Most students have a student loan: you need it to live; to buy text books; to survive. So, what do you do if your student loan hasn’t appeared in your bank account? This is a problem that many students have been facing. The Student Loans Company said that even after most courses had started, 175,358 students had still not had their loan application processed. This represented 16% of applications. There are various reasons given for this delay, but one that appears more often is the current economic downturn. This has been a crucial factor in so many students being without the necessary finance to begin university. Another reason is that many documents have been misplaced. On the other hand, a spokesman for the Student Loans Company (SLC) said that actually delays this year were no worse than in previous years, even though this is the first year when students applied directly to the SLC. Does this suggest that actually the whole system of student loans is still inefficient and needs to be overhauled again? Is there a better method?
In order to help students, many universities have made emergency payments to those without their loans. What’s the opportunity cost of this money? Surely it could be used for other purposes. Universities have seen their highest ever number of applications, although there has been a drop in Scottish student numbers and there are suggestions that tuition fees will increase again. What are the implications of the problems with student loans and the massive increase in university applications?
Minister ‘sorry’ for student loan delays ePolitiX (15/10/09)
140,000 miss university places The Press Association (17/10/09)
Student loan firm explains delays BBC News (12/10/09)
Student loan delay hits 175,000 students Telegraph, Graeme Paton (9/10/09)
Enquiry to be held over late payments of student loans Guardian, Jessica Shepherd (13/10/09)
Watchdog fears over poor students BBC News (29/9/09)
Student tuition fees could increase Telegraph, Graeme Patton (14/10/09)
Student debt to soar Daily Express, Alison Little (14/10/09)
Questions
- Why has the recession had an impact on university applications?
- Should universities be able to set their own fees? What are the advantages and disadvantages of such a system? How could fees be determined?
- Primary and Secondary education is a merit good and free in the UK. What do we mean by a merit good and how can we illustrate the positive externalities associated with education? Why is higher education not free to the student? Aren’t there positive externalities associated with it?
- If tuition fees increase, student debt levels after graduation will be higher. What is the likely impact of this on the students themselves and on the economy?
- What the likely consequences for (a) students (b) universities of the delays in student loans?
“We will look back at 2009 as a watershed in economic history. This is the first time since the war that the world economy has not been led out of a recession by the US consumer.” (Jeremy Beckworth, CIO, Kleinwort Benson Private Bank – see second linked article below) How has the Chinese economy fared during the global recession? What policies has it pursued and how successful have they been? Will Chinese growth continue and how will this impact on the rest of the world? What economic risks does China face? These are questions that the following articles consider.
Array of figures adds to optimism over China economy Reuters (15/10/09)
Look East for the land of opportunity Jeremy Beckwith, Portfolio Adviser (14/10/09)
Greenback Woes Boost China’s Global Muscle Money Morning (15/10/09)
China Rises Amid Global Economic Crisis Manufacturing.net (13/10/09)
Why China must do more to rebalance its economy Financial Times (22/9/09)
China economic growth accelerates BBC News (22/10/09)
Chinese economy grows at fastest pace in a year Telegraph (22/10/09)
China’s 3Q growth accelerates to 8.9% pace Los Angeles Times (22/10/09)
Questions
- Examine whether Chinese inward investment to the UK is desirable for UK companies and employees.
- Why is a more powerful Chinese economy a ‘mixed blessing’ for the USA?
- In what ways is the Chinese economy ‘distorted’? Explain why this matters.
- Why is it encouraging that China’s current account and balance of trade surpluses have been shrinking?
- What effect would an appreciation of the yuan (or ‘renmimbi’) have (a) on the Chinese economy; (b) on the rest of the world? What would determine the size of this effect for any given appreciation?
- Why must China do more to rebalance its economy?
In a speech to Scottish business organisations, Mervyn King, the Governor of the Bank of England, argued that it might be necessary to split banks up. The aim would be to separate the core retail banking business, of receving deposits and lending to individuals and businesses, from the more risky and exotic wholesale acitivites of banks, such as securitisation, speculation and hedging – so-called ‘casino banking’.
Governments around the world, as represented at the G20 meeting at Pittsburg in September, have favoured tougher regulation of banks. But Mervyn King believes that this is not enough. It may not prevent the reckless behaviour that resulted in the credit crunch and bank bailouts by the government. “Never has so much money been owed by so few to so many. And, one might add, so far with little real reform.” And if regulation were to fail and banks were to get into difficulties, what would happen? There would have to be another bailout. As Mervyn King said, “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.”
There are two key problems.
The first is Goodhart’s Law. If rules are set for bank behaviour, banks may adhere to the letter of the rules, but find ways around them to continue behaving in risky ways. The rules may cease to be a good measure of prudent behaviour.
