UK's over-Reliance on Deregulation and Current Economic Crisis - Essay Example

? UK'S OVER-RELIANCE ON DEREGULATION AND CURRENT ECONOMIC CRISIS By Presented to Introduction Since the pronouncement of expenditure cutbacks in 2010, the economy upturn has weakened, unemployment has risen and the entire world currently encounters a double dip recession. A double dip recession might initiate decreased tax proceeds and increased spending on revenue, making it much harder to minimize deficit. Self-defeating austerity is a phrase used to describe the cycle of spending the population is trapped in, initiating decreased growth and development. Eventually, decreased tax receipts will call for the imposition of additional spending cuts by the government. The United Kingdom has a majority that believes that if governments and banks create an economic downturn, there are up to some good motive. The deregulation of the monetary sectors that occurred during the eighties and nineties has fostered income cuts, job losses in the civic sector and elevated unemployment. The following paper will look into the factors that propose that the over-reliance of the United Kingdom on deregulated industry, and depreciating euro, has fostered the existing fiscal depression (Nanto, 2009, p. 64). 1. Reliance on lesser flexibility within bond markets The alleged spending cutbacks by the government were observed to be essential by contrasting the economies’ of United Kingdom with Greece and Ireland. Outside the Euro market, the United Kingdom faces a much superior flexibility on other financial markets apart from the bond markets. This is because of the fears of liquidity deficits that the bond markets encounter with the Sterling Pound being the single currency. Bond Fannie Mae and Freddie Mac Fannie Mae and Freddie Mac returns on the United Kingdom deficits have decreased since the start of the economic downturn since the private sector is considering saving funds with lack of self-assurance in investing in its own sector under such a fiscal climate. Whilst the private sector is looking forward to improving its savings rates, the focus on the economic turnaround is misplaced with cuts instead of lesser flexibility within bond markets (Kilmister, 2008). 2. Debt buildup The major development of the subsequent half of 2008 turned out to be a spectacular worsening phase of the opening dimensions. Debt accumulated in the deregulated industry of the United Kingdom through the rising acknowledgment on the amount of bad debt in the system was much bigger than that it was previously presumed to be. Sequentially, confusion arose amongst the United States financial regulators concerning the approach to be used to react to the increasing number of borrowing defaults. Reluctantly driven to make mortgage corporations Fannie Mae and Freddie Mac public, they suddenly swapped to permitting prominent investment banks Lehman Brothers to fold (Kilmister, 2008). 3. Crisis in European banking system The European banking system deteriorated into a downturn in three ways. Firstly, the intensifying tide of bad balances put the banks at risk of bankruptcy. Secondly, the clear change in the Federal Reserve policy from the previous save from bear sterns formed a panic in the inert-bank borrowing market. The United Kingdom was doubtful on which banks could withstand the bad debts and stopped the lending services that they offered, leading to an entire market seize up. Thirdly, stock market financial speculators also dreaded losses, hence drawing back from their shares. Bank regulation is grounded on the notion of borrowings can just be a definite amount of bank capital and such a situation is bound to go through a substantial decline in shares and ultimately reduce capital by a great extent. Bank borrowing in the European market decreased significantly ending in further risks of the stability of the financial system in the United Kingdom. While these issues were mainly experienced the US and UK only, the real estate sector shot up, and bank deregulation had been particularly strong in continental Europe. This is also because majority of states in Europe had taken huge loans (Arestis and Karakitsos, 2009, p. 2). 4. Bailing-out of banks in the financial markets The outcome of banks pulling out of the financial markets was a sudden alteration in the policy towards pulling out of banks. The policy has been implemented in various republics and the United States reaction to the change was headed by the treasury, claiming that it was rather blatant. The UK, on the other hand, implemented a plan that was efficiently adopted by the entire European Union. The plan involved the potential advantage for political discussions concerning the purchasing of shares in the banks. Even though the plans were intended for stabilizing the banks’ positions and the economy’s status, they were still relying on the deregulation of the financial sector. It is apparent that the opening objective of the government was to have the least level of state participation in the economic sector and provide subsidies that could be used to reinstate commercial and central banks to profitability positions, in anticipation of a rapid sale of the government’s ventures (Kilmister, 2008). 