Blame for Recession

Readers Question: actually, I would like to know if the current  uk’s recession is caused whether economic policies which have been practised, or the UK has been affected from outside the country?

The recession is caused by a mixture of domestic and international factors. For more detailed explanation see:

Firstly, this is very much a global recession. Even countries who pursued different economic policies than the UK have been facing a serious downturn.

The credit crunch is a global phenomena. All banks have found it more difficult to lend in the current climate.

Since the credit crunch (shortage of finance for lending) is one of primary causes of recession. It is worth asking what caused credit crunch?

The worst loan defaults originated in America. It was the American mortgage market which imploded causing a ripple of bank losses around the world. The UK has had serious problems with the housing market. But, it has not had the rate of mortgage defaults experienced in America.
American mortgage defaults were so high because:

  • Aggressive selling of mortgages to people who couldn’t afford to pay them back.
  • US interest rates kept low during boom years encouraging lending.
  • more on crisis in US housing market

However, although a large % of bank losses originated in the US, the UK is far from blameless. Many UK banks pursued reckless strategies of reducing saving deposits. Northern Rock was borrowing on money markets to lend long term mortgages.
Banks were encouraging short termism and risky growth strategies. This involved exposing UK banks to the subprime mortgages in the US. Thus when US mortgage defaults started UK banks were badly affected and this affected the wider economy when banks could no longer retain normal lending practises.

The UK recession has been heightened by the sharp reversal in property prices. The UK housing boom was one of the largest and now faces a sharp correction. Falling house prices have reduced consumer spending aggravating the recession.

So the UK retains some culpability:

  • Lack of regulation in finance sector
  • Banks which exposed themselves to risk and mortgage default.
  • A credit bubble in the UK, typified by high availability of mortgages in the boom years followed by shortage after Summer 2007.

However, countries like Germany are experiencing a deep recession. Yet, Germany had no housing bubble, a current account surplus, a much higher rate of domestic savings and even a balanced government budget in last financial year. If the UK had pursued different policies we would probably have had a less serious and painful recession, but, I very much doubt we would have avoided a recession altogether.

To some extent UK have done more to get out of recession than our Eurozone partners.

UK has:

  • had a depreciation in pound sterling which helps our exporters
  • Cut interest rates much faster than conservative ECB
  • Pursued expansionary fiscal policy

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By on February 15th, 2009

One thought on “Blame for Recession

  1. The uk bank interest rate cuts are benefiting no one but the banks.
    Banks are only lending money to folks who are willing to pay several percentage points above base rates. Which means profits for the bank.

    Savers are not getting the returns on savings.
    Which means lower costs for the bank.

    The banks are still screwing the masses en masse.

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