The second is moral hazard. If banks know that they will be bailed out if they get into difficulties because they are too big to fail, then this encourages them to take the risks. As Mervyn King said in his speech, “The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The ‘too important to fail’ problem is too important to ignore.”
So should the banks be split? Is there any likelihood that they will? Or are Mervyn King’s proposals merely another headache for the government? The following articles looks at the issues. The first link below is to his speech.
Speech by Mervyn King, Governor to Scottish business organisations, Edinburgh (20/10/09)
Mervyn King: bail-outs created ‘biggest moral hazard in history’ (including video of part of speech) Telegraph (20/10/09)
Governor warns bank split needed BBC News (20/10/09)
A sombre warning BBC News, Stephanomics (20/10/09)
Alistair Darling rebuffs Mervyn King’s attack over timidity of banking reforms Guardian (21/10/09)
King and Brown in rift over whether to split the banks Independent (22/10/09)
Tucker set to join calls for stricter controls on banks Scotsman (22/10/09)
Testing times for bank regulators Financial Times (21/10/09)
Mervyn King is right – the economy is changing and we’re blindfolded, without a map Telegraph, Edmund Conway (22/10/09)
Questions
- Explain what is meant by ‘moral hazard’ in the context of bank bailouts. Are the any ways in which banks could be prevented from failing during a crisis without creating a moral hazard?
- Does regulation necessarily involve Goodhart’s Law? To what extent is it possible to devise regulation and avoid Goodnart’s Law?
- What are the arguments for and against splitting banks’ core business from more risky ‘casino banking’?
- Does the separation of retail and investment banking necessarily involve splitting banks into separate organisations? If they are not split, how can the government or central bank underwrite retail banking without underwriting riskier investment banking?
Gold prices have been soaring in recent months. In fact, such is the demand for the precious metal that Harrods has just started selling gold bars. “The Knightsbridge department store yesterday began selling bars of pure Swiss gold bullion as part of a range that is being displayed in a miniature vault on the lower ground floor” (see eighth link below).
In November 2008, gold was trading at around $750 per ounce; by October 2009, the price had reached $1080 per ounce. Why has this happened? Will the trend continue? What does it signify about the world economy – both its current and likely future state? The following articles look at the causes and effects of this new ‘golden age’.
Gold prices continue to hit new highs Guardian (7/10/09)
Gold price hits fresh high Guardian (14/10/09)
Gold’s bull run set to roar ahead This is Money (17/10/09)
Why the price of gold is rising BBC News (13/10/09)
Gold price ‘set to double in four years’ (includes video) Telegraph (10/10/09)
Gold at $1,500? Don’t hold your breath Telegraph (10/10/09)
Bullion bulls The Economist (8/10/09)
Harrods put Swiss gold bars up for sale in a miniature vault Times Online (16/10/09)
Gold Eases from New High as “Less Bad” Data Drives Up Equities, Oil & Wall Street Bonuses BullionVault (14/10/09)
Gold Just Broke Its Neck, Targets $5,250? The market Oracle (14/10/09)
Questions
- Use a demand and supply diagram to illustrate the change in the price of gold between November 2008 and October 2009. Does the explanation lie largely of the demand or the supply side? Use the concepts of price elasticity of demand and supply to explain the size of the price change for any given shift in demand or supply.
- How is the price of gold related to the strength of the US dollar?
- Explain whether gold is a commodity or a currency (or both).
- What is meant by the ‘head and shoulders pattern’ in the price of gold? Is the use of ‘patterns’ a good way of predicting future prices? Give reasons why it may or may not be.
Elinor Ostrom and Oliver Williamson shared the 2009 Nobel Prize for Economics (and a prize of $1.4m) on Monday for their work on how economic transactions operate outside markets in common spaces and within companies. Their work includes topics such as the free-rider problem and how this can lead to a sub-optimal over-consumption of a resource. Their work also considers economic governance and how this has led to the increasing popularity of outsourcing for companies.
Despite the prestige of a Nobel Prize, there have been suggestions that a Nobel Prize in Economics should not have been awarded this year, given the inability of economists to predict the financial crisis and mixed opinions about how to prevent another one in the future. What do you think?
US duo wins Nobel for economics Financial Times, Chris Giles (12/10/09)
Two Americans win Nobel economics prize MSNBC, Associated Press (14/10/09)
What this year’s Nobel Prize in Economics says about the Nobel Prize in Economics The New York Times, Steven Levitt (12/10/09)
Humbling year for bickering economists Financial Times, Alan Beattie (11/10/09)
Questions
- What is market failure and how does the free-rider problem fit in?
- Do you think economists were at fault for not foreseeing the financial crisis?
- Do you think that the research of Elinor Ostrom and Oliver Williamson was deserving of the Nobel Prize and how important is their research in the context of economic theory?
