The United Kingdom Economic Policies and the Financial Crisis - Assignment Example

The United Kingdom economic policies and the financial crisis By School Location The United Kingdom economic policies and the financial crisis Introduction Following the economic crisis that disrupted the economic activities of the United Kingdom, many issues were raised based on the country’s preparedness concerning dealing with economic issues. In this case, based on the event s that led to the financial crisis and the means used to respond to the crisis questions were raised whether the United Kingdom required an efficient economic policy paradigm. The article UK Economic Policy and the Global Financial Crisis: Paradigm Lost? By (Hodson & Mabbet, 2009) was one of the major articles that looked into the economic policies of the country prior and during the economic crisis. Basing their analysis on the requirement of policy paradigms, the authors of the article emphasized the need to structure a strong economy based on strong economic policy paradigms. The following analysis aims to establish the essence of policy paradigms in response to economic crisis as per the article by Hodson and Mabbet. 1) What is Hall’s model? The proposed policy with regard to dealing with the economic crisis in the United Kingdom was based on implementation of Halls economic model. In this case, the implementation of the model was aimed at providing a multi dimensional approach towards dealing with the economic crises (Hodson & Mabbet, 2009, pp. 1042). Consequently, the applicability of this model can be identified through analyzing what it entails. Halls model of policy paradigm was based on the requirement to define the role of the state with regard to developing policies and tackling issues based on the policies (Hall, 1993, pp. 275). Whereas the state has been relied upon to always deliver solutions based on apt policies, the concept of developing policies involved many factors. In this case, policymaking involves a cooperation of various state bodies and exchange of ideas in order to develop policies that are relevant to the issues being addressed (Hickson, 2005 pp. 162). As a result, the development of policies was subject to analyzing a current issue based on previous policies used to respond to the issues. Since most issues affecting a state were mainly economical Hall’s model narrowed down to the assessment of the economy concerning the levels of economic decision-making (Hickson, 2005 pp. 163). Based on the model the levels of economic policymaking were three. The first level involves progressive transition of policies based on the changing economic situation. The second level involves developing proposed policies with regard to dealing with the economic issues in a state. On the other hand, the third level is perceived to be the most important level of policy development. The third level involves embracing all the required objectives of the policies in order to work on policies that respond to economic issues comprehensively (Hickson, 2005, pp. 163). 2) What are the main ideas behind monetarism? Hall’s model was based on the presumption that since the 1970’s, the major economic solutions in the United Kingdom were founded on monetarism. Monetarism is an economic theory that supposes that the amount of money in circulation in a given country influences the level of gross domestic product and prices within a country (Jahan & Papageorgiou, 2014). Therefore, monetarism is founded on the notion that the level of expenditure in a country plays a major role in determining the economic conditions of a country (De long, 2000 pp. 86). In this case, policies influenced by the monetarism theory are meant to gauge the level of money in circulation in a given country. Therefore, the main goal of monetary policies in a country is to regulate the circulation of money through monetary policies. For monetary policies of a country to succeed, the respective authority must ensure that the level of inflation in a country is controlled in addition to implementing policies that enable financial institutions in a country to facilitate a positive financial growth (Pepper & Oliver, 2001, pp. 8). The major state body that is given the mandate to implement the policies under the monetarism theory is the central bank. Nevertheless, whereas the monetarism is perceived to be an ideal policy with regard to controlling the inflation levels, interest rates and growth of Gross domestic product through control of the money supply the policy may also be a major contributor to an economic crisis. For instance, the initiative by the government of the United Kingdom to control the financial crisis of the United Kingdom during 2008- 2009 through controlling the circulation of money led to a severe case of financial crisis than it was prior to the intervention (Williamson, 2012, pp. 2570). 3) What are the main ideas behind the New-Keynesian approach? The main ideas behind the New-Keynesian approach can be presumed to be an improvement of the old Keynesian theory. The Old Keynesian theory maintains that the utilization of resources in an economy cannot be fully attained unless the state intervenes in order to increase the rate of employment and economic growth (Kindleberger, 2013, pp. 41). However, economists establish that more factors influence the economy of a given state as opposed to the factors identified in the old Keynesian model. Therefore, the new Keynesian model is based on the requirement to recognize the major factors that influence the economy of a country. The new- Keynesian approach supposes that the rigid prices in the market as well as the forces of demand and supply and other economic elements that influence market trends should be incorporated in the new Keynesian model (Hartley, 2014). The new Keynesian theory maintains that contrary to the old Keynesian model the rate of employment in an economy is not constant. Moreover, prices in the economy do not respond to a definite pattern. Therefore, individual changes in an economy may not necessarily reflect the overall change in the state economy. Nevertheless, the new Keynesian model supposes that lack of cooperation between individual economic patterns disrupts the economy a country’s economy (Mankiw, 2008). Several theoretical conditions are perceived to be in existence in every market that may be analyzed under this approach. For instance, this approach supposes that a lot of markets have the ability to determine prices hence the reason for persistent high prices in the market regardless of the demand changes. On the other, hand the labor markets tend to be rigid hence the high resistance to drop wages despite an experienced decrease in demand during inflation (Pettinger, 2013). As a result, the new Keynesian approach proposes that unlike the old Keynesian notion that market forces happen on a small market scale all the dynamics of a small market may be exhibited on a national scale. 