On 2 May 2012, Sir Mervyn King, Governor of the Bank of England, gave the BBC Today Prgramme’s public lecture. In it, he reflected on the causes and aftermath of the banking crisis of 2007/8.
He said that the main cause of the banking crisis was the risky behaviour of the banks themselves – behaviour that they had been allowed to get away with becuase regulation was too light. The cause was not one of inappropriate fiscal and monetary policy.
According to Dr King, there had been no classical macroeconomic boom and bust. True there had been a bust, but there was no preceding boom. Economic growth had not been unsustainable in the sense of being persistently above the potential rate. In other words, the output gap had been close to zero. As Mervyn King puts it
Let me start by pointing out what did not go wrong. In the five years before the onset of the crisis, across the industrialised world growth was steady and both unemployment and inflation were low and stable. Whether in this country, the United States or Europe, there was no unsustainable boom like that seen in the 1980s; this was a bust without a boom.
In terms of monetary policy, inflation had been on track and interest rates were not too low. And as for fiscal policy, government borrowing had been within the Golden Rule, whereby, over the cycle, the goverment borrowed only to invest and kept a current budget balance. Indeed, the period of the late 1990s and early to mid 2000s had become known as the Great Moderation.
So what went wrong? Again in the words of Dr King:
In a nutshell, our banking and financial system overextended itself. That left it fragile and vulnerable to a sudden loss of confidence.
The most obvious symptom was that banks were lending too much. Strikingly, most of that increase in lending wasn’t to families or businesses, but to other parts of the financial system. To finance this, banks were borrowing large amounts themselves. And this was their Achilles’ heel. By the end of 2006, some banks had borrowed as much as £50 for every pound provided by their own shareholders. So even a small piece of bad news about the value of its assets would wipe out much of a bank’s capital, and leave depositors scurrying for the door. What made the situation worse was that the fortunes of banks had become closely tied together through transactions in complex and obscure financial instruments. So it was difficult to know which banks were safe and which weren’t. The result was an increasingly fragile banking system.
But doesn’t his imply that regulation of the banking system had failed? And if so why? And have things now been fixed – so that banks will no longer run the risk of failure? Dr King addresses this issue and others in his speech and also in his interview the next day for the Today Programme, also linked to below.
Podcasts
The Today Programme Lecture BBC Radio 4, Sir Mervyn King (2/5/12) (Transcript of speech)
Also on YouTube at Governor’s Today Programme lecture, 2 May 2012
Sir Mervyn King: The full interview BBC Today Programme, Sir Mervyn King talks to Evan Davis (3/5/12)
Sir Mervyn King analysis ‘verging on delusional’ BBC Today Programme, Dylan Grice and Ngaire Woods (3/5/12)
Articles
Sir Mervyn King rejects criticism for crisis BBC News (3/5/12)
The boom and bust of Mervyn King BBC News, Robert Peston (3/5/12)
Sir Mervyn King admits BoE failed over financial crisis The Telegraph, Philip Aldrick (3/5/12)
Sir Mervyn King admits: we did too little to warn of economic crisis Guardian, Larry Elliott (2/5/12)
King Says BOE Will Risk Unpopularity to Prevent Crises Bloomberg, Jennifer Ryan and Scott Hamilton (3/5/12)
Data
Economic Outlook Annex Tables OECD (See Annex Tables 1, 10, 14, 18, 27, 28, 32, 33, 61 and 62)
Statistical Interactive Database Bank of England (See for example, A Money and Lending: counterparts to changes in M4, alternative presentation > Seasonally adjusted > Public sector contribution > PSNCR)
Questions
- Why was the period of the late 1990s and early to mid 2000s described as the Great Moderation?
- Chart the size of the output gap, the rate of inflation and public-sector deficits as a percentage of GDP in the UK and other major economies from 1995 to 2007. Is this evidence of the Great Moderation?
- To what extent would evidence of house prices, consumer debt, bank lending and the balance of trade deficit suggest that there was indeed a boom from the mid 1990s to 2007?
- What, according to Dr King were the main causes of the credit crunch?
- What, with hindsight, should the Bank of England have done differently?
- What UK body was responsible for regulating banks in the run up to the credit crunch? Why might its regulation be described as ‘light touch’?
- In what sense was there a moral hazard in central banks being willing to bail out banks?
- What banking reforms have taken place or will take place in the near future? Will they address the problems identified by Dr King and prevent another banking crisis ever occurring again?
According to the Sunday Times Rich List, the combined wealth of Britain’s 1000 richest people grew by nearly 4.7% last year to £414 billion (after growing by 18% in 2010).
