Whilst some economists predicted the banking crisis of 2007/8 and the subsequent global recession, many did not. Was this a failure of macroeconomics, or at least of certain macroeconomic schools of thought, such as New Classical economics? Or was it a failure to apply the subject with sufficient wisdom? Should the subject be radically rethought, or can it simply be amended to take into account aspects of behavioural economics and a better understanding of systemic risk?
The four linked articles below from The Economist look at the debate and at the whole state of macroeconomics. The other articles pick up some of the issues.
Will the ‘crisis in macroeconomics’ lead to a stronger subject, more able to explain economies in crisis and not just when they are working well? Will a new consensus emerge or will economists remain divided, not only about the correct analysis of how economies work at a macro level, but also about how to tackle crises such as the present recession?
What went wrong with economics The Economist (16/7/09)
The other-worldly philosophers The Economist (16/7/09)
Efficiency and beyond The Economist (16/7/09)
In defence of the dismal science The Economist (6/8/09)
How to rebuild a shamed subject Financial Times (5/8/09)
What is the point of economists? Financial Times – Arena (28/7/09)
Macroeconomic Models Wall Street Pit (23/7/09)
Macroeconomics: Economics is in crisis – it is time for a profound revamp Business Day (27/7/09)
Questions
- Distinguish between ‘freshwater’, ‘saltwater’ and ‘brackish’ macroeconomics.
- Explain why economists differ over the efficacy of fiscal policy in times of recession. To what extent does the debate hinge on the size of the multiplier?
- Why is the potential for macroeconomics higher now than prior to the recession?
- What is meant by the ‘efficient market hypothesis’? How did inefficiencies in financial markets contribute to the banking crisis and recession?
- Should economists predict the future, or should they confine themselves to explaining the present and past?
On July 8 the UK government published its long-awaited White Paper on reform of the system of banking regulation. Several commentators had called for the abolition of the ‘tripartite’ system of regulation, whereby responsibility for ensuring the stability and security of the banking system is shared between the Financial Services Authority (FSA), the Bank of England and the Treasury. Some have advocated a considerable strengthening of the role of the Bank of England and even abolishing the FSA. What is generally agreed is that there needs to be ‘macro-prudential’ regulation that looks at the whole banking system and at questions of systemic risk and not just at individual banks. Several of the articles below debate this issue.
The government’s White Paper proposes keeping the tripartite system but also strengthening various aspects of regulation. Amongst other things, it proposes giving the FSA powers to ‘penalise banks if their pay policies create unnecessary risks and are not focused on the long-term strength of their institutions’. It also proposes setting up a ‘new Council for Financial Stability – made up of the FSA, the Bank of England and the Treasury – to meet regularly and report on the systemic risks to financial stability’. Banks would also be required to increase their capital adequacy ratios. The first two articles below give an outline of the proposals. The detailed proposals are contained in the third link, to the Treasury site.
Chancellor moves to rein in ‘risky’ banks Independent (9/7/09)
Banks to face tougher regulation BBC News (8/7/09)
Reforming financial markets HM Treasury (8/7/09)
Treasury sees devil in the detail Financial Times (7/7/09)
How to police the banking system Independent (8/7/09)
City regulation: a quick guide Telegraph (8/7/09)
Treasury White Paper: what it means for the financial services industry Telegraph (8/7/09)
Key issues: Financial regulation BBC News (8/7/09)
Alistair Darling accuses banks of ‘kamikaze’ attitude to loans Telegraph (5/7/09)
HSBC boss on banking reform BBC News video (3/7/09)
Bankers ‘want to be proud of what they do’ BBC Today Programme, Radio 4 (7/7/09)
Divisions on display at Mansion House BBC Newsnight video (18/6/09)
Who should supervise the banks? BBC Newsnight video (18/6/09)
Governor wants more bank powers BBC News video (17/6/09)
King puts spotlight on banks too big to fail Times Online (21/6/09)
Mervyn King: Banks cannot be too big to fail Edmund Conway blog, Telegraph (17/6/09)
The City doesn’t need any more rules Telegraph (6/7/09)
Treasury admits ‘intellectual failure’ behind credit crisis Telegraph (8/7/09)
Bankers to face draconian pay veto Times Online (8/7/09)
Questions
- What do you understand by macro-prudential regulation? What would be the difficulties of applying regulation at this level?
- Why may liquidity ratios and capital adequacy ratios that are deemed appropriate by individual banks be inappropriate for the banking system as a whole?
- If banks are too big to fail, why does this create a moral hazard?
- Examine the case for splitting universal banks into retail banks and investment banks.
- Examine the arguments for and against regulating the level and nature of remuneration of senior bank executives.
The global economy has been in a recession since December 2007, but have we now passed the worst of it? Whilst companies are still going bankrupt, unemployment is still rising, the housing market is still looking pretty gloomy and government debt surely can’t go up anymore, there are indications that we’ve reached the bottom of the recession. There are murmurs that the economy may start to recover towards of the end of the year.
But, of course, economics wouldn’t be economics if there wasn’t considerable disagreement. Many still believe that the worst is yet to come. According to the OECD, the recession is ‘near the bottom’. Yet, output in the UK is still set to decline by 4.3% in 2009, and by 2010 the budget deficit is predicted to have grown to 14%. Unemployment is at its highest since November 1996, but US consumer confidence is said to be rising and the pound is climbing. Read these articles and make up your mind about the state of the UK and global economy!!
