The Impact of Global Financial Crisis on the United Kingdom Essay Example

banks (Gamble, 2009, p. 21). It was seen as a way of promotion of home ownership for minorities. In 1992 the Federal Reserve Bank of Boston advised lenders that a mortgage applicant’s lack of credit history should not be seen as a negative factor in assessing them for a loan (Booth, 2009, p. 53). These policies led banks to making loans to people who could not afford them.

Therefore, when interest rates rose sharply after 2004, borrowers defaulted, especially homeowners with sub-prime loans, and banks discovered that prices of housing they had bought were less than before. More and more banks faced bankruptcy and the whole global financial structure crashed down. The United Kingdom, as well as many advanced economies, is experiencing a severe economic downturn because of the global financial crisis of 2007-2008. The main reason is that the bursting of the housing bubble. Similarly, the UK economy has been suffering from the sub-prime mortgage crisis.

First of all, compared to traditional banks, most of banks take a very aggressive strategy and run a different business model. For example, three-quarters of Northern Rock’s funding comes from the wholesale inter-bank markets and it was lending it out in the form of mortgages (Brummer, 2008, p. 13). It is obvious that Northern Rock relied heavily on the liquidity of the wholesale markets. On the contrary, Lloyds TSB is a symbol of conventional banks. 75 per cent of Lloyds TSB’s funding comes from retail and business customer deposit and it only borrows 25 per cent of its money from the wholesale markets (Brummer, 2008, p. 3).

That is why some banks were in deep trouble when the source of funding

was disrupted. Secondly, in order to pursue profits, many banks lend a large amount of money to people who are less likely to afford the loan, especially when interest rates go up. Customers, especially young people, could apply for a mortgage loan easily before the global financial crisis of 2007-2008. They could borrow 125 per cent of the value of the property and mortgages loans were worked out on the basis of five times income or more than became commonplace in 2006 (Brummer, 2008).

It is no doubt that it had a greater risk than mortgages of two and a half times salary and no more than 75 per cent of the value of the home in the past. Thus, when interest rates rose in 2007, most of banks could not put cash back because more and more homeowners with mortgages were forced to default, and they also could not borrow money from wholesale market because others were involved in the same situation. Lastly, although Bob Bennett, the finance director, said ‘the credit crunch that was obviously coming should have led to more restrained [mortgage] volumes. in February 2007, managers of banks did not believe that rising interest rates would affect lending (Brummer, 2008, p. 10).

Moreover, another reason is the changing of the UK economic structure. From 1945, significant sectors were run by the state, because the Labour Government stated that the economy must be centrally managed. However, it was a big challenge for the local government to run them efficiently because of a limited budget. In order to solve this problem, Conservative governments transferred some state industries to private sectors from 1979 to 1997.

After that,

the Labour Government also accepted privatization. Nowadays, there is a free market economy in the United Kingdom (Oakland, 2006). That means the UK government plays a neutral role in its administration and legislation of economic activity. It was so difficult for companies, especially for the private sector, to deal with the negative effects of the global financial crisis of 2007-2008. Furthermore, It is no wonder that the UK government should take responsibilities for recession of economy. If something bad has happened, the target of governments is to prevent the public from this bad situation (Gamble, 2009).

However, these days, the Labour Party, which runs the UK incumbent government, failed to deal with the recession. In addition, many countries, including the United Kingdom, were deeply and quickly influenced by the global financial crisis of 2007-2008 because of globalisation. These days, there is a close relationship between the UK economy and other countries trade. The search for new markets and inputs encourages firms to become bigger and to operate in many countries, becoming multinational firms (Abercrombie, et al. 000, p. 29).

Obviously, More and more firms cooperate with other countries companies and imported goods from them, such as raw materials, products, services etc, so that they are more likely to reduce the cost, make a sizable profit, and survive from fierce competitions. However, it is no doubt that companies are more likely to be affected, when their counterpart are involving in a bad situation. That is why the UK economy started to slow down following the bursting of the housing bubble in the United States. Evaluation

The global financial crisis of 2007-2008 produced sudden changes in some fields in the

United Kingdom, such as the economy, the labour market and daily life in Britain. As can be seen from this paper, the global financial crisis of 2007-2008 has not only affected business, but also has impacted the individuals in the United Kingdom.

