Day 13: What do you know about the big recession of 2008?

The financial crisis of 2007–2008, was a severe global financial crisis (GFC). This global crisis was mainly caused by deregulation in the financial industry. The supply began to outpace the demand of house prices. This is because permitted banks (banks with a banking license) engage in hedge fund trading with derivatives. Banks then to help improve their profitable sales of the derivatives, demanded more mortgages.

Effects on the UK

The recession began after the 2007–2008 global crisis and lead to a long period of prolonged growth lasting until 2013. This resulted in rising unemployment and a period of fiscal austerity (a decision by the government to reduce the amount of government borrowing). This lead to a sharp real GDP fall in the UK economy from 2008–2009.

In the 4th quarter of 2008 in the UK, GDP dropped by 1.5%, leading the country into a recession. The decline of house prices is another factor which helped enhance the recession. During the boom years, rising house prices (and wealth) supported consumer spending. Therefore, consumers cut back on spending and could no longer rely on re-mortgaging to gain equity withdraw (the act of borrowing against the value of ones home).

Strategies adopted to help get the UK out of the recession

The treasury started recapitalizing banks by buying shares and nationalizing banks, who were inevitability going to fail. On top of this, they put a large sum of money into the Financial Services Compensation Scheme (FSCS), to promise savers they won’t lose their money.

The Bank of England took steps to increase the liquidity in banks. The banks were given treasury bills in return for their dodgy mortgages. Plus they designed a Credit Guarantee Scheme (CGS) to restore people’s faith in the markets. Finally Asset Protection Scheme (APS) was a program open to all banks. The government would ensure up to 90% of their assets from losses so banks can continue responsible business and consumer lending. Although only the Royal Bank of Scotland (RBS) used this to their advantage. The government to this day still owns 62% of RBS due to this bail out.

Overall, as a result of the GFC, it lead to a feeling of resentment towards bankers. This is because people felt as if they have been deceived by financial institutions they had placed their trust in. The hatred for bankers is perfectly summed up in the movie The Big Short whilst a trade is being made in a pub in remote England where a local remarks “Are you a drug dealer or a banker cuz if you are a banker you can f*** right off”.

However, there is one positive thing that did come as a result of the GFC, it means banks are now heavily regulated to make sure a crisis like this never happens again. One does wonder whether the same applies to the rating agencies who were equally to blame.