This is in stark contrast to average households, who saw their real incomes decline by 1.9% in 2011. As the Guardian article below says:
The Rich Listers are not merely the 1%, but the 0.01%, and this fanfared celebration of their assets feels like a celebration of things that nobody feels like celebrating: bankers’ bonuses, complex corporate tax-avoidance structures, the stifling grip of aristocratic family wealth.
So why are the rich getting richer and what are the implications for society and the economy? Watch and read the following webcasts and articles and then see if you can answer the questions below.
Webcasts
Rich List shows how super-wealthy have dodged recession (or) Channel 4 News (29/4/12)
Sunday Times Rich List: Wealthy getting richer BBC News, Ben Thompson (29/4/12)
Articles
Britain’s richest see fortunes rise to record high Reuters, Tim Castle (29/4/12)
Sunday Times Rich List shows rich recover wealth twice as fast Myfinances.co.uk, Ben Salisbury (29/4/12)
Sunday Times Rich List suggests UK’s wealthiest defy recession BBC News (28/4/12)
Sunday Times Rich List 2012: Wealth of richest grows to record levels The Telegraph, Patrick Sawer (28/4/12)
The Not-So-Rich-Any-More List Guardian, Oliver Burkeman and Patrick Kingsley (27/4/12)
Sunday Times Rich List ITV News (29/4/12)
Data
Distribution of Personal Wealth HMRC
The effects of taxes and benefits on household income ONS (19/5/11)
Household Quarterly Release 2011 Q4 – Real household actual income and expenditure per head ONS
Questions
- Distinguish between stocks and flows. Which of the following are stocks and which are flows: income, wealth, savings, saving, expenditure, possessions?
- If the combined wealth of the 1000 wealthiest people increased in 2011, does this imply that their incomes rose? Explain.
- Why have the super rich got richer, while average incomes in the country have fallen?
- What are the costs and benefits to society (other than the super rich) of the super rich becoming richer?
- Distinguish between the income and substitution effects of an increase in income of the wealthy. Which is likely to be larger and why?
The UK hosted the third Clean Energy Ministerial conference on 25/26 April 2012. More than 20 energy ministers from around the world attended. In his address, David Cameron, gave his backing to more wind farms being built in the UK, both onshore and offshore.
Currently just under 10 per cent of the UK’s electricity is generated from renewable sources. But to meet agreed EU targets this must increse to at least one-third by 2020. Most of this will have to come from wind.
But whilst wind turbines create no CO2 emissions, electricity generated from wind is currently some 15% more expensive than from gas. To make wind power profitable, energy companies are required by law to generate a certain percentage of their electricity from renewables and the cost is passed on to the consumer. This adds some £20 per year to the average household energy bill.
Over the coming years, many new power plants will have to be built to replace the electricity generated from older plants that reach the end of their life. So what types of plant should be built? Unfortunately measuring the costs and benefits from power generation is not easy. For a start, energy needs are not easy to predict. But more importantly, electricity generation involves huge environmental and social externalities. And these are extremely difficult to measure.
What is more, the topic is highly charged politically. The social costs do not fall evenly on the population. People might favour wind turbines, but they do not want to see one outside their window – or from their golf course!
The following videos and articles will give you some insight into the difficulties that any decision makers face in making the ‘right’ decisions about electricity generation
Webcasts and podcasts
Can Cameron still claim the ‘greenest government ever’? Channel 4 News, Tom Clarke (26/4/12)
Energy Secretary: UK will meet green targets BBC News, Ed Davey (25/4/12)
Donald Trump attacks Scottish government’s green policy BBC News, James Cook (25/4/12)
Trump: Wind farms ‘bad for Scotland’ BBC News (24/4/12)
Tycoon Trump fights Scotland over wind farms near golf resortReuters, Deborah Gembara (25/4/12)
Wind power blows Siemens off course Euronews, Anne Glemarec (25/4/12)
Mexico inaugurates largest wind farm in Latin America BBC News, Carolina Robino (9/3/12)
BP’s Flat Ridge 2 Wind Farm in Kansas YouTube, BPplc (10/4/12)
Arnold Schwarzenegger: Green quest goes on BBC News (26/4/12)
Denmark Pioneers Clean Energy Green TV (18/4/12)
EU wind industry defies recession Green TV (16/4/12)
Wind Farm Issues – Compilation LiveLeak (15/4/12)
News articles
David Cameron commits to wind farms The Telegraph, Louise Gray (26/4/12)
David Cameron says wind energy must get cheaper The Telegraph, Louise Gray (27/4/12)
Could 2012 be year of the wind turbine? The Telegraph, Louise Gray (3/2/12)
Green energy vital, says David Cameron Independent, Emily Beament (26/4/12)
Cameron: renewables are ‘vital to our future’ businessGreen, Will Nichols and James Murray (26/4/12)
Green energy ‘must be affordable’ – Cameron BBC News (26/4/12)
Wind farms will kill tourism, says Donald Trump Independent (25/4/12)