5. Spread of the economic crisis The most significant and existing growth following the banking system crisis is the transmission of the crisis to the rest of the economy of UK. Like all other states, banks interrelate with the more general financial downturn that is currently surfacing. The most understandable problem is the beginning of the recession economic analysts has stated that this depression can be well evaded with the complete turn around of banking regulation and policies (Evans-Pritchard, 2009). Over-dependence on customers’ demand and trading investment on high levels of debt over the past twenty years has been linked to the downturn in United Kingdom. Lending is contemporarily dwindling in quantities as rates are cut back, fuelling the debt expansion. Deregulation plays a big role in this slowdown since economic sectors, such as real estate, or housing, have been forced to engage in polices that see a decline in prices and discourage investment. This way, households are no longer able loan in opposition to the increasing equity values (Arestis and Karakitsos, 2009, p. 2). 6. Over–reliance on debt There are two main reasons explaining the dependence on debt amongst commercial financial institutions in UK. Consumption has become reliant on debt since there is contradiction amid driving salaries down to make earnings in production and requiring assurance over demand for the sales of commodities and services and make profits. Another noticeable sign of the economic downturn connection with the deregulation is the inequality in income amongst the people. The accumulation of debt has worsened in republics with the biggest variation in revenue earned is not a coincidence either. The UK industry has been deregulated by the government to the level of generalizing production, and lack of funds from financial institutions leads to deeper debts. Profitability has depreciated in the production sector, and the rate of amplifying revenue for non-financial companies have sharply fallen starting from the fifties, and the issue seems to have never been solved to the current date. Non-financial companies reacted to the situation by increasingly investing in fiscal speculation. Afterwards, an economic recession appears to be progressively more likely to happen within the current monetary speculation (Adair, Berry, Haran, Lloyd and McGreal, 2009, p. 15). 7. Deregulation of the financial sector of the UK Lately, political powers have influenced the financial sector more than just imposing deregulating policies in the United Kingdom. Greedy bankers, major shareholders and managers of hedge funds have been attributed to the banking financial crisis, together with the negative effects of the financial deregulation throughout Europe, Asian and American markets of recent decades. The new regulatory protections rushed by the United Kingdom government have been implemented with the aim of preventing the outburst of another financial crisis. Similar to past trends, the new policies enacted by the governments have established an economy not ready for a financial crisis. The policies have created room for perhaps a much worse crisis in the future, alongside straitjackets that will significantly hinder economic development (Nanto, 2009, p. 64). Innovations in the financial structures include resource-supported securities and collateralized debt obligations, have greatly contributed to the economic downturn in UK. Financial modernization has enhanced liquidity and facilitated investors to spread risk of venturing in the financial sector through intercontinental diversification. The disadvantage of the approach is that worldwide implications of the present crisis are more reflective of past economic depressions. The present financial downturn may perhaps comprise a structural recess or stage shift in the financial system (Kilmister, 2008). The change previously held theories concerning the means by which it operates and financial paradigms are disclosed to criticism.teh result of the existing economic downturn might be an economic order for UK, and the kind that cannot be fully comprehended or resolved. 8. Nature of novel trade and industry policies followed by a significant number of central banks around the world Another feature of the dependence of the United Kingdom on their deregulated financial system comes from the type of novel central bank policies. These new regulations seek the implementation of new consensus in macroeconomics. The policy is also completely aimed at monetary policy at almost full collapse of the financial system. More importantly, from this point of view, the contribution stresses that regular interest rate changes act as vehicles of controlling inflation within and outside the domestic financial system. The effect of these kinds of growth has been associated with deregulation patterns, arising from huge liquidity and household debt. Europe holds a major part of the debt, hence arrival at indefensible amounts and production in the crisis. Such participations depend on the policies passed by central banks for a likely description of the roots of the existing downturn. Nevertheless, the origin of this crisis is the establishment and succeeding developments in the subprime mortgage markets, and its concentration on these policies (Arestis and Karakitsos, 2009, p. 2). 