How Has the UK Been Affected By the Recent Financial Crisis of 2008 - Example

How Has the UK Been Affected By the Recent Financial Crisis of 2008 and Subsequent Recession, Explore Their Economic, Political and Socio-Economic Consequences Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date: How Has the UK Been Affected By The Recent Financial Crisis Of 2008 And Subsequent Recession. Explore Their Economic, Political and Socio-Economic Consequences The recent financial crisis of 2008 and the subsequent recession after that had a great impact on the world. The giant economies of the world too did not escape the fate of the financial crisis and subsequent recession (Adair, Berry, Haran, Lloyd & McGreal, 2009, p.5). The crisis and the recession had immense impacts on the economic, political and socio-economic spheres on the world. In this essay, the consequences of the financial crises and subsequent recession will be analyzed with respect to the United Kingdom, which is one of the major economies of the world which was hard hit by the crisis (Barnes 2011, p.424). But what exactly caused the financial crisis and the recession in the United Kingdom? The financial crisis in the United Kingdom can be explained using the Minsky Hypothesis. According to the Minsky hypothesis, nations which uphold capitalism economies have an inherent proclivity to experience a financial instability. This is commonly summarized as ‘success breeds success breeds failure’. This is derived from the fact that capitalist economies have an inbuilt capacity to generate and amass great wealth, which is success. However, this wealth at times leads to failure when the institutions which have supported the wealth accumulation fall. This can be traced back in the United Kingdom which is one of the oldest capitalism economies of the world. Prior to the financial crisis, the United Kingdom was an economic giant as it has always maintained over years. Minsky’s hypothesis stipulates that a financial crisis is based on two cycles, which are known as the Minsky cycles (Keen 1995, p. 607). The basic Minsky cycle is the first cycle. It is characterized by a start of hedge finance. On this stage, borrowers are able to pay their loans comfortably using the revenues that they expected to generate from their investments. On the second stage which is the speculative finance, the expected revenues are only able to repay the interest accumulated on loans. On the third cycle, which is the Ponzi finance, Minsky argues that the expected revenues are neither able to repay the principal amount nor the interest amounts. Hence borrowers rely heavily on capital gains to repay their loans. Looking at the United Kingdom’s situation, this cycle was eminent in the economy. Many businesses sought to finance their businesses using loans, which was the start of basic Minsky cycle. This cycle gave way to the speculative cycle. On this cycle, investors in the United Kingdom speculated on the future, basing the speculation on the economic prospects. Lastly, the Ponzi cycle was experienced where investors found it hard to repay their loans comfortably, hence relying on the capital gains to repay their loans. Therefore, the financial instability hypothesis can be used to explain the financial crisis in the United Kingdom (Nimmo, M., 2009, p.3). The country upholds a capitalist economy, which has inherent risk of leading to a financial crisis. As indicated earlier, this essay will give a deep insight into the economic, political and socio-economic consequences of the 2008 financial crisis in the UK and the subsequent recession which occurred after that. The economic consequences of the crisis in the United Kingdom were very great, with the country hitting its major economic lows in the recent past. The exit of regulation in the financial markets in the Unites States, United Kingdom and other European nations in 1970’s is taken to be as one of the root causes of the financial crisis. Government regulation of the economy had its own benefits. It shielded the common man from market forces which threatened his/ her existences (Pryce & Sprigings 2008, p.145). The government was also able to control debt; hence the debt burden on the people by financial institutions was not that much. However, the liberalization of credit paved way for the accumulation of individual debts as people used debt as a means of economic empowerment. Therefore, one of the economic consequences of the financial crises and subsequent recession in the UK is on property (Benamraoui 2010, p.255). On this note, the face value of properties rose by a margin high, which was sometimes equal to overvaluing of property. Another except of the crisis was the sharp increase in the interest rates. This impacted heavily on the economy as borrowers had to pay far much larger sums of money, which did not match their expected revenues. As per Minsky’s hypothesis, borrowers were not able to repay their debts; hence they relied heavily on capital gains to repay their debts (Shah 2010, p.1). For instance, it is noted that the overnight interbank lending rate had increased by 100%. The insurance costs levied on credit default also increased by a high margin. This era also saw the fall of major companies for instance Dow Jones and AIG. The economic consequences of the financial crisis also reduced profitability index in the country, which led to the closure or exit of major business organizations (Federation of Small Businesses 2009,p.1). For instance Woolworths, Blacks and MFI were hard hit by the crisis. The government also had a reduced revenue income due to the fall in the amount of taxes that it was able to collect from the people. The falling of the GDP by 1.5% in the fourth quarter of 2008 was the high mark of the crisis, which saw the country enter into an economic recession. There was also the establishment of economic imbalances as the crisis led to economical divide between the rich and the poor. During the recession, the asset prices in the country fell by a substantial margin, hence impacting negatively on the investors who had invested in the property (Banks, Crawford, Crossley & Emerson, 2012, p.2). With respect to the political consequences of the financial crisis and the recession, the governance of the UK government was under