The Financial Crisis
What Was The 2008 Financial Crisis?
The Financial crisis of 2008 was the second largest crisis in global history after the Great Depression. Excessive risk-taking by banks, combined with the bursting of the USA housing bubble, caused the values of U.S. real estate to plummet, damaging financial institutions globally. This culminated with the Lehman Brother bankruptcy on September 15, 2008, and an international banking crisis. The economic crisis started in the U.S. but spread to the rest of the world. U.S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007 and the rest of the world depended on the U.S. consumer as a source of demand. As consumer confidence fell the stock market plummeted and the whole world descended into the Great Recession.
How Did This Effect The UK?
The fall in the UK’s GDP was the greatest since the Great Depression of the 1930s, and at the start of 2013 was over three per cent below its 2008 peak. As the economy has shown virtually no growth, house prices have fallen and unemployment has risen. However, the employment rate in the UK fell by much less than anyone expected given the fall of GDP and has recovered to a much greater extent than output. This seems to be because the UK labour market is more flexible now than in previous recessions: wages have fallen in real terms, reducing the pressure on employers, and the employment service has been better at helping people into jobs.
How Did The UK Tackle The Recession?
The outgoing Labour government provided a fiscal stimulus during the 2008–2009 crisis. This included cuts in VAT and extra spending. To tackle the problem of higher public debt they cut spending and increased taxes. In 2010 the Coalition Government accelerated this fiscal consolidation. Most economists agree that this austerity programme has led to lower economic growth. In co-operation with the EU and other major global economies, UK financial regulators have taken steps to ensure that financial institutions reduce the amount of risk they take on and have a greater protection against future crises in the form of higher capital reserves and more liquid funds to cover sudden funding gaps. The UK also plans to ring-fence high street banks from their higher-risk investment banking arms. As a result of the depth of the economic slowdown and the amount of public money needed to shore up failing banks, the UK racked up multi-billion pound deficits and had a debt of £2,205 billion at the end of 2012. British households also hold a large amount of debt. The UK has the second largest amount of household debt, measured as a share of economic output, of the ten largest developed economies.