Business and Consumer Surveys (After following link, click on chart) European Commission, Economic and Financial Affairs (29/6/09)
Pound climbs against euro as King sees signs recession easing Bloomberg, Lukanyo Mnyanda, Gavin Finch (20/6/09)
Bank says banking crisis easing BBC News (25/6/09)
First signs of optimism returning to some parts of financial services CBI PRess Release (29/6/09)
Darling and King agreed on tentative recovery Guardian, Ashley Seager (17/6/09)
Sharp contration for UK economy BBC News (30/6/09)
Housing market knocked by price falls Moneywise (22/6/09)
OECD says recession ‘near bottom’ BBC News, Steve Schifferes (24/6/09)
US Federal Reserve says recession is ‘easing’ Telegraph, James Quinn (24/6/09)
Public borrowing at record levels BBC News (18/6/09)
Leading index suggests recession easing UPI.com (18/6/09)
US consumer confidence up in June BBC News (26/6/09)
Blow for housing market as prices fall The Independent, David Prosser (22/6/09)
Most UK businesses freeze pay as recession bites, CBI says Telegraph, Peter Taylor (23/6/09)
Questions
- What are the typical characteristics of a recession? Do the current statistics of the four main macroeconomic objectives fit in with what economic theory tells us?
- Which policies would governments normally implement to get a economy into the expansionary/recovery phase of the business cycle and how do they work?
- Why is consumer confidence so key to economic recovery?
- What type of banking regulation is needed to prevent a similar crisis happening again?
- Movements in the housing market are often seen as indicators of the state of the economy. Why is this?
The global recession can be traced back to the collapse of the sub-prime mortgage market in America and so it’s hardly surprising that one of the biggest sufferers of this global crisis has been the housing market. House prices in the UK had, for some months, been in apparent free-fall, but they now appear to have stabilised. Some estate agents report prices beginning to increase, but others say they’re still falling.
Whilst lower prices should be an encouraging sign for first-time-buyers, there is another obstacle in their way. Mortgage lenders have been requiring large deposits and, unsurprisingly, have become more vigilant about whom they lend to and how much. Read the articles below that look at the crisis in the housing market and consider the impact this has had on the wider economy.
Experts far more upbeat about UK house market The Herald, Ian McConnell (26/6/09)
Gloomy CIPS data shows further woes for construction firms Construction News, Nick Whitten (2/10/08)
Construction contracts at slowest pace for seven months Construction News, Nick Whitten (5/5/09)
House prices decline again in May BBC News (26/6/09)
Mortgage lending falls back again BBC News (18/6/09)
More fixed-rate mortgages go up BBC News (16/6/09)
Housing market needs ‘feel-good factor’ to recover CityWire, Nicholas Paler (26/6/09)
Housing market set for recovery Exec Digital, Ben Lobel (26/6/09)
Home-ownership ‘aspirations hit’ BBC News (15/6/09)
House prices fall 1.7 percent in April Exec Digital (6/5/09)
Spring bounce in mortgage lending BBC News (11/6/09)
Is the first rung on the property ladder broken? BBC News, Kevin Peachey (27/4/09)
Lack of affordability may slow housing sector recovery RLA News Service (25/6/09)
See the following two sites for house price data in the UK:
Halifax House Price data from the Lloyds Banking Group
Nationwide House Price data
Questions
- Why has the collapse of the housing market had much wider repercussions on the UK economy? Consider the impact on construction, solicitors, surveyors.
- Have any groups benefited from falling house prices?
- How has the UK’s monetary policy in particular helped to stimulate the UK housing market? Has it been successful?
- Why are lenders so reluctant to lend? Is this a direct result of the sub-prime crisis in America?
- What is the meaning of ‘negative equity’? How does being in a situation of negative equity affect people’s behaviour?
Banks appearing in the news has become commonplace in the past year or so. Everyday, there has been something newsworthy happening in the banking sector, whether in the UK or abroad. A recent development in this sector is Barclays agreeing to sell its fund management division, BGI, to Blackrock for £8.2 billion. Barclays says that there are strategic reasons for the sale, which undoubtedly add to the 8.2 billion other reasons. This deal will put the bank in a strong position to make acquisitions next year in creating the world’s biggest asset manager. It will also allow Barclays to weather any further storms on the horizon. The articles below look at recent developments.
Blackrock in £8.2 billion Barclays deal BBC News (12/6/09)
Blackrock and a hardplace The Economist (12/6/09)
Bob Diamond: The builder of Barclays Telegraph, Louise Armitstead (13/6/09)
Barclays offloads fund management business BGI to Blackrock for £13.5 billion Telegraph, James Quinn (12/6/09)
Inside Look: Blackrock buys Barclays fund unit for $13.5 billion Bloomberg, youtube (12/6/09)
Sovereign wealth funds back BlackRock move to acquire Barclaysd Global Investors Telegraph, Louise Armitstead, James Quinn (12/6/09)
Blackrock targets Barclays firm BBC News (8/6/09)
Questions
- What are the ‘strategic reasons’ behind Barclays’ decision to sell its fund management division?
- The Blackrock and a hardplace article talks about the benefits of economies of scale. What does it mean by this?
- What are the advantages and disadvantages of combining fund management with banking and creating such a large business?
- Given that Barclays’ fund management, BGI is a successful part of its business, does their agreement to sell it put them in a stronger position?
- What will be the likely impact of this deal on the economy? Consider who will be (a) the winners and (b) the losers.