Category: Economics: Ch 18

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Between a rock and a hard place?

The Chancellor Alistair Darling announced in February that Northern Rock – the beleaguered bank – was to be temporarily nationalised. The government had been unable to agree terms with prospective buyers and so decided that temporary nationalisation was the best way to proceed. The move has met with sharp criticism from shareholders and many commentators, but was supported by the Liberal Democrats who had argued from the outset that this was the best solution to the crisis.

Northern Rock shareholders will argue that nationalisation is theft Times Online (20/2/08)
Reaction to Northern Rock nationalisation Guardian (18/2/08)
‘Our shares are worthless’ say the Rock’s furious investors Times Online(18/2/08)
Northern Rock reclassified as public company Guardian (7/2/08)
Northern Rock staff warned of job cuts Guardian (7/2/08)
Q&A: Nationalised Northern Rock – what next? BBC News Online (18/2/08)
Northern Rock crisis (Special Report) BBC News Online

Video


Northern Rock nationalisation BBC News Online (February 2008)

Questions

1. Explain what is meant by nationalisation.
2. Examine the advantages and disadvantages of privatisation. Why was privatisation introduced as a strategy in the 1980s?
3. Discuss the advantages and disadvantages of temporarily nationalising Northern Rock.
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Is inflation actually what we think?

Inflationary expectations can be an important determinant of the actual level of inflation and so the Bank of England monitor people’s perceptions of inflation closely. Expectations of inflation are currently at their highest level in eight years.

Questions

1. Explain the transmission mechanism by which higher inflationary expectations are translated into inflation.
2. What are the key determinants of inflationary expectations?
3. Discuss strategies that (a) the Bank of England and (b) the government can adopt to reduce inflationary expectations.
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Northern Rock – the crumbling financial system

The Northern Rock crisis has caused significant repercussions in the UK financial system. It may continue to do so as the various groups bidding to take over the beleaguered bank try to persuade the government to write off the interest owed on the money borrowed in the run-up to the crisis. In the Guardian article below the build-up to the crisis is considered in detail, while in the other article Anatole Kaletsky argues that central banks need to stand firm against pressure from financiers.

Questions

1. Explain what is meant by the term ‘moral hazard’.
2. Examine the main factors that led up to the Northern Rock crisis.
3. Summarise the main reasons why Anatole Kaletsky argues that central banks need to stand firm when pressurised by City financiers.
4. Assess the likely impact of the Northern Rock crisis on the performance of the UK economy over the next year.
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Money supply growth – a danger signal?

In the early days of monetary policy, money supply targeting was a core element of anti-inflation policy. This approach was slowly dropped during the 1990s, but the underlying growth of the money supply has remained an important issue for policy makers and recent growth in the money supply has led to concern from some commentators that higher inflationary pressures may yet emerge.

King sees money growth as danger sign Times Online (3/5/07)
Bank’s inflation controllers leave the NICE decade to enter the not-so-nice Guardian (3/5/07)
Should letter-writing be a thing of the past? Times Online (30/4/07)


Questions
1. Explain the relationship between money supply growth and inflation.
2. What were the main factors that led to money supply targeting being dropped as a core element of monetary policy?
3. Assess the extent to which the MPC should pay more attention to the level of money supply growth.
4. Should letter-writing be a thing of the past?
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Free banking, or is it?

The Office of Fair Trading (OFT) is to set up an investigation into the reality of ‘free banking’ to establish whether greater transparency in charging would benefit consumers. The articles linked to below consider the scope of this investigation and look at what some consider the ‘myth’ of free banking.

OFT probe into bank charges could mean end of ‘free banking’ The Scotsman (27/4/07)
‘Free’ banking could end as overdraft charges challenged Guardian (27/4/07)
Watchdog probes cost of banking BBC News Online (27/4/07)
Charges inquiry may spell end of free banking Telegraph (28/4/07)
OFT considers ending ‘free’ banking Times Online (27/4/07)
Q&A: Banking investigation and you BBC News Online (26/4/07)
Calling banks’ bluff BBC News Online – Robert Peston blog (26/4/07)
Free banking ‘myth’ to be probed Guardian (26/4/07)

Questions

1. Explain the reason why some people consider free banking to be a ‘myth’.
2. Examine the likely impact of the market structure in the market for banking on the level of competition.
3. Assess two policies that the government could implement to ensure that consumers get a fairer deal from their banks.