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Ec 111 week 5 b
1. EC-111 British Economy
Recent UK Macroeconomic
Trends
Dr Catherine Robinson
F26, Richard Price Building
Office Hours: Mondays 10.30-11.30 and Thursdays 9.30-10.30
Appointments: c.robinson@swansea.ac.uk
2. So, the UK policy response
•To emphasise international co-operation and co-ordinated
fiscal and monetary policy responses to help move the UK
and world economies out of recession
•a number of levers during the recession:
Bank base rate reduced to 0.5 per cent
Bailing out of some banks and finance to support the balance
sheets of the banks
Value Added Tax temporarily reduced from 17.5% to 15%
Quantitative easing of £200billion – Asset Purchase Facility by
which the Bank of England can buy corporate bonds
Car scrappage scheme
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3. Into 2009…heading into
double dip…
But the market is still jittery (Flash crash of the NYSE in May
2010)
International organisations meeting to define standards in
banking (BASEL I – 1980s and non-binding)
To raise capital ratios, to improve stability in international
banking and to reduce regulatory differences globally
BASEL III (September 2010)
Increased the capital ratio requirements
Insisted on new capital buffers
Banks argued that there was a risk of a double dip as a result
Banks consolidated and tried to diversify – also M&A
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4. And the currency markets??
Contagion means that currencies are suffering
Euro problems in Ireland, Greece and now Portugal and
Italy…
Cyprus problems in the news recently
A country that was developing via two sectors – tourism and
off shore banking
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5. How can we ensure this mistake
doesn’t happen again?
Regulate the financial sector more effectively
Commission a report – the Independent Commission on Banking
Sir John Vickers
Report published in September 2011
recommendations on ring-fencing domestic retail banking, 1/6th to
1/3rd of banking assets to be within the ring-fence
Competition in banking sector needs to be improved
“Future of Finance”, 2010
Report by LSE stars – Adair Turner, Andy Haldane and lots of
others
Highlights that central banks and governments should shoulder
some of the responsibility for the failure – argue as yet, this hasn’t
happened
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6. Financial Services Act
2012
Came into effect on 1st
April, 2013
Brings Bank, FSA and treasury
under the same umbrella
Criticised in the past for little
coordination between the
institutions
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7. Management of the financial
system
Increasingly understood that the financial system had
changed beyond recognition from the 1980s
Many banking investments were obscured, bordering
on illegal (Barclays fined £500m by the UK treasury)
Libor scandal extended beyond Barclays in the end
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8. Why are banks regulated in the
first place?
Goodhart (2010)
Market failures:
Monopoly control
Asymmetric information
Externalities (social costs to bankruptcies)
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9. What has happened to our macro
variables?
Source: Gregg and Wadsworth
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10. International variations
• Gregg and Wadsworth (2010) group countries into 5
categories on the basis of changes in the GDP and
unemployment over the recession:
Those with small falls in employment relative to GDP (UK
and Sweden)
Those with small falls in employment relative to
GDP, having introduced employment subsides
(Italy, Germany, Netherlands and Japan)
Those with similar employment and GDP falls (France)
Those with larger employment falls than GDP (US, Spain
and Ireland)
Those with little fall in GDP (Australia)
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11. Why did the UK labour market hold
up?
Employers entered the recession in fairly good financial shape
Able to absorb some of the downturn without shedding jobs
Total hours worked have fallen sharply and the share of part-timers
risen
Workers accepted nominal wage moderation early on in the
recession
increased chances of finding work if they are made redundant
• The impact on productivity (and international competitiveness) and
public finances has been large; hence the cuts
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12. Cost of crisis
The level of debt in most Western Economies is a
direct result of bank bailouts
Severe recession
Bank of England policy of “quantitative easing”
Exchange rate system in Europe under threat
Greece most obviously
Irish IMF loan and the austerity measures
Italy, Spain and Portugal also under pressure
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14. And now the Euro…
Weaker countries within the Eurozone have suffered –
especially Greece
No longer considered to be a good debtor
Agreed to a range of austerity measures for the
foreseeable future in exchange for Euro bailout to prevent
national bankruptcy
A wider EU problem
The ECB issued €530bn of cheap loans for Banks to
ease liquidity concerns
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15. Failures of macro models?
How come no one saw this coming?
Well, some did (but not as many as now claim they did)
Housing market had been overvalued for years in the UK
Savings far too low
Did our macroeconomic models let us down?
Over-reliance on inflation targeting?
Argued that MONEY is a glaring omission from existing
new Keynesian macro models
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16. There will be other
mistakes…
Macroeconomic models will not cover all eventualities
Abstractions from the real world
Simplifications
BUT still powerful tools
A new focus on risk?
The role of credit ratings are also under scrutiny
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17. Road to recovery
Osborne:
Treat the recession
Tighten the fiscal belt – balance the budget
Reduce government spending – rebalance the UK economy
Encourage growth through private sector enterprise and growing
exports
Regulatory reform of the financial sector
Balancing the need for reform against the footloose nature of financial
intermediaries
Balls:
Treat the depression
Looser fiscal policy to encourage growth
Short term increase in government spending to get the economy back
on track
Tougher stance on financial sector reform
Is the second policy approach viable?
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18. References
Griffiths and Wall (2012) Applied Economics, Chapter 21 for UK financial
institutions, Chapter 30 for the basics
Crafts and Fearon (2010) ‘Lessons from the 1930s Great Depression’, Oxford
Review of Economic Policy, 26(3), 285-317
Drinkwater, Blackaby and Murphy (2011) ‘The Welsh Labour Market
Following the Great Recession’, WISERD Policy Brief
A play by Julian Gough: goat futures explains the housing bubble
For up to date information, have a look at the Economist blog:
http://www.economist.com/blogs/blighty
Deeper understanding in the current debates going on:
Finance for the Future, LSE Report of 2010, available at
http://www.financeforthefuture.org.uk.
This is really tough stuff though, so just read the summary!
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19. Review
We have covered a lot
70 years in about 10 hours!
What have we looked at?
A bit of theory
Macroeconomic variables
Tinbergen’s model
Flexible targets
Keynesinan versus monetarism
Inherent tradeoff between macro variables
Post war macroeconomic performance in Britain was not
bad, but could perhaps have been better
What did post war Britain look like? Capital, labour,
intermediates, employment, output, balance of payments
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