A new Chancellor, a new age?

New Chancellor Phillip Hammond has made clear his intentions for the future of fiscal policy in the UK, deciding to scrap George Osbourne’s failing long term plans dating back to 2010 of achiving a fiscal surplus, for which he consistently pushed back his set deadline. Does this mean the years of austerity are finally over?

Hammond announced his intentions to invest around £2bn into housing to build 40000 homes by 2020. However, Hammond did make clear that since the Brexit vote, the UK faces a future of uncertainty, and these changing times require a change in policy. He did not criticise Osbourne since his policies were right for the times, but now we require more expansionary policy. However, this does not mean there won’t be cut backs in future, since the budget is ‘eye-wateringly large’, Hammond must keep a close eye on this as well.

Hammonds plans to invest into housing will be beneficial in the long term of the UK economy. In the short-term the increase in employment helps to stabilise the economy, encouraging further spending, which is required to offset the likely drop in spending due to uncertainty of Brexit. In the long term, infrastructure will help to improve the productivity in the UK and will hopefully help us compete more on international markets.

With Theresa May announcing the intention to invoke article 50 by March 2017, the need for more expansionary policy became clear, with austerity policy may do more harm than good in current economic conditions. Saying this is contrary to growth statistics since the brexit vote which have been surprisingly postive, but hard times ahead are expected. Nevertheless, Brexit negotiations will likely have a greater impact on the future of the UK economy than fiscal policy in the years to come, with the hope than the UK can negotiate some trade deals which will ensure the preservance of the UK export markets and FDI.

Brexit. What will happen now?

I’m sure I wasn’t the only one sitting up to watch the results of the EU referendum being unravelled last night, slowly watching the leave campaign edge ahead but still not facing the reality that we would actually leave the European Union. Looking at the breakdown of the results, younger generations tended to vote to remain in the EU whilst it was the older generations who voted to leave. Whilst I know this is a generalisation it does seem a little unfair that older generations get to vote on our future, we have now lost access to live and work in all EU countries freely, severely limiting our opportunities.


Nevertheless, what an eventful day it has been, David Cameron has resigned, Mark Carney has pledged to take measures to ensure the financial sector remains stable, willing to provide an extra £250 billion to banks if they run short on reserves. Nicola Sturgeon has said another Scottish independence referendum is on the table. Nigel Farage has already gone back on promises.

Watching the results coming in live from different constituencies last night saw Sterling fluctuate largely with it. This highlights the uncertainty in the British economy as no one really knows what will happen now. It was expected that Sterling would depreciate with a Brexit vote and that’s just what happened, the GBP depreciated to a 30 year low, a lot due to speculators making money though I imagine.

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As seen, the drop off was due to the Brexit decision, but due to Carney’s and the Bank of England’s speech, Sterling began to recover once again, however it might be a while before it gets back to where it once was. The stock markets have been crashing all day, worldwide. Stock exchanges in Europe have suffered worse than the UK, still waiting to see the effect on the NYSE when it opens.

Before the referendum I said there would be a recession if we were to leave the EU, this is still to be seen, however I believe that the economy will be able to cope better than expected due to the Bank of England and Treasury response, although the UK inevitably has some tough times ahead.

In my previous blog post I mentioned the Leave campaigns false promises. Almost instantly UKIP’s Farage proved me right. On ITV’s This Morning programme he said he can’t guarantee the NHS will benefit from the £350m saved from EU membership. Just one promise that the leave campaign can no longer claim to be true. I hope promises of free trade deals with the EU will not be broken. The UK could be in a very difficult situation in the coming years.

With David Cameron’s resignation there is now big talk about who will be the next Prime Minister. I think Boris Johnson or Theresa May must be the front runners to lead the Conservative Party. Boris made a political move to back the Leave campaign knowing he would be in a favourable position to lead if there were a Brexit. May, on the other hand, kept convenient quiet throughout the campaigns but has the experience in the cabinet to be a great leader. It will be an interesting race. Regardless of who wins, they will have a large task on their hands to ensure the future of Britain remains bright. There is the need to make new trade deals, ensure the financial sector (Britain’s largest industry) remains strong, ensure the NHS is secure and improved as well keeping all other promises made during the leave campaign.