9. Inflation imposes some costs on United Kingdom’s government Because of all the factors discussed above, inflation is bound to come about the financial system. Inflation has different costs imposed on the UK society, financial system and government: Inflationary intensification is unsustainable High inflation is frequently a sign that an economy is depreciating, or operating under a fiscal environment where demand is higher than supply. Inflation is often succeeded by a recession, a common pattern amongst all leading economies worldwide, the United Kingdom in particular ahs faced past inflationary growth developing from the extreme demands corporations and banks experience from open markets. Targeting a lower rate of inflation assists in sustaining an economy. However, unemployment rates have risen because of deregulation strategies employed by the government. Inflation from discouraged investment High and unpredictable rates of inflation challenge companies in Europe, discouraging long-term investment decisions. This arises from insecurity and misunderstanding around potential income and profits. Therefore, UK’s high inflationary intensification in the financial system is inclined to have decreased growth rates over time (Adair, Berry, Haran, Lloyd and McGreal, 2009, p. 15). Decrease in international competition Baling-out of banks and investors from investing in the European eventually leads to decreased exports and imports. When exports and imports reduce, competition within the economy also decreases. High inflation rates are the result of such occurrences as they are offset by a decreasing in the trade rate, with the aim of restoring competition. In countries that use the Euro as their currency for trading, they cannot diminish. Therefore, inflation and increased labor costs become very destructive to their economy (Nanto, 2009, p. 64). Reduction in actual worker’s income Income growth can occasionally level beneath inflation, making the economy undergo decreases in actual salaries. The UK has been facing this issue this year since the high cost-push inflation of 5% above wage growth leading to falling actual wages (Roubini, 2010). Inflation can wear down reserves Should inflation be higher than interest rates, inflation could clear savings for people in banks. Inflation in the UK has decreased the value of currency and numerous people who depend on wage from savings have seen a deduction in the living standards. This has been an issue for pensioners who depend on savings for living. Thus, inflation could initiate a reallocation of wage in the European society from old to young and from savers to loaners. Legacy of inflation Future speculations made by the people and huge investors will eventually dwindle if they experience inflation. Government bonds might not be purchased by investors because of the fear of the establishment of effective default through inflation. People are bound to be more unwilling to save, hire less room or land for investment purposes (Kilmister, 2008). 10. Deregulation in financial markets that started in the United Kingdom In accordance to a national survey, the standard house price in the UK decreased 14.7% throughout 2008 to 156,288 sterling pounds. Currently, house prices in the United Kingdom are level with the trading period of spring 2005. In Northern Ireland, the improvement has been more evident, with house prices having decreased somewhere between 28.2% in the quarterly house price index, and 34.2% Nationwide. The real estate industry is a major mover in the European markets, imposing a huge effect on the financial system of UK, should any kind of adjustments occur (Arestis and Karakitsos, 2009, p. 8). The crises in both industrial and residential markets have joined with the inadequate accessibility of credit and tight-ended borrowing categories. Such criteria have paved way for a striking fall in both dealings and development operations. UK and Irish banks have an elevated weighting of property disclosure on the lending books, and have tried containing the situation by managing the loaning rates (Nanto, 2009, p. 64). While enhancing their liquidity status, the policies that the banks run are grounded on old deregulation policies imposed during the nineties. This factor limits the chances of the banks penetrating new markets. The market’s response is still subdued in the midst of majority of commercial banks with anticipations that property prices are possibly to fall further over the coming months. The perspective accompanied with the viewpoint of the worldwide economy is not favorable for advanced borrowing. Suggest economic policies that could be used to avoid a double dip recession There are some possible proposals that can be laid out and implemented by the UK, European market and other developed economies, evade a double-dip recession. 1. Loans consolidation Greece is part of the European Union and its solvency state requires an incomplete default to restore its economy and stabilize the Euro currency. The EU is not supposed to prop it up where there is no alteration of reimbursement. Greece is supposed to permit to default and focus on reinforcing its position of countries that experience similar economical situations. Italy and Greece are supposed to consolidate their debts even though they might encounter liquidity limits, involving deficits of currency because of market doubts (Nanto, 2009, p. 64). 