replete of the housing bubble, together with the consequent sub-prime mortgage crisis within the USA. Although the crisis has not yet been thoroughly analyzed, there are suggestions by experts that a number of causes explaining the reasons for the sub-prime crisis, which exploded in August 2007 in the USA ( Hansjorg & Milka 2011, p.36). There are two significant trends in the years resulting in the crisis; firstly, interest rates had been dropping since the 1980s, secondly, following the financial crisis in Asia during 1997–1998, countries began accumulating foreign exchange reserves, aided by the current account deficit of the US. The majority of countries diverted part of their reserves to sovereign wealth funds put into higher-yielding assets compared to the US Treasury, in addition to other government securities, streaming into high technology stocks and, following the “dot.com Bubble” spout in 2000, to housing markets within the USA and countries such as the UK. The continuous falling of interest rates, along with the large inflows of foreign funds paved way for easy credit conditions, advancing debt-financed consumption, while, at the same time, fuelling the housing bubble within the UK. Furthermore, new financial vehicles got developed; loans of different kinds were accessible while consumers assumed an extraordinary debt load. As a result, of housing and credit booms, a big recognition of the securitization of assets, especially mortgage debt (consisting of sub-prime mortgages) to collateralize debt obligations (CDOs). Mortgages underwent the securitisation chain, creating a connection between home buyers, lenders, investment banks, together with investors. Home buyers were capable of getting credit to buy houses; lenders vended their mortgages so as to investment banks; while investment banks mingled mortgages, together with other loans in creating complex derivatives that derived their worth from mortgage payments, along with housing prices; on the other hand, investors bought the CDO, the majority of which gained the highest qualifications from rating agencies thereby becoming popular with retirement funds. As a result, this securitisation chain turned into an enormous increase within CDOs, particularly the sub-prime factors, because they produced higher interest rates as intended by the investment banks. This led to banks borrowing colossal amounts of money in order to buy more loans, while at the same time selling more CDOs thereby leading to their levels of leverage i.e. the ratio between borrowed money and the money belonging to the bank vastly improved. This process got facilitated by a vague system of incentives, as well as the underestimation of risks down the securitization chain (Jackson 2010, p.49). Considering the financial market’s interconnected nature, the financial crisis within the USA rapidly stretched throughout the financial sector in the world, thereby spilling over to other industrialized, as well as emerging market economies and the UK was no exception. This led to the deepest global recession since the Second World War. As a result, there was slowing against the background of stiffening credit conditions, with developed economies falling into placid recession during the middle quarters of 2008; nonetheless, emerging, as well as developing economies continued growing at fairly robust rates. This situation deteriorated quickly in September 2008, due to the collapse of Lehman Brothers, which happens to be a US investment bank that was the rescue of the greatest US insurance company (AIG), while, at the same time, intervention in a level of other systemic institutions within Europe. This led to international investors reacting to financial shocks by means of re-balancing their portfolios, thereby creating a feeling of uncertainty, as well as lack of confidence, which profoundly influenced financial institutions, particularly in the UK. The capital center of banks got sternly reduced owing to latest accounting rules affecting capital i.e. asset ratios, having a negative effect on their capability to give additional loans. The majority of companies could go bankrupt froze credit markets since trust and confidence were absent, hence complexity in borrowing (Kolb 2010, p.55). These events brought an enormous increase in the perceived dangers and the solvency of the majority of the most established financial names since they got hit hard. This further worsened financial strains within a global feedback loop with advanced economies experiencing an unprecedented decline within the fourth quarter of 2008. Although, at a different level, all the economies all over the world got affected. Whatever the causality relations might be, it is clear that throughout the years prior to the crisis massive inflows of foreign funds from countries, which had extensive trade surpluses developed easy credit conditions, resulting in a credit boom thereby encouraging debt financed consumption in the majority of advanced economies, together with some emerging countries. However, this imbalance became unsustainable as time went by this led to the development of latest financial products, the nature that might not have been apparent to a number of regulators, along with financial market experts, thereby resulting in distorted financial markets (Nanto 2010, p.71). The UK's public finances According to the Government, its most urgent priority is tackling the budget deficit, so