Which Role did Private and Public Debt Play in the Build –up to the Financial Crisis in 2008?
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Which Role did Private and Public Debt Play in the Build-up to the Financial Crisis in 2008?
Discussion
After a compilation by the Labor Force survey, the statistics drawn showed that 7.1% represented the 2.3 million people lacking employment. The number of individuals under the Job Allowance program range between 24,000 to 1.25 million by the end of the year. This survey was carried out in 2013. The evolution of unemployment in the United Kingdom as illustrated in a statistical chart showed a decrease from 5% to 4.7% between the year 2002 and 2005. The following years were faced by a drastic drop to 2.9% in 2006 and a drastic rise to 5.3% (Maximilian, 2008). The subsequent years faced a steady increase between 2007 and 2008. Another drastic change was experienced between 2008 and 2009 whereby there was an increase of 2% in the unemployed population (Midthjell, 2011). In the course of three months prior to January 2014, the estimated percentage of the unemployed individuals was at 7.2. When compared to the percentage in 2013, the number had increased by 105,000 people in the employment sector and a decrease of 63,000 in the number of unemployed individuals. This rise was contributed to the rise in self-employment. In 2013, the value of unemployed persons was at 2.33 million. This year also experienced a sharp fall to 7.1% between the months of September and November; this then surprisingly rose to 7.2% before the end of the year.
The negative impact that resulted from the financial crisis in 2008-2009 was on the banking sector. The logic used by some scholars to explain the impact was the crisis created a financial wave that was directed towards the financial sector. It saw the foreclosure of major banks all across UK and Europe prompting some banks to contribute in assisting the government salvage the financial system that has further deteriorating (Maximilian, 2008). The public debt was at a high range before the crisis, and the nation seemed to be managing it without any scuffles. However, some financial factors predisposed the nation to the crisis. They included
- Bad debts with US: This led to significant losses in terms of money by the European banks as they had exposed themselves to sub-prime debts with the US such as the sub prime mortgage.
- Recession: The recession during the crisis caused a drastic fall in the government finances further increasing the debts as the country received less tax that resulted due the increasing number of the unemployed individuals and a minimal workforce.
- Rise in GDP ratios: This rise further increased the debt, as debt management is directly proportional to the debt towards the GDP ratio. The resultant fall in GDP, which commenced in 2007, meant the there would be a fast rise in debt. A statistical survey showed that the public sector debt in UK almost doubled from 36% to 61 %
- Decreased Bond Yields: A decrease in bond yields further led to financial problems in both private and public banking sectors due to increased inflation. Prior to the crisis, Government yields had faced a rise as low inflation rate reducing the worth withholding the bonds (Maximilian, 2008).
Analysis of the public and private debt in the UK has substantially risen after the crisis in 2008. It retains the largest GDP compared to other economically well-grounded financial systems in the world. However, there has been a debt shift from the private sector to the public sector. The reason behind this phenomenon is the fall of the private financial sector that resulted from the foreclosure of the banks and their reluctance to lending (Midthjell, 2011). Another case study shows that, after 2008, there has been an increase in debt as regards the private sector due to certain factors. The 2008-2013 global recessions are among those factors. This has led to even higher government spending to provide unemployment benefits and lowered tax rates due to reduced inflation. Another factor is the exposure of a structural shortage that has been created by the increase in government spending as compared to the tax collected. The financial bailout by major banks such as RBS and Northern Rock has also contributed to the rise in the debt in the public sector.
The government spending has been maintained leading to the expansion of the public sector. In surveys conducted, positive trends have been observed in the reduction, in GDP in both sectors. A fall from 122% GDP to 109 % GDP in the British companies’ debts has been observed and reduction from 102% to 97% in the household debt. The household debts have also faced a decrease as from 2009 with a fall from 111% GDP to 99% GDP. In the private sector, there has a drop from 121% GDP to 108% GDP. This fall in the GDP indicates that both businesses and individuals in the UK are trying to reduce the debts the nation is in by finding alternative financial means other than borrowing from the banking and creating self-employment opportunities. This also explained the reason why the banks have maintained a no policy on lending of finances. There is a direct comparison between the percentage in debts observed in individuals and non-financial organizations, which is similar to the GDP values dating from mid-2007 to the current value at 208%. These recent debts are said to be relatively higher as compared to previous GDP dating back to as far as a decade ago when it was at 128%. It is suggested that, despite the inexistent clarification of the perfect GDP for a sustainable economy in the United Kingdom, the current values are still wanting and should progressively reduce. This reduction will be reliant on the salaries and employment opportunities, inflation rates and the overall productivity of the nation (Romer, 2012).
Despite the
positive outlook on the reduction of debts, the rate at which household and
personal debts are repaid is still worrying, as it is seen to have a slow
progression over the years following the crisis. Another observation quite
contrary to the expected trend is the rise in the government debt. A rise from
52% GDP to 76% GDP has been observed. This estimates to £1,231.7 billion by the
end of 2013. The percentage coincides with the caliber set by the rich countries.
As regards to the debt by financial organizations, a rise in the GDP from 205%
to 210% has been viewed as a disturbing trend that may still pose a threat to
the reduction of debts in the UK.
According to McKinsley, this rise might actually be masqueraded as a positive
drift as the financial debts have an extended payment scheme thus reducing the
impending threat to the stabilization of the nation’s economy (Romer, 2012).
References
Maximilian, J. B. H. (2008). The sub-prime crisis, the credit squeeze and Northern Rock: the lessons to be learned. Journal of Financial Regulation and Compliance, 16, 1, 19-34.
Midthjell, N. (2011). Fiscal policy and financial crises. NorgesBank Economic Bulletin
Romer, C. (2012). “Fiscal Policy in the Crisis: Lessons and Policy Implications”. Working Paper