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The Credit Crunch in the United Kingdom - Essay Example

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The Credit Crunch in the United Kingdom

The US seemed to have the biggest problems, if only by the sheer magnitude of their economy and its impact on other nations around the world. Still, Great Britain felt the shock and their economy suffers many of the same ills as the system has stagnated with the same symptoms. Though the political leaders portrayed the problem as an emergency that suddenly erupted, it was actually the culmination of years of under-regulation, neglect, abuse, and corruption. The credit crisis in the United Kingdom has come about as a result of over-extended consumer credit and a banking system that has exploited the concept of free market economics.
To understand the vulnerabilities in the global banking system it is helpful to understand some of the history that got it where it is today. Six hundred years ago the population of England was largely agrarian and lived as subsistence farmers. Wages earned came almost exclusively from farm labor and were very sensitive to the law of supply and demand. When times were good, the population rose and the labor supply increased. This drove down farm wages and the resulting poverty would decimate the population. As the labor supply fell, wages increased again and the cycle repeated. In fact, the real wages earned in 1740 were the same as the wages earned in 1400 (Khan 10). However, the Industrial Revolution created a larger demand for labor and created concentrated centers of capital. Technological advancements contributed to the growing economy and real wages have risen by approximately 2200 percent in the 200 years since the turn of the 19th century (Khan 10). The escalating wage scale and the concentrated capital resulted in an economy that was ever more dependent upon credit and increasingly demanding consumer goods. According to Khan, "in the 19th century, a steady rise in living standards began that has, in some sense, never ceased. As a result, people are now accustomed to economic growth" (9). This cultural attitude of consumerism led to the concepts of easy consumer credit, sub prime loans, and the complex system of banking instruments that were at the foundation of the UK's current credit crisis.
The credit crisis that suddenly came to a head in the fall of 2008 was not as unexpected as it was portrayed. Warning signs had been apparent for years as bankers favored greed and not heed. In the Spring of 2004 Cohn reported that "Thanks to easier credit terms and rock-bottom interest rates, unsecured debt in Britain is soaring, refinancings of home mortgages are way up, and more piggy banks are being cracked as the savings rate falls". This easy credit and mortgage refinancing resulted in speculators entering the real estate market in record numbers. People were refinancing their primary residence to purchase a second home as an investment in light of the soaring real estate prices. A house purchased for 100,000 pounds in 2000 would have been worth 180,000 pounds in 2004 (Cohn). This scheme worked well as long as prices continued to rise. Mortgage debt rose by 30 percent from 2000 to 2003 and hit a record $1.3 trillion. The more profits that the speculators made, the more that was put back in the market and the cycle of demand and escalating prices continued.
Along with the high mortgage credit, consumers were also running up record levels of unsecured credit card ...Show more


One fall day in 2008 it was if the world had stopped turning as economies around the world ground to a halt and the flowing taps of credit dried up faster than a beer at a NASCAR race. It was if suddenly, and with no warning, all of the liquidity in the world's market has simply just vanished with no reasonable explanation…
Author : annette86
The Credit Crunch in the United Kingdom
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