Donald Trump accuses Salmond of ‘betrayal’ over wind farm plans The Telegraph, Simon Johnson (25/4/12)
Turbine scheme provokes wuthering gale of protest Independent, Mark Branagan (6/4/12)
Prince Charles endorses wind power in new film at Sundance Festival The Telegraph, Roya Nikkhah (29/4/12)
Study claims tourists ‘not put off’ by wind farms in Scotland BBC News (24/4/12)
Tide turns in favour of wave power instead of wind farms Scotsman, David Maddox (23/4/12)
Rush towards wind-generated electricity will not reduce fuel poverty Power Engineering (21/4/12)
Shell says no to North Sea wind power Guardian, Terry Macalister (26/4/12)
David Cameron, the Speech He Needs to Make Huffington Post, Juliet Davenport (25/4/12)
Campaigners want David Cameron to come clean over wind farm policy Western Daily Press (27/4/12)
Being Green Doesn’t Mean Higher Electricity Costs Says Green Energy UK DWPub (27/4/12)
Documents
Cost Benefit Methodology for Optimal Design of Offshore Transmission Systems Centre for Sustainable Electricity and Distributed Generation, Predrag Djapic and Goran Strbac (July 2008)
A Cost Benefit Analysis of Wind Power University College Dublin, Eleanor Denny (19/1/07)
Ecological and economic cost-benefit analysis of offshore wind energy Renewable Energy 34, Brian Snyder, Mark J. Kaiser (2009)
Questions
- Why is difficult to predict the future (financial) cost per kilowatt-hour of electricity generation by the various methods?
- Why is it difficult to estimate the demand for electricity in 10 years’ time?
- Identify the external benefits and costs of electricity generation from (a) onshore wind turbines; (b) offshore wind turbines.
- Is ‘willingness to pay’ a good method of establishing the value of external benefits and costs?
- What are the steps in a cost–benefit analysis?
- What types of problems are there in measuring external benefits and costs?
The UK is officially back in recession: or to be more accurate, a double-dip recession.
The generally accepted definition of a recession is two or more quarters of negative growth in real GDP. According to figures released by the Office for National Statistics, the UK economy shrank by 0.2% in quarter 1, 2012, having shrunk by 0.3% in quarter 4, 2011.
(Click on the following link for a PowerPoint of the above chart: Double dip 2)
As you can see from the chart (click chart for a larger version), these declines are tiny compared with the recession of 2008/9. Nevertheless, with the eurozone economy slowing (Britain’s largest export market), and with cuts to government expenditure set to bite harder in the coming months, there are worries that there may be more quarters of negative growth to come.
So what are the causes of this double-dip recession? Are they largely external, in terms of flagging export markets; or are they internal? Is the new recession the direct result of the tight fiscal policy pursued by the Coalition government?
And what is to be done? Is there no option but to continue with the present policy – the government’s line? Or should the austerity measures be reined in? After all, as we saw in the last blog post (Economic stimulus, ‘oui’; austerity, ‘non’), the mood in many European countries is turning against austerity.
The following articles explore the causes and policy implications of the latest piece of bad news on the UK economy.
Articles
Double-dip recession a terrible blow for George Osborne Guardian, Larry Elliott (25/4/12)
Double-dip recession figures mark another bad day for George Osborne Guardian, Larry Elliott (25/4/12)
UK double-dip recession: what the economists say Guardian (25/4/12)
Feared double dip recession becomes reality as British economy contracts again in first quarter of 2012 Daily Record (25/4/12)
Britain in double-dip recession as growth falls 0.2pc The Telegraph, Angela Monaghan and Szu Ping Chan (25/4/12)
Did the eurozone crisis cause the double-dip recession? Guardian, Polly Curtis (25/4/12)
UK’s double-dip recession Financial Times, Chris Giles (25/4/12)
UK is in ‘double dip’ recession FT Adviser, Rebecca Clancy and John Kenchington (25/4/12)
Flanders explains GDP figure BBC News, Stephanie Flanders (25/4/12)
No recovery for UK: No let up for ONS BBC News, Stephanie Flanders (25/4/12)
Double-dip recession: There’s always fantasy island BBC News, Paul Mason (25/4/12)
UK double-dip recession to drag on into summer, economists warn The Telegraph, Philip Aldrick (26/4/12)
George Osborne can stop the rot, but only by spending as he slashes The Telegraph, Jeremy Warner (25/4/12)
Double dip has arrived – and Osborne is running out of escape routes Independent, Ben Chu (26/4/12)
Britain’s bosses tell the ONS: it’s bad, but not a recession Independent, Tom Bawden, Lucy Tobin , Gideon Spanier (26/4/12)
The Chancellor received plenty of warning Independent, David Blanchflower (26/5/12)
Data
Gross Domestic Product: Preliminary Estimate, Q1 2012 ONS (25/4/12)
Preliminary Estimate of GDP Time Series Dataset 2012 Q ONS (25/4/12)
World Economic Outlook Database IMF (17/4/12)
Business and Consumer Surveys (for all individual EU countries and for the EU as a whole) European Commission: Economic and Financial Affairs
Consumer Confidence Nationwide Building Society
Questions
- Assess the current state of the UK economy and its likely course over the coming few months.
