The Key Issues

The Financial Crash had impacts well beyond finance markets and government, here we look at the reasons it happened, what has been learned and how each policy area could and should react to it.

Understanding the Economy

In November 2008, the Queen famously asked economists at the LSE, ‘Why did no-one see it (the Crash) coming?’ To which the answer is that while financial and economic models were good at predicting the short-term and small risks, few were equipped to say what would happen when things went really wrong. There has been a growing current of thought that prevailing economic models, based on a simplistic set of assumptions and an outdated mathematical paradigm, are incapable of keeping up with present-day realities.

There has also been a groundswell of discontent among students who felt that economics wasn’t dealing with issues they wanted discussed, which has kick-started a more enlightened approach to the teaching of economics in some educational institutions. Promoting economic pluralism is part of this movement, and has launched an international dialogue on the design of a new international accreditation system for masters courses that take a pluralist approach to economics.

The economy in detail

Economic Policy

So what went wrong – and why was the Crash so severe in the UK? One reason may have been the huge relative size of the finance sector, and because the government had gone in for a policy of light regulation of financial transactions. The incoming Coalition believed the answer was to reduce the public sector, and end culture of benefits, heralding a long period of austerity. However debt has continued to rise and now stands at 90% of GDP.

There was a very active monetary policy with very low interest rates and huge injections of liquidity into banks. However, this has not worked, as productivity has declined and the balance of payments deteriorated significantly, sucking resources out of the UK. The current government now sees tackling productivity as the answer through their industrial strategy but do they have the focus to do this in the context of Brexit? And are the issues more fundamental anyway?

Economic Policy and the crash in detail

Financial Regulation

The Big Bang in 1989 and later deregulation measures enabled London to become a leading global financial centre in the 1990s, entering “a new golden age for the City of London”. In this free-for-all atmosphere, US and UK banks effectively became mortgage lenders, leading to increasing levels of unsustainable debt, with bankers described as “overenthusiastic waiters at a party, who were happily drinking themselves and happily giving everybody too much to drink”.

As the party finished this set off a chain reaction of defaults and bankruptcy in the US and UK. In the UK, the stock market became very volatile and banks stopped lending to each other, so the government adopted a sub-nationalisation programme and injected billions of pounds into banks as bailouts and loan guarantees.

While new stringent regulation have tried to change banking practice, the bank culture of taking high risks and avoiding regulation has changed little. Some despair of it ever changing, and in the US, with pressure to dismantle regulations altogether, and in the UK the possibility post-Brexit deregulation to defend the finance sector, the future does not look very positive.

Financial Regulation and the crash in detail

Socio-Economic Impacts

The Recession had a strong impact on the British economy and on its population, but there are signs that things have and will continue to improve for the richest percentile and older people.

Employment, which fell sharply is now rising, but largely driven by growth in self-employment and in part-time workers. While there was a sudden downwards trends in income, inequality has now fallen across most income groups, but the share of income going to the top 1% has risen from 5.7% to 8.3%.

The Coalition government reduced spending on social security by cutting welfare benefits and tax credits, reducing net incomes of poorer families by 5%. Spending growth on health has been the lowest since records began, but will have to increase considerably over the next 50 years, due to an ageing society.

In the future median income is projected to grow by 3.8% between 2017 and 2022, while median income in 2021 will be 10% higher than in 2008. Absolute poverty is expected to decline slightly, but child poverty is expected to rise from 27.5% to over 30%, and general income inequality will widen.

Socio-economic impacts in detail

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