Macro examples Flashcards
Example of systemic risk in banking sector
Global Financial Crisis illustrated how inter-connected the financial world has become, since shocks in one location (the US) had a sizeable impact on the stability of institutions and markets around the world
Example of ring fenced banks
Lloyds, Barclays and HSBC
Libor Scandal
1) In 2012 a whistle blower reported that big banks including Barclays, RBS and HSBC had under-reported the rate at which banks were lending to each other
2) This would make banks look stronger and more credit worthy as interest rate is a reflection of risk
Example of information asymmetry in the banking sector
Payment Protection Insurance (PPI) scandal - millions were mis-sold policies they did not need
How much did the financial crisis cost the UK tax payer at its peak?
1) £1.162 trillion
2) £18,803 per person
3) But most of this cost was temporary as it was guarantees given by the UK government
Dotcom bubble
1) The value of equity markets grew exponentially during the dotcom bubble, with the Nasdaq rising from under 1,000 to more than 5,000 between 1995 and 2000
2) Equities entered a bear market after the bubble burst in 2001
3) The Nasdaq saw an almost 77% drop, resulting in a loss of trillions of dollars
4) The bubble caused 52% of tech companies to fail
What factors caused the UK recession, 2008-2009?
1) A financial crisis which increased the costs of borrowing for firms and households as banks feared collapse due to their exposure to bad debts
2) A subsequent tightening of access to finance for both households and firms
3) Falling house prices, which reduced consumer confidence and created a negative wealth effect
4) Significant losses on stock markets
5) High levels of household debt due to cheap, easy finance and a falling saving ratio in the NICE decade (12.8% in 1997 to 7.3% in 2007)
6) Rising oil prices (increased from $55 to $147 per barrel between early 2007 and July 2008)
What is the NICE decade and what does it stand for?
Decade of ‘Non-Inflationary Continuous Expansion’ 1997-2007
What was the impact of the UK recession, 2008-2009?
1) Increase in unemployment (5.2% in late 2007 to 7.9% in late 2009)
2) Falling living standards as average earnings fell (total pay fell 5% between March 2008 and March 2009)
3) Increased demand for higher education places as school-leavers sought to remain in education for longer
4) A depreciation in the sterling
5) Pressure on the government’s budget position as automatic stabilisers kicked in
What anti-recession monetary policies were implemented post-2008?
!) Drastic cut in the base rate of interest from 5.25% at the beginning of 2008 to unprecedented low of 0.5% in March 2009
2) Programme of QE begun in March 2009 (by Feb 2012, BoE had authorised purchases of up to £375bn)
3) Acceptance of the fall in the value of sterling
What anti-recession fiscal policies were implemented post-2008?
1) Cuts in tax rates (e.g. reduction in VAT from 17.5% to 15% in December 2008)
2) Increases in other taxes (e.g. introduced top rate of income tax of 50% on earnings over £150,000 per annum)
3) High government spending (e.g. extra £1.7bn on the job centre network)
4) Scope for fiscal expansion limited due to ‘austerity’ policies
When did GDP recover post-2008?
1) UK GDP returned to its pre-crisis level in Q2 when economy grew at 3.1%
2) Record positive quarterly growth in 2017
What are the arguments around austerity post-2008?
1) Austerity boosted confidence and innovation in the private sector of the economy, creating a ‘crowding-in’ dynamic and sustainable job creation and output
2) Austerity slowed recovery (fiscal stimulus would have returned the economy to growth more quickly)
3) ‘Austerity’ is a myth since the economy remained reliant on government spending to maintain recovery (Phillip Hammond’s programme of infrastructure spending in the Autumn Statement in November 2016 looked ‘Keynesian’)
4) Recovery continues to look unbalances and dependent on cheap credit