Now we have voted to leave the EU, I fear for the future of the EU and the free movement of people, goods and services. Many great leaders have worked so hard to make this single market and a greater union for the greater good of all countries. However now the UK has left I fear we may ‘open the floodgates’ for many other countries to now want to leave, restricting the ability for the single market to work. If this were to happen, the future for Europe as a whole could be very dark.

The unity of Europe isn’t the only worry. The UK itself is at risk of being split up with remain votes being dominant in Scotland and in Northern Ireland. This could bring a desire to campaign for independence referendums. I predict Scotland will become independent within the next few years since it is unfair to take them out of Europe when Brexit votes came mostly from England and Wales.

I hope I’m wrong about the future of the UK and Europe. However, it may turn out that the UK may bite back at the many people who voted leave as a rebellion against big institutions and the government or voted for the false promises from the leave side. Yesterday was a once in a lifetime decision and now the population be forced to suffer.

The Big Short – Understanding the Financial Crisis

Last night I watched The Big Short, the five-time Oscar nominated movie. It made me realise how little I really knew about what happened leading up to the financial crisis of 2008/09, despite having studied economics for nearly 3 years.

During this post I will discuss the causes of this disastrous period.

I already understood the main cause of the financial crisis being the housing market bubble which was caused by subprime mortgages given out with very few (if any) credit checks, resulting an unstable market with people unable to pay their debts. Eventually, the bubble burst and banks collapsed. But lets go deeper….

Bankers played their part, believing there was no risk the housing market would collapse. During the Great Moderation people began to believe the world economy had outgrown the days of the business cycle, when simply, it had forgotten about the serious risks of a crash occurring. 

Additionally, central bankers must hold part of the blame as it is argued they became too complacent with what appeared to be strong economic conditions leading up to the crisis, holding interest rates too low encouraging subprime lending, making no attempt to stop the housing bubble.

In the years leading up to the crisis irresponsible mortgage lending in the US meant loans were given to subprime borrowers with a poor credit history. These loans were pooled together with the belief that their risks were uncorrelated – in hindsight this seems foolish as housing markets simultaneously crashed across the US. These pools were used to back securities known as collateralised debt obligations (CDO’s) which are structured financial products that grouped these mortgages into discrete tranches that could be sold to investors. These securities appeared to be safe products with high returns attracting large amounts of investment. The AAA ratings were misleading but were given by agencies which feared losing out to competition if they did not give such ratings. The mortgages within these CDO’s were not secure but ‘ticking time bombs’ as more and more people defaulted on their debts. 

The high yield and apparent low risk CDO’s spread throughout International Financial Markets.

From 2006, the housing bubble was increasing inflation, so the US Central bank was raising interest rates in an effort to control it. The cost of borrowing rose, and more subprime borrowers were finding it increasingly difficult to repay their mortgages, defaulting on their loans. Lenders were now reselling these houses into a declining housing market. Correspondingly, there was a reduced demand for CDOs, as the number of defaults on mortgage payments increased.

Now traders looked to repackage the risk and selfishly create further business rather than writing off their CDO’s, not just delaying but accentuating the eventual crash. The traders split the worst elements out of their CDOs to create new CDOs. When an increasing proportions of these CDOs failed to sell, they would be sliced up and the worst bits sold into new CDOs that the traders created. In the height of the housing boom around 2005 the riskiest securities accounted for around 5% of a CDO. By 2007 they accounted for as much as 40% – effectively there was a multiplier of risk in these securities being sold.

The realisation of these banks holding worthless assets came from around Q2 2007 onwards. Many CDOs were finally downgraded by ratings agencies.

When the financial crisis peaked in 2008 crippling the banking sector, banks found themselves holding billions in worthless assets. With many banks suffering huge losses, no bank wanted to lend to another potentially failing bank, so interbank lending effectively stopped. This was the start of the economic turmoil that followed.

Even though the whole the financial crisis is shocking, ruining countless livelihoods, what is more chilling is that despite 50 CDO managers being investigated, only 1 was prosecuted.

While this is not the full story, this summarises the main cause of the largest financial crisis since the Great Depression 1929.

I recommend watching The Big Short for an insight into the financial crisis and how some people predicted it would happen and actually benefitted from it.