sharp criticisms with regard to its ability to make good economic policies (Milas & Martin 2009,p.4). The economic might of the United Kingdom had been realized through production. The country has previously enjoyed international production, exporting locally produced products to other countries and in turn earning foreign exchange, and consequently ascending in the economic ladder. Over time, the capacity of the country to produce had grown; hence making production become the backbone of the economy. The economic consequences of the financial crisis and the recession in the United Kingdom gave rise to the scrutiny of the capability of governance to be able to regulate the economy, the major question being as to whether the financial crisis and the recession was as a result of international finance or a lack of governance in the country (Kilmister 2008, p.3). On this note, the issue of globalization came into the context, with many people advocating for de globalization measures as a means of shielding the United Kingdom’s economy from global market forces. In particular, the deregulation of the market in the 1970’s particularly gave rise to a sharp criticism of the capability of global governance to regulate the world’s economy. Questions as to whether global governance should or should not exist came into the limelight. The government was faced with the problem of budget deficits, which led to huge internal and external borrowing (Gamble 2009, p.450). The domestic debt was also growing at a tremendous rate. On the other hand, the international community was refusing to fund the tax deficits of the United Kingdom. These were the major problems which faced the political elite of the UK, hence the use of the economy as a crucial campaign tool in the subsequent elections. The socio-economic consequences of the financial crisis on the United Kingdom are equally adverse (Walyat 2010, p.1). During the crisis, a lot of job positions were lost as organizations laid off workers in an attempt to cut down on the operation costs. This impacted negatively on the economy as the number of dependent people in the economy rose tremendously hence imposing a burden on the working population. The inflation which was associated with the financial crisis saw the increase in the cost of living (Rayner 2008, p.1). The consumer price index rose sharply, hence making it hard for the normal man take ends meet. This led to a socio – economic conflict as the people criticized the economic policies of the country and the capacity of the government to provide good economic governance to the people. In addition to this, people were angry for the wrong reasons. Everyone understood the financial crisis according to its effects on his/ her individual life. For this reason, the socio- political crisis was established as people questioned the logics of exposing the country to the world market forces, which the government could not control (Sasi 2009, p.2). This aspect came out evidently in the general elections after the financial crisis as the electorate was divided with respect to the economic policies of the candidates. In conclusion, this essay has given the overview of the financial crises and recession in 2008 in the United Kingdom. The essay has given a perspective of the financial crisis and recession in the light of Minsky’s hypothesis, the financial, hypothesis and the financial instability hypothesis. All the hypothesis above, point out that the capitalist economies are prone to financial instability, hence explaining the way in which the financial crisis hit the United Kingdom. From the essay, it is clear that there is a need to establish a good governance model so as to ensure that the financial crisis which occurs from time to time does not have adverse effects on a country as it was in the United Kingdom. References Adair, A., Berry, J., Haran, M., Lloyd, G., & McGreal, S., 2009. The Global Financial Crisis: Impact on Property Markets in the UK and Ireland, University of Ulster Real Estate Initiative Research Team,pp.1- 79 Banks, J., Crawford, R., Crossley, T., & Emmerson, C., 2009. The Effect of the Financial Crisis on Older Households in England, Institute For Fiscal Studies, pp.1- 52 Barnes, P., 2011. Minsky’s Financial Instability Hypothesis, Accounting Information And The 2007–9 Financial Crisis in the UK and US, Accounting History. Vol.16, no.4, pp.423–437 Benamraoui, A., 2010. The Real Effect of the Recent Financial Crisis on the UK Housing Price Indicators, International Journal of Arts and Sciences, Vol. 3, no.13, pp.255-266 Gamble, A., 2009. British Politics and the Financial Crisis, British Journal, Vol.4, no.4, 450-462 Federation of Small Businesses, 2009. What Impact has the Financial Crisis had on Small Businesses in the UK? Federation of Small Businesses, pp. 1-3 Nimmo, M., 2009. An Empirical Examination of the Financial Instability Hypothesis, Leeds University Business School, pp. 1-45 Keen, S., 1995. Finance and Economic Breakdown : Modeling Minsky’s Financial Instability Hypothesis, Journal of Post Keynesain Economics, Vol.17, no.4, pp.607- 634 Kilmister, A., 2008. The Economic Crisis and Its Effects, International Viewpoint, Vol. 10, no.4, pp.1- 12 Milas, C., & Martin, C., 2009. Causes Of The Financial Crisis: An Assessment Using UK Data, Rimini Centre for Economic Analysis, pp. 1-23 Pryce, G., & Sprigings, N., 2008. Outlook for UK housing and the implications for policy Are we reaping what we have sown? International Journal of Housing Markets and Analysis, Vol. 2, No. 2; pp. 145-166 Rayner, G., 2008. UK Facing Worst Financial Crisis 'In Decades', The Telegraph [Online] Viewed on 10th November from < http://www.telegraph.co.uk/finance/markets/2786497/UK-facing-worst-financial-crisis-in-decades.html > Sasi, K., 2009. The Consequences of The Global Financial Crisis, Committee on Economic Affairs and Development, pp.1-10 Shah, A., 2010. Global Financial Crisis, Global Issues [Online] Viewed on 10th November from http://www.globalissues.org/article/768/global-financial-crisis Walyat, N., 2010. The Economic Crisis in the UK: Inflation and Debt Default Bankruptcy, The Market Oracle [Online] Viewed on 10th November from < http://www.globalresearch.ca/the-economic-crisis-in-the-uk-inflation-and-debt-default-bankruptcy/18691> Read More