as to be able to maintain confidence within the economy, while, at the same time, supporting the recovery. In June 2010, the Government announced a five-year plan, on the basis of credible latest independent forecasts, of eliminating the structural budget deficit while ensuring that public debt goes down as a proportion of national income. The majority of the deficit reduction emerges from reductions within public spending instead of increases in taxation. There was the introduction on a levy on banks thereby discouraging inappropriate risk-taking. In October 2010, the Government announced tough latest public expenditure plans, for permitting the progressive exclusion of the budget deficit. This will ensure that the budgets of the majority of ministries got reduced within the coming years; however, priority was on continued investment within healthcare, international development, education, infrastructure, science and national security. This fiscal plan by the Government got endorsed by means of the IMF, OECD as well as the European Commission. This has been helpful to the UK in keeping its “triple A” credit ranking for its government debt, while, at the same time, allowing interest rates to be maintained lower than how they would have been (Ciro 2012, p.61). The UK's financial sector regulation In June 2010, the Government announced a radical reform regarding financial sector regulation, following the global economic crisis. As a result of this, the Bank of England will get the opportunity of controlling macro-prudential regulation, as well as the supervision of micro-prudential regulation. This will lead to the Financial Services Authority getting replaced by a modern prudential regulator that will end up being a subsidiary of the Bank of England. Subsequently, there will be the creation of a sovereign Financial Policy Committee present at the Bank of England responsible for considering threats to economic, as well as financial stability. There will be the establishment of a modern Consumer Protection, as well as Markets Authority necessary for the regulation of the conduct of all financial institutions, while, at the same time, providing services to consumers. There has been the establishment of an independent commission on the banking industry responsible for considering the structure of banking within the UK, with the intention of reducing risk, as well as increasing competition (Kolb 2010, p.87). The final report by an independent commission on the structure of banking within the UK got published in September 2011. The recommendations made by this commission included the placement of a regulatory ring-fence surrounding the retail, along with the investment activities of worldwide banks within the UK; enhancing the capability of banks in absorbing losses comprising of an equity capital appendage for large banks (Shaw 2011, p.81); a constitutional bail-in power in order to for private investors, not taxpayers, bearing the losses if things break down; and measures to enhance competition within the UK banking sector. Currently, the Government is contemplating these recommendations. The UK's economic and business strengths The UK possesses fundamental strengths that tend to be undiminished through the economic crisis, this places the UK in a strong spot of benefiting as the pace of recovery accelerates. The UK continues to be one of the world's foremost economies considering that it happens to be the world’s sixth biggest economy, as well as being a trading nation since it is one of its top ten manufacturers, while, at the same time, the second greatest exporter of services. Apparently, the UK presents a unique gateway of international connections thus making it a magnet for a number of global businesses; its membership of the EU offers companies in the UK privileged accessibility to the world's greatest single market, with not less than 500 million consumers; there are many foreign companies who have their European headquarters within the UK compared to France and Germany combined. Considering that the UK happens to be one of the most open economies all over the world, it welcomes trade, together with investment from overseas, as well as from sovereign wealth funds; research shows that the UK is the most favourable destination within Europe for overseas direct investment, together with the third worldwide. Additionally, the UK has strong public institutions; this is making it a stable regulatory environment, along with a respected independent judiciary. In Europe, the UK happens to be the easiest place of setting up and running a business while having one of its most dynamic, as well as flexible labour markets; this led the World Bank to rate the UK first within Europe while fourth globally due to its “Ease of Doing Business”. London continues to be the world's premier international centre, due to its financial services, together with legal with other business services; in 2011, London was in the first place in Global Financial Centres Index. There are other sectors whereby the UK companies head the world such as advanced engineering, energy and renewable, aerospace, creative industries, architecture, information & communications technology, biotechnology & pharmaceuticals along with retailing. The UK happens to be a world leader in the field of innovation since it is at the second position after the US due to its quality of the research base; the UK's topmost