UK Recession Overview

By | December 22, 2008

A recession or a depression does not happen overnight. You do not go to sleep one night feeling affluent, and wake up the next day inexplicably impecunious. It takes time for the economy to get over inflated, reach a peak, and then begin the slide downwards. How far it slides, and for how long, dictates whether the down wave is called a downturn, recession or a depression.

The government is fond of using other euphemisms to stop the spread of panic. “Business contractions”, “periods of stagflation”, “credit crunch”, “extended seasonal slumps”, “market corrections” and “rolling adjustments” are all fine examples of political doublespeak that all mean pretty much the same thing to you and me.

The government has finally admitted that we are in a recession, but countered this admission with the idea it will be temporary. In reality, it is more than credible that we are heading into another great depression like we experienced in the 1930’s. In 1928 they said a depression could not happen, can you believe those same voices in 2008 and 2009?

So can it be avoided?

Not really. Despite what any government will tell you the economy works in peaks and troughs. The red light that flashes “Danger” is usually noticed when some major event happens in the stock market, the housing market or another area of the economy. Experienced hands who saw the last downturn will have learned to recognise the signs around two years ago. (It’s an Equitable Life, Henry!) 

What caused it?

Downwaves are always cyclical; they follow an extended upwave. The old adage of “what goes up, must come down” is applicable here. The economy had got overheated and something had to give. The UK economy is affected a lot by the happenings in other countries, most notably the USA. The £/$ and £/€ exchange rate, oil prices, cost of bank borrowings and many other things all combine to make the market conditions – in this case those market conditions are unfavourable.

The bell started sounding when the US sub prime mortgage scandal was made public. A bunch of banks and mortgage companies with ludicrous sounding names were lending money to the American underclass, or the “sub-prime market” as they like to call it (that’s poor blacks and trailer trash to you and me). The Yanks had packaged and sold much of this debt around the world to get the risk of their shoulders (slick eh?), and many British and European banks bought into it (stupid eh?). When it went belly up, that means British banks lost money too.

Add a few investment houses like Bear Stearns, AIG and Lehmans into the mix, a few rip offs like Bernie Madoff and the whole fiancial and insurance sector starts to wobble.

What happened then is like a domino effect. British banks lost money, so their share price fell, others noticed the share price falling and sold too, thus fuelling the downward spiral. If one bank is falling in value, whatever caused that might affect other banks, so their share prices fall also – even if they are sound. Attention then turns to our banking and lending practices. Oh dear….. our banks were doing it too. Lending money to the underclass and flighty get-rich-quick types seemed good business for UK banks to make a few quid selling sub-prime loans  – sorry, self certification mortgages  – too. The myriad buy-to-let mortgage products that any Tom, Dick or Harry could get all too easily were based on projected earnings from rental income and ever increasing house prices. It was always a house of cards; the only question was when the wind would blow to help it fall. Now it has.

When one bank goes (Northern Rock), it takes others with it. That has a domino effect at home and abroad, and before long, this crisis had spread to our offshore banks (where the real money hides away from grasping Gordon Brown) like Landsbanki Guernsey and the knock on from that had the potential to make entire countries bankrupt – as in Iceland. Guernsey has already lost all credibility as a retail financial centre in recent months as many UK residents have lost their money there (but the government don’t want it talked about, so don’t go writing it on the internet or anything will you?).

As banks fail, the lending to companies dries up and companies who were on a knife edge drop off the cliff – Woolworths and MFI for example. People lose their jobs, which means they spend less with the butcher, the baker and the candlestick maker. Retail spending goes down, more shops and industries close, and it feeds on itself this way.

Welcome to the new Great Depression. Check the other articles in this section for more. 

4 thoughts on “UK Recession Overview

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  2. Pingback: The Weak, Collapsing Pound against the Euro and Dollar.


    I found your topic “UK Recession Overview” when i was searching for guernsey car insurance and it is really intresting for me. If its OK for you i would like to translate your topic and post it on my german blog about guernsey car insurance. I link back to your topic of course!

  4. Caleb

    Ah ha, good article. Can’t wait to study economics later this year.

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