Low Interest Rates

Low Interest Rates

This graph shows how far interest rates have fallen since Jan 1990 when interest rates peaked at 15%. One issue is that many banks have not passed the 0.5% base rates onto consumers. In fact banks have already started increasing the rate on fixed mortgages. However, with low interest rates it does effect many consumers Mortgage payments are relatively cheaper Saving…

Household Savings in UK

Household Savings in UK

A Classic example of the paradox of thrift. Since the start of the recession, household saving rates have increased sharply. From a negative saving rate, consumers have become more risk averse and sought to increase their savings. This rise in private sector saving has been offset by a rise in government borrowing. The increase in saving rates may also be due to the difficulty of getting loans which are forcing consumers to save rather…

placeholder

Major Banks in the UK

A list of the major banks and their subsidiaries Bank Revenue Subsidiaries Lloyds TSB £17.5bn (2008) Lloyds TSB, HBOS (Halifax and Bank of Scotland), Intelligent Finance, (50% Sainsburys bank) Cheltenham & Glocester, Birmingham Midshires HSBC £99.9bn (2008) HFC bank, First Direct, Royal Bank of Scotland £26.5bn (2008) National Westminster Bank, Ulster Bank, Direct Line, Citizens Financial Group, ABN AMRO, Coutts & Co., Adam and Company, Child & Co., RBS Greenwich Capital Standard Charter £24.5bn (2008) Barclays £23.56 (2008) Woolwich Building Society, Goldfish Credit Card Co-operative Bank Smile, Santander (Spanish owned £16.38bn Alliance & Leicester, Bradford & Bingley, Abbey. (these brand names will be subsumed under the Santander…

Why Extra Spending Can Help

Why Extra Spending Can Help

Readers Question: why are measures to increase spending in a recession generally considered a good response and why extra spending is less inflationary in this situation. There are quite a few reasons. But, a general principle is the importance of confidence (Keynes referred to ‘animal spirits’). In a recession, people become pessimistic and therefore very reluctant to spend and invest. If unchecked this negative confidence can cause a negative momentum effect in the economy. One specific example is the paradox of thrift. Keynes noted that in the Great depression, individuals felt…

placeholder

Chinese Growth and Exports

Readers Comment (Ralph Musgrave) from Why is Chinese Yuan undervalued You claim “Chinese growth is dependent on exports” (2nd bullet point). You then argue that a lot of labour is quitting agriculture and state industries. Plus this labour needs jobs, therefore an undervalued currency and a healthy export sector is helpful in creating such jobs. I suggest an artificially under or over-valued currency is very hard to justify. Instead of boosting employment via exports, China can perfectly well boost employment by boosting internal demand (which is exactly what they have…

placeholder

Monopoly Power in Banks

A key element of UK competition policy is that any merger which leads to the creation of a firm with more than 25% of market share will automatically get referred to the competition commission.  The competition commission will then evaluate whether the merger is in the public interest. However, the due to exceptional circumstances, the government made an exception for the merger of Lloyds TSB and HBOS. Thus Lloyds TSB were able to gain monopoly power without being blocked by the competition Commission. Generally, a merger of over 25% of market…

placeholder

Why is Chinese Currency Undervalued?

Many argue that on simple purchasing power parity, the Chinese currency the Renminbi is undervalued by approximately 30%. This is a source of friction in the US, with firms claiming they lose out to a cheap Chinese currency which can undercut US goods. The Chinese government wish to keep the currency undervalued because: A weaker exchange rate makes exports more competitive and increases demand for Chinese exports. Chinese economic growth is dependent on exports, so the value of the currency plays a key role in boosting growth China needs high growth. China’s economic…

placeholder

Why We Save banks

Readers Comment (Rob Brown) from Bank lending standards: Surely the key difference between the banks and other firms is their broad base. If a bank goes bust not only do you lose those jobs but also, all the firms borrowing from that bank are in deep trouble and hence create further job losses across many industries, creating negative spiral throughout the whole economy. So whilst morally the banks may have been at fault the case for saving them is greater than general motors or vauxhall for example. Yes, I…