US national debt has got so large that the national debt clock in Time Square has run out of zeroes and they have had to order a new one. UK national debt is also set to rise in the current financial crisis as government borrowing rose sharply in September. The impact of greater public spending and the part-nationalisation of the banks is all likely to lead to a rapid rise in public borrowing and therefore national debt, but is this sustainable for the UK economy?
How the bank crisis hits Britain’s public finances Guardian (14/10/08)
National debt clock runs out of zeroes – new larger clock ordered Guardian (9/10/08)
Banks’ bail-out: ‘The money’s being spent on buying bank shares, so it shouldn’t hit public borrowing’ Guardian (14/10/08) (podcast)
Rescue plan underlines likelihood of tax rises and spending cuts Guardian (9/10/08)
Darling must spend now Times Online (20/10/08)
Public borrowing hits record high Times Online (20/10/08)
Gordon Brown defends level of national debt Guardian (20/10/08)
UK borrowing hits a 60-year high BBC News Online (20/10/08)
Crisis ‘to double UK borrowing’ BBC News Online (22/9/08)
Deep pockets The Economist (9/10/08)
Questions
| 1. |
Explain the relationship between the level of public borrowing and the national debt. |
| 2. |
Examine the reasons why public spending has risen. |
| 3. |
Discuss whether this increase in aggregate demand will be sufficient to prevent the UK economy falling into recession. |
A key determinant of the credit crunch was a shortage of liquidity and a breakdown of the interbank lending market. In an attempt to ease the credit situation and restart the interbank lending market, the Bank of England auctioned over £40bn of credit at the end of September. The aim of this was to boost the liquidity position of the banks.
Central banks pump billions into system Guardian (27/9/08)
Bank of England pumps £55bn into credit markets Times Online (26/9/08)
Where has all the money gone? BBC Magazine (15/10/08)
Questions
| 1. |
Explain why the Bank of England needed to boost liquidity in the money markets. |
| 2. |
Using diagrams as appropriate, show the impact of this increase in credit on the money markets. What constraints does the Bank of England face in ensuring that it achieves the desired outcome? |
| 3. |
Discuss whether the approach of raising liquidity is likely to be more or less effective than a change in the regulatory framework. |
In recent years Labour has taken what might be described as a light-touch on regulation of City firms and financial institutions. In the article below the economics editor of the Guardian, Larry Elliott, argues that this ‘pact with the devil’ might have come back to haunt Gordon Brown as the impact of the global credit crunch continues to dominate economic news.
Brown damned by his Faustian pact Guardian (12/5/08)
Questions
| 1. |
What form has regulation of the financial sector taken under the Labour government? |
| 2. |
Assess the extent to which this regulatory approach could be considered a ‘Faustian bargain’. |
| 3. |
Discuss the extent to which tighter regulation of financial markets might have helped the UK economy avoid the impact of the global credit crunch. |
The recent credit crunch has resulted in a lot of criticism of the banks and other financial institutions. Many commentators have argued for reforms to the financial system with greater controls on lending and restrictions on banks’ ability to create credit. The articles below have a common theme – assessing the actions that politicians and policy makers need to consider as a result of the recent credit crunch.
After excess comes fear – and then socialism, at least for the bankers Guardian (23/3/08)
Capitalism’s too important to be left to capitalists Observer (23/3/08)
If the City won’t put its house in order, politicians must Observer (23/3/08)
Podcast
How to stop the market mayhem Guardian (19/3/08)
Questions
| 1. |
Explain what is meant by the ‘liberalisation of financial markets’. |
| 2. |
“If the City won’t put its house in order, the politicians must”. Examine the validity of Will Hutton’s argument. |
| 3. |
Discuss the extent to which the freedom of banks to lend has been the cause of the recent credit crunch. |
Concerns have been growing that the UK faces a downturn in economic growth during 2008. The articles below consider this possibility. With a credit crunch taking place and manufacturing output falling, the concerns for a recession may well not prove unfounded.
Is this the big one? Guardian (3/1/08)
Your survival plan if a recession strikes Times Online (5/1/08)
Top of the flops – 10 pointers to a downturn in 2008 Guardian (6/1/08)
Recession fears as manufacturing drops Times Online (11/1/08)
Crash that ‘won’t happen here’ looms large Guardian (3/12/07)
Questions
| 1. |
What are the key indicators of an impending recession? |
| 2. |
Assess the likelihood of a recession in the UK in 2008. |
| 3. |
What policies could the UK government adopt to avoid a recession during 2008. What would determine the success of such policies? |