universities rank amongst the very best around the world, and have won the largest number of Nobel Prizes compared to other countries; it has also created five of the world’s topmost twenty best-selling medicines. The home of English language happens to be the UK; this is a language widely accepted internationally used in business, science as well as technology. Finally, the UK’s latest anti-bribery legislation is amongst the most contemporary robust within the world, while, at the same time, underlining the UK’s attractiveness as a location of doing business (Sylvester & Donato 2012, p.69). The UK's Partnership for Growth with China The UK, together with China have an exceptionally strong economic and commercial relationship, while, at the same time, they share an interest within the open markets for trade, along with investment. In 2009, the UK worked extremely closely with China in resolving the global economic crisis. The UK is the only European country with a high-degree economic policy dialogue together with China. There exists an extensive programme of alliance between British, as well as Chinese policymakers with practitioners on financial sector development, along with regulation. On the other hand, China happens to be the UK's biggest trading partner, following the EU and the US. Apparently, the UK is not only one of Europe's topmost investors within China, but also one of the biggest recipients of Chinese investment within Europe. In November 2010, David Cameron who is the UK’s Prime Minister visited Beijing, and in his speech, he said that it is crucial for the UK, along with China to be partners for growth. Research shows that the UK and Chinese economies tend to be complementary strengths; this is evident since China turns out to be the largest exporter of manufactures in the world, whereas the UK has world strengths when it comes to innovation, as well as services. Within the next stage of China’s development, there is enormous potential for advanced economic, along with commercial connections between the two countries considering the growth of China’s middle class, along with domestic consumption. There is a need for UK companies, along with their international course that increasingly work together with Chinese companies all over the world. On the other hand, Chinese companies, along with investors have the opportunity of using the UK as a springboard in entering the EU, along with the global marketplace (Goodstadt 2011, p.79). The UK happens to be an open economy, which welcomes the brightest, as well as the best from all over the world. As a result, the UK has come up with the “points based” visa system aimed at giving clarity to businesses, employees, as well as students concerning what is necessary in making a successful visa application. China turns out to be the UK’s second largest, as well as fastest developing visa market; in mainland China alone, there are UK Visa Application Centres within 12 cities with a business visa taking a remarkably short time. A number of tailored businesses, together with VIP products are accessible in making the application process much easier. The latest visa rules introduced in 2011 are making it easier for high-value investors, together with entrepreneurs coming to the UK. Those people coming to the UK and investing large sums of money get the right of settling permanently within the UK faster ( Hansjorg & Milka 2011, p.80). In 2009, the international leadership of the UK through its chairmanship of the G20 assisted the world in taming the worst economic crisis for almost three-quarters of a century. It succeeded in drawing the leaders of the world's main economies at the G20 Summit within London by April 2009 thereby agreeing on strongly coordinated action of stabilizing the world economy (Jackson 2010, p.95). These leaders also laid out rules for strengthening the financial sector directive, together with the international financial institutions, thereby making future crises less probable. This London Summit made a turning point within the global crisis. Subsequently, the UK continues providing the ideas, along with initiative for shaping the international economic order for the 21st century. References: Ciro, T., 2012. The Global Financial Crisis: Triggers, Responses and Aftermath. London: Ashgate Publishing, Ltd.. Goodstadt, L. F., 2011. Reluctant Regulators: How the West Created and How China Survived the Global Financial Crisis. Illinois: Hong Kong University Press. Hansjorg H., HYPERLINK "https://www.google.co.ke/search?hl=en&sa=N&prmdo=1&biw=1024&bih=578&tbm=bks&tbm=bks&q=inauthor:%22Hansj%C3%B6rg+Herr%22&q=inauthor:%22Milka+Kazandziska%22&ei=jKXHT-zXIqKk0QW1w7m3Dw&ved=0CE8Q9Ag" Milka K., 2011. Macroeconomic Policy Regimes in Western Industrial Countries. New York: Taylor & Francis. Jackson, J. K., 2010. Financial Crisis: Impact on and Response by the European Union. New York: DIANE Publishing. Kolb, R., 2010. Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future. Chicago: John Wiley & Sons. Nanto, D. K., 2010. Global Financial Crisis: Analysis and Policy Implications. New Jersey: DIANE Publishing. Shaw, D., 2011. The Impact of the Economic Crisis on East Asia: Policy Responses from Four Economies. Taiwan: Edward Elgar Publishing. Sylvester Eijffinger, Donato M., 2012. Handbook of Central Banking, Financial Regulation and Supervision: After the Financial Crisis. Nottingham: Edward Elgar Publishing. Read More