4) What was the main goal of monetary policy before the crisis? Prior to the economic crisis in the year 2007 and 2008, the United Kingdom retained some aspects the monetarism theory on its economic policy. In this case, based on the requirement to maintain a stable monetary supply system in the economy, the government of the United Kingdom aimed at attaining this objective through structuring dynamic housing rates of the country. This policy was also in line with the government’s goal of curbing inflation (Hodson & Mabbet, 2009, pp. 1044). Inflation in the United Kingdom was persistent due to the “wage–price dynamics” in the market (Hodson & Mabbet, 2009, pp. 1044). The wage price dynamics have a “cost push” effect on the economy whereby high wage costs may lead to inflation (Mehra, 2000). In this case, based on the effect of the wage price dynamics in the United Kingdom Market it was essential for the government of United Kingdom to monitor the levels of price fluctuations and employment in the country. The economic impact of the wage-price dynamics relies on the fact that consumers and firms in the market use prices as a benchmark to spend money. Hence the higher the prices the less money spent and the lower the prices the higher the spending habits which in this case leads to increased circulation of the individuals income (Poole & Wheelock, 2008) .Therefore, the inflation levels in the country would be controlled by maintaining the “output and the employment” at sustainable levels (Hodson & Mabbet, 2009 pp. 1044). In addition based on the emphasis on the housing prices, the government structured its economic policies to focus on monitoring inflation and managing the interest rates of the country. This emphasis on interest rates can also outline the high level of house purchases in United Kingdom due to a significant decline of housing rates prior to the financial crisis (Garratt, 2013). Therefore, since the house rates were used as a yardstick to determine the asset prices in the country, this contributed to the rapid financial crisis as the interest rates rose rapidly. 5) What are its new goals after the crisis? Why? Following the detrimental effects of the financial crisis, the government aimed to enhance inter sate policy dialogue among members of the European Union (Hodson & Mabbet, 2009 pp.1049). In line with collaboration with other countries, one of the goals after the crisis was to increase the competitiveness of London city based on the performance of the major cities in the world such as New York City (Hodson & Mabbet, 2009, pp.1049). The goal to increase the competitiveness was to exploit the strengths of London firms in order to bolster the overall economy of Britain. London has been over the years a host of leading financial firms in the globe. However, after the financial crisis the credibility of the London firms with regard to being global financial leaders was disputed (Scott, 2013). Therefore, the goal to increase the competitiveness of the London city would have a general improvement in the economy of the United Kingdom since London was the heartbeat of the country’s economy. Additionally, another goal involved ensuring that fraud or any other unprecedented incidents did not hinder the policies that encouraged healthy consumer decisions that would promote asset growth (Hodson & Mabbet, 2009 pp.1049). This goal was meant to entice non-state institutions to invest in the country in order to improve the stability of the markets. It is noteworthy, that this goal also coincided with the first goal. Based on the encouragement to invest most private investors took to London in order to launch Initial public offers in the vibrant London financial markets (Weinmann, 2014). Therefore, the creation of scandal free United Kingdom market would not only be effective in encouraging the investors to trade in the economy but it would also encourage the consumers to have faith in the market. Consequently, this would enable the consumers to spend their income in the market hence maintaining a stable supply of money. 6) How have the new goals been implemented? The new goals have been implemented through the macroeconomics policy paradigm (Hodson & Mabbet, 2009 pp.1051). Thus, the major policies employed were based on the controlling the inflation rate in the country. In order to implement these goals the Treasury of the United Kingdom, the Bank and the financial services Authority (FSA) made a pact. The reason for the pact was also based on the decision to foster a union among the countries of the European Union. In this case, whilst each party had its own role in the event of a financial crisis the three parties were to make a major decision based on consultations (Hodson & Mabbet, 2009, pp.1051). The government gave the FSA the mandate to maintain a positive reputation of the market in order to create a conducive environment for the consumers in order for them to participate in the financial market. Consequently, the government ensured that under the partnership of the three institutions the FSA would have the sole responsibility of regulating the financial position of the country since enabling the bank to regulate monetary policy would give the bank of England more authority (Hodson & Mabbet, 2009 pp.1051). Moreover, the government of the United Kingdom decided to offer all banks in the country deposits in the United Kingdom. This also involved allowing the banks to purchase securities in addition to using the securities to lend. In the event the banks incurred losses from these securities the government would refund money equivalent to the losses (Hodson & Mabbet, 2009 pp.1051). Another means of implementing the government’s economic policy was to sustain the monetary policy by borrowing funds. 