2. Economic Growth The European Union (EU) and the European central bank ECB) have to observe the significance of financial development. Currently, strategy recommendations are the only approaches that appear to be expenditure cuts and strictness. Nevertheless, the policies are pushing states into a pessimistic twist of decreased growth, increased unemployment and lesser tax returns (Roubini, 2010). 3. Monetary easing ECB is supposed to follow a monetary easing policy that targets higher inflation rates in economies within the European Union (Roubini, 2010). Quantitative easing is another approach defined by fiscal easing that provides minor states with several fiscal incentives to tackle all deflationary pressures they encounter. When faced with potential double dip recession, the ECB is not supposed to amplify interest rates since inflation normally and briefly on top of the target. 4. Supply side regulations to enhance competitiveness and efficiency Economies like Greece and Portugal need to improve their competition to boost exports and imports. Side supply incentives scan boost efficiency and improve yield made by non-financial institutions within and outside their economies (Roubini, 2010). 5. Recalibration of Europe’s financial policy Britain, which is decreasing its financial susceptibility with a well thought-out severity program, is able to afford pull the rate of the tightening budget of the following year (Nanto, 2009, p. 174). Abandoning the expenditure cutbacks is not an option that Britain can ignore through tax incentives that form a barrier against investment. Crisis-struck states in the euro zone were under pressure from Germany and bond markets, and are currently attempting to minimize shortages as quickly as possible. However, the policy can only become successful in preventing a double-dip recession by learning from the past financial mistakes made by Spain and Italy. Bond markets are normally anxious about the financial system’s capacity to develop as the size of their shortage. This implies that that putting priority on financial reforms that foster developments within the economy like the increase in the retirement age. Under this lesson, it is observed that speed is opposed at all expenses, making Greece able to profit from an elegant privatization arrangement, than a fire sale to increase supply of cash-currency (Roubini, 2010). 6. An introduction of a monetary policy shift The ECB is in the unfamiliar position of both sustaining the single currency through the purchase of Italian and Spanish bonds, and simultaneously making those states’ changes more difficult by temporarily increasing interest rates. To balance this situation, the ECB is supposed to offer members that hold abnormal debts additional room for adjustments and imposition of ne policies for recovery (Nanto, 2009, p. 64). Conclusion Behavioral financial analysts try to enlighten the function of human behavior in financial decision-making. Various aspects of human nature, and the means by which man approaches decision-making on monetary situations, are very important for comprehending fundamental causes, effects and propositions behind the existing financial system downturn in Europe. As a result, the decisions that bankers, political leaders, investors, non-monetary institutions, consumers and suppliers make are based on buying and spending decisions that lead to the imposition of policies that seem to hold on past and unsuccessful deregulation policies of the economy. The United Kingdom has a majority that believes that if governments and banks create an economic downturn, there are up to some good motive. The deregulation of the monetary sectors that occurred during the eighties and nineties has fostered income cuts, job losses in the civic sector and elevated unemployment. Even though the plans were intended for stabilizing the banks’ positions and the economy’s status, they were still relying on the deregulation of the financial sector. It is apparent that the opening objective of the government was to have the least level of state participation in the economic sector and provide subsidies that could be used to reinstate commercial and central banks to profitability positions, in anticipation of a rapid sale of the government’s ventures. References Adair, A., Berry, J., Haran, M., Lloyd, G. and McGreal, S., 2009. The Global Financial Crisis: Impact on Property Markets in the UK and Ireland. London: University of Ulster Real Estate Arestis, P. and Karakitsos, E., 2009. Subprime Mortgage Market and Current Financial Crisis. Cambridge: University Of Cambridge Ely, B., 2009. Bad Rules Produce Bad Outcomes: Underlying Public-Policy Causes of the U.S. Financial Crisis. Cato Journal, Vol. 29, No. 1 Evans-Pritchard, A., 2009. Let banks fail, says Nobel economist Joseph Stiglitz. [Online] Available at: [Accessed 25 October 2011] Kilmister, A., 2008. The Economic Crisis and its Effects. [Online magazine : IV407] Available at: < http://www.internationalviewpoint.org/spip.php?article1581> [Accessed 25 October 2011] Nanto, D. K., 2009. The Global Financial Crisis: Analysis and Policy Implications. New York: Congressional Research Service Roubini, N., 2010. How to Avoid a Double-Dip Global Recession. [Online] Available at: [Accessed 25 October 2011] Rudd, K., 2009. The Global Financial Crisis. [Online] Available at: [Accessed 25 October 2011] The West’s economy, 2011. How to avoid a double dip: Rich countries need to squeeze their economies less hard and get serious about growth. [Online] Available at: [Accessed 25 October 2011] Read More