The UK economy According It can be seen that GDP trend was a continuous growth between 2005 and 2008 in the United Kingdom, follows six quarters of contraction where the level of GDP fell from peak to trough by around 6. per cent (Chamberlin, 2010). There was a sharp decline in Gross Domestic Product from 2008 to the third quarter of 2009. There were huge negative impacts on many sectors, especially global financial market, because of the collapse of the sub-prime mortgage market in the United States. Figure 2 has shown that there was a marked decrease in financial market liquidity index from 0. 74 on June 2007 to -1. 55 on September 2008. The main function of financial market is to provide funding to companies and financial products to investors.

That is why there had been a strong and substantial effect on companies and banks, and many companies had gone bankrupt, when global financial market was suffering from the US sub-prime mortgage crisis. Figure 1 Gross Domestic Product Figure 2 Global Financial Market Liquidity

The Labour Market In the United Kingdom, a great deal of people lost their job because of the global financial crisis of 2007-2008. According , there was a steady increase in employment rates between 2007 and January 2008. Nevertheless, the UK working age employment rate decreased rapidly from 74. per cent in January 2008 to 72 per cent in March 2010,

reaching 27. 4 million (Office for National Statistics 2010).

On the other hand, as can be seen from table 2 and figure 4 that there was an increasing trend in unemployment rate from May 2008 to March 2010. Unemployment rate reached 8. 0 per cent and the number of unemployment was 2. 51 million in March 2010. Moreover, figure 5 has shown that job vacancies declined sharply from about 700,000 in the three months to April 2008 to approximately 475,000 in the three months to April 2010 (Office for National Statistics 2010).

In the first place, more and more British citizen had lost their jobs and they were more likely to suffer from serious debt problems. Gamble (2009, p. 102) states that the banking collapse meant there were huge losses in savings accounts, pensions and housing for British residents. In the second place, people, more or less, do not want to buy a house, invest amount of money in financial products or plan a holiday trip, because they are worried about their future. Compared to the past, people cannot seek a job for life.

No one will know for several years whether they will lose their job or not, so residents want to save money as much as possible. Lastly, although some British people want to buy a house, it is difficult for borrower to apply for a mortgage loan from banks now. Nowadays, there is a series of items checked by banks, such as income, credit record, job prospects etc, so that banks can reduce the risk (Brummer 2008, p. 19). According to figure 6, there was a sharp decrease in the UK gross mortgage lending from 

363,409 million in 2007 to  257,589 million in 2008.

Others In the United Kingdom, incumbent government had been impacted by this crisis as well. Gamble (2009) argues that many governments will become the victims of the global financial crisis of 2007-2008, lose the election because voters realise that governments did not take responsibilities to satisfy them and governments are feeble and incompetent.

This is one factor which results in that the Labour Party lost the election in 2010 and was replaced by the Conservative Party. On the other hand, in order to provide more job positions for local people, the UK government control the number of job positions for immigrants more strictly than before. That means that it is very difficult for immigrants to live in the United Kingdom. Conclusion To conclude, it is inevitable that the UK has suffered from the global financial crisis of 2007-2008, which was a result of the collapse of the sub-prime mortgage market in the United States, because of internal and external factors.

In the meantime, there were strong impacts on business, economy, the UK government and residents in the United Kingdom. Recommendations In order to recover the economy from the recession, the UK government has taken some effective actions, such as investing a large amount of money in financial market, reducing interest rates, providing a fund for some small enterprises, create more job opportunities. It is very important to provide more job positions and invest money in banks to stimulate consumption.

However, this crisis was great enough and it is almost impossible for government to change this situation in the short-term. Thus, the UK government should make a long-term plan and pay

more attention to the financial market in the future.

References

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