Nationalisation of Northern Rock – What it Means

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Although, the government has tried for several months to avoid this option, Alastair Darling admitted that the government had decided to nationalise the beleaguered bank Northern Rock. It means the government is responsible for over £100m of mortgages and savings. What Nationalisation Means Shareholders are likely to get very little in compensation. They have threatened …

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Recovery in Housing Market – Who benefits?

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Readers Question: Which businesses are likely to benefit from a recovery in the housing market?

I think it is a little premature to talk of a recovery in the housing market. But, nevertheless when there is a recovery in the housing market the following firms will benefit.

  • House Builders. At the moment there is a surplus of unsold houses. This is contributing to falling profitability for many large homebuilders. A recovery in the housing market would benefit these firms very significantly.
  • Mortgage Lenders. The Council of Mortgage Lenders in the UK have reported a significant drop in mortgage lending. This reduces the profitability of banks and building societies who lend money to potential home buyers.  An upturn in the housing market would increase demand for mortgage products enabling profitable mortgage loans to be made. If conditions in the housing market improved, mortgage lenders would see an additional benefit of declining mortgage defaults which has been causing significant losses to mortgage lenders and banks who bought the securitisation products.
  • Estate Agents. Estate agents benefit from the number of transactions and the value home sales. An upturn would increase the number of house sales and increase the value of houses meaning that their % share would improve.

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Who Sets Interest Rates – Markets or B of E?

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Readers Question: Interest rates are determined by the markets and not by the Bank of England-where’s the truth?

An interesting question.

Firstly, it is worth bearing in mind that there are different interest rates in an economy.

Bank of England Base Rate. This is the most important interest rate because it is the rate at which other commercial banks need to borrow from the Bank of England. Therefore, the base rate is an important determinant of other rates in the economy.

Generally, speaking the Bank of England is free to set base rates to achieve its target of low inflation CPI 2%+/-1. At certain times markets may pressurise the Bank of England to change rates, but largely the Bank of England is free to set rates depending on how it sees fit.

  • ERM crisis. in 1992, the government increased interest rates to 15% to try and protect the value of the £ (which was then in the ERM) However,  the markets felt this interest rate was unsustainable in a recession. Therefore, people continued to sell pounds effectively forcing the £ out of the ERM and making the UK cut rates. This is an example of market forces forcing the monetary authorities to change interest rates, but, it is relatively rare.

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Higher London Congestion Charge for Gaz Guzzlers

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It is interesting to note that Ken Livingstone has introduced a higher rate of the London congestion charge for cars which have high levels of fuel consumption (band G vehicles, which emit more than 225g of carbon dioxide per km) These are said to make up 15% of cars. It is clear that the policy is aimed at targeting the ‘chelsea tractors’ and encouraging people to buy energy efficient cars.I agree with this step, as I have always found that large SUVs 4WD to be unnecessary in London. They take up more space, are more dangerous (to pedestrians and cyclists) and contribute to higher levels of pollution. Therefore, it is good step to introduce a higher tax on these cars to take into account their higher social cost.

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What is Most Serious Economic Problem Facing the UK 2008?

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I asked my Economics students to conduct a questionnaire, asking people in the street various questions about Economics. One Question was:

What do You consider to be the Most Serious economic problem Facing the UK at the moment. These are the most popular responses to far.

  1. House Prices (50% of responses)
  2. Government Debt
  3. Ignorance because of fear
  4. no response
  5. No Problems

What I would consider the most serious Economic Problem:

  1. High levels of consumer debt / bankruptcy

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Merger of Yahoo and Microsoft

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An interesting development is Microsoft’s bid to buy Yahoo. This would be one of the biggest mergers, and change the nature of the internet.

It is rather ironic that Google, have filed a complaint on the ground the new firm would have too much market power. It is interesting because it was Microsoft who was once seen as dominating the computer industry. But, it seems increasingly the case that it is Google which is looked upto as the dominating firm in the industry. The reason for the shift is simply that Google are dominating the biggest areas of growth – which is online advertising.

Microsoft has monopoly power in software like Microsoft Word, but, it is expected that people will increasingly choose software that can be downloaded online. Google’s dominance of search engines and online advertising mean that they will be in a position to benefit from this.

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Policies to Increase Equilibrium National Output

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Equilibrium national income occurs where aggregate supply equals aggregate demand. An increase in equilibrium national income requires an increase in long-run aggregate supply and aggregate demand. Equilibrium national income and Keynesian Consumption function We can also show equilibrium national income using a Keynesian consumption function. In this case, an increase in domestic aggregate demand (C+I+G) …

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Readers Questions II

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You are welcome to ask questions on Economics. I will post the answer on this blog, for everyone to benefit from. I shall try to answer the economics question and / or point to other resources but please bear in mind. The replies will be guidance and not for duplication. Your essays should always be …

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