7) What is the main problem with financial regulation (or banking policy)? In any economic situation, banking policies are relied upon to provide solutions to the economic situation of a country. However, banking policies do not guarantee a reliable reprieve for a financial crisis (Rahn, 2008). The bank policy introduced in the country was aimed at reducing the interest rates of the banks. However, due to the level of inflation during the crisis the reduction in interest rates did not have a significant effect with regard to providing a reprieve for the failing economy. Moreover, the interest rates reduction proved to be elevating the rate of inflation in the country (Hodson & Mabbet, 2009 pp.1051). As a result, this highlighted the major limitation of the financial policies. In most cases, the banking policy also relies on the strength of the banking system in the given country. For the financial regulation to be effective, the banking system in the country must be cohesive (Lindgren, Garcia & Saal, 1996, pp. 163). Therefore, because the bank of England, the FSA and the government attempted to apply a financial policy through a new structured banking framework the banking framework was not well established. Hence, the financial regulation in the country would not be effective sine the new financial structure in the country was not stable enough to effectively follow the financial policies. Moreover, regardless of the fact that inflations affect the circulation of money in a country most commercial banks in developed countries have high liquidity levels. Therefore, the banking policies may end up not having a significant effect on these banks (Nadar, 2013, pp. 184) .Consequently, the effectiveness of the banking policy relies on the stabilization of the market. Therefore, banking policy alone cannot alleviate the financial crisis in an economy (Enoch & Green, 1997, pp. 88). Nevertheless, regardless of the fact that banking policies tend to regulate the financial crisis in a state banking industries in a state may also become victims of their own banking policies. In the event that the banking policies may not be effective in controlling a financial crisis the banks may end up delving into a deeper crisis than the financial crisis that was intended to be controlled (Caprio & Honohan, 2002 pp. 2). 8) What would it be the main ingredient(s) of the new paradigm according to the Authors? The new paradigm as outlined in the paper was meant to focus solely on the financial crisis as opposed to providing long-term solutions for the economy. Based on the approach of the government towards the development of the policy paradigm, the policy required different ingredients in order to tackle the financial crisis. Therefore, the ingredients for the new policy paradigm were based on the proposition that economic crisis was based on recurring risk factors as opposed to the macro economical factors outlined in the Philips curve. However, the authors of the article note that the paradigm implemented by the United Kingdom government to curb the financial crisis in the country was only based on two orders (Hodson & Mabbet, 2009, pp.1051). Whereas the two orders do not satisfy the three-order sequence in order to signal a paradigm shift, it is not essential for economists to embrace an entire paradigm shift in incidents of economic crisis (Paul, 2010). However, for the country to embrace a new paradigm the government should introduce more financial instruments in order to provide a multi dimensional approach to the financial crisis. Since the approach used by the government was more politically oriented, the new paradigm needs to have backing that is more political. Moreover, for a new policy paradigm to be embraced it is essential for the policy makers to analyze the potential political response to the policy paradigm (Hodson & Mabbet, 2009, pp.1051). 9) Contemplating the current developments after the paper’s written. What is your own interpretation on the current monetary paradigm? Based on the assessments of the policy paradigm outlined in the paper, the United Kingdom has since implemented the monetary policy for five years. The major goal of the monetary paradigm was aimed at regulating the asset-price conditions as opposed to attaining financial stability in the country. Whereas this approach seemed ineffective during the financial crisis period, the paradigm has been effective in driving the economy of the country during the post- financial crisis era. The paradigm has been effective since the residents of United Kingdom mainly focus on asset prices as opposed to focusing more on the interest rates (Joyce, Tong & Woods, 2011 pp. 201). This has consequently contributed to a high population of the United Kingdom showing a lot of belief in the United Kingdom’s financial system (Fleming, 2014). The main goals of monetary policies are safeguarding the investors and the consumers, enhancing market performance and promoting stability in the financial sector (Kokkoris, 2014 pp. 2014). Therefore, regardless of the fact that the current monetary paradigm seemed to be ineffective with regard to promoting stability of the financial sector, the paradigm provided an ample environment for consumers and investors hence enhancing the market performance. Nevertheless, financial market stabilization was perceived to be the most critical aspect of the appropriate paradigm that would deal with the financial crisis. However, economic policy paradigms have always differed over the years based on individuals and context economic issues at hand (Lavoie, 2014 pp. 31). Therefore, based on the context of the economical issues in the United Kingdom it was essential to develop a monetary paradigm that was applicable based on the context of the United Kingdom. Hence, whereas the monetary paradigm was perceived to be unconventional and ineffective its applicability has ultimately had a positive impact on the economy. Conclusion The effect of policy paradigms with regard to dealing with economic issues relies on the implementation and context of the specific economic issue. Therefore, there is need for consultations in development of economic policies as witnessed by the collaboration between The Bank of England, the government, and the FSA in the country. Nevertheless, since policies do not guarantee solutions to economic issues in a country, it is essential for the collaborating bodies to integrate all macroeconomic elements in their policies in order to achieve positive results. References List Caprio, G. and Honohan, P., 2002. 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