- Why may looking at the business surveys provide a truer picture of the state of the UK economy than the official measure of GDP?
- Why has the UK economy gone back into recession?
- Compare the policy approaches of the Coalition government with those of the Labour opposition.
- How important is it for the UK to retain its AAA credit rating?
Fuel prices at German petrol stations fluctuate wildly – by up to €0.14 per day. They are also often changed several times per day. In morning rush hours, when demand is less elastic, prices may shoot up, only to drop again once people are at work.
But is this a sign of healthy competition? Critics claim the opposite: that it’s a sign of the oligopoly power of the oil companies. More than two-thirds of Germany’s petrol stations are franchises of five big oil companies: BP/Aral, Esso, Jet, Shell and Total. These five companies directly control the prices at the pumps. According to the Der Spiegel article below, oil companies:
have sophisticated computer systems that allow them to precisely control, right down to the minute, when they increase their prices nationwide, and by how many cents. The prices are not set by the individual franchise holders. Instead, they are centrally controlled – for example, in the town of Bochum, at the headquarters of Aral, a BP subsidiary that is the market leader in Germany.
The price manager merely presses a button and price signs immediately change at all 2,391 Aral service stations in Germany. All filling stations are electronically linked with Bochum via a dedicated network called Rosi. After each price increase, they watch closely to see how the competition reacts and whether they follow suit.
… If the competitor’s prices are significantly cheaper, the Aral franchise holder can, with the help of Rosi, apply for permission to reduce the prices again.
Not only do the oil companies control the prices at the pumps, but they observe closely, via their franchise holders, the actions of their rivals, and then respond in ways which critics claim is collusive rather than competitive. The problem has become worse with the introduction of incentives to the franchise owners of additional commission if they exceed the price of their competitors within the local area. This has the effect of ratcheting prices up.
The sophisticated pricing strategies, with prices adjusted frequently according to price elasticity of demand, are making it very hard for independent operators to compete.
In response, the German Cartel Office has launched an investigation into the oil companies and in particular into the issues of collusion and frequent price changes and how these impact on independent operators.
German anti-trust authority probes alleged fuel cartel Deutsche Welle (4/4/12)
German antitrust watchdog to probe oil majors-paper Reuters, Ludwig Burger (3/4/12)
Oil giants probed over claims they rigged petrol prices in Germany The Telegraph, Nathalie Thomas (4/4/12)
BP, Exxon, Esso, Jet, Shell and Total in Germany Price Fix Probe International Business Times (9/4/12)
German cartel office probes petrol company pricing MarketWatch (4/4/12)
Kartellverfahren gegen fünf Mineralölkonzerne (in German) Frankfurter Allgemeine Zeitung, Helmut Bünder and Manfred Schäfers (4/4/12)
Crazy gas prices driving German consumers mad msnbc, Andy Eckardt (3/4/12)
Big Oil’s Strategy for Jacking Up Gas Prices Der Spiegel, Alexander Jung and Alexander Neubacher (5/4/12)
Questions
- What the features of the German road fuel oligopoly?
- Why does the price elasticity of demand for petrol and diesel vary with the time of day? Is it likely to vary from one week to another and, if so, why?
- In what ways have the actions of the big five oil companies been against the interests of the independent petrol station operators?
- Consider the alternatives open to the German Federal Cartel Office for making the market more competitive.
- Would it be a good idea for the big five German companies to be forced to adopt the Western Australian system of price changes?
On 2 May 2012, Sir Mervyn King, Governor of the Bank of England, gave the BBC Today Prgramme’s public lecture. In it, he reflected on the causes and aftermath of the banking crisis of 2007/8.
