The Case of the Bank of England
During the campaign to the United States 2000 presidential election, the incumbent party had a list of economic achievements under its belt which included a record low of unemployment rates, a balanced budget—even a surplus—and a broad trend of rapid economic growth. The opposition, represented by former president, George W. Bush, came to office under the promise of repaying the public its investment in the economy. As it took office, the economy plunged into recession, with the market correcting itself of the unprecedented expansion of the previous decade.
With events like widespread corporate scandal revelations, the continually detrimental culture of corporate malfeasance and the costly attacks of September 11, 2001, the global economy’s correction transformed into a stagnant economy which has since descended into a serious recession. The Bush Administration responded to its appointment to office by fulfilling its promise, passing an ‘Economic Recovery Act’ designed to stimulate a return to growth.
Its primary avenue to accomplishing this would be the essentially faulty fiscal policy of pairing marginal income tax cuts with an uncontrolled and misappropriated discretionary spending approach. The monetary policy which would be twinned with this would be one of reactionary interest rate manipulation, demonstrating the Federal Reserve’s willingness to
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A statement from December of 2002 denotes a recommendation “for the federal funds rate to be unchanged at 1 1/4 percent. The committee continues to believe that this accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, is providing important ongoing support to economic activity. The limited number of incoming economic indicators since the November meeting, taken together, are not inconsistent with the economy working its way through its current soft spot.” (AP, 1)
This altogether too optimistic outlook would persist across more than five years of interest reduction rate and improper lending practices in the United States, such that in a number years, its irresponsibility would bear consequence for all nations.
Today, we are in the midst of an undeniable global recession, even as America transitions to new and optimistic leadership. As the Bank of England reported toward the close of the 2008 calendar, “there has been a marked deterioration in the outlook for domestic and global economic activity. Instability in banking and financial markets intensified to levels not seen for almost a century.” (Inflation Report November, 5) It would not be hyperbolic to observe here that a serious and fairly rare economic crisis was now underway on a global basis and much of this could be attributed to the significant mismanagement of America’s vast private and public wealth.
The subprime mortgage crisis is perfectly indicative of the danger with which the United States had flirted throughout the reckless Bush tenure. The continued lowering of interest rates stimulated a deluge of credit-based investment by middle-class citizens who sought opportunities for home ownership in a favorably saturated real estate market. Under the thumb of inflation, dramatic rises in gas prices and associated commodities and the continued decline of the dollar’s value relative to foreign currencies, these average borrowers cannot afford to repay their ownership loans.
The outcome is today’s recession, which as result of the widespread incapacity for borrowers to repay loans from banks, has spilled out into a global crisis that has come to roost in close economic partnerships such as that with the U.K. The Bank of England reports on a condition shared by nationalized banks in the U.S. and throughout the world, who are in the position of having to prop up banks and other lenders who have been unable to collect on the debts which are intended to sustain them.
So reported the Bank of England in its November Inflation Report, where it warned of the increasing certainty that inflationary trends would correspond across late 2008 with shrinking GDP and rising commodity costs to produce evidence of a recession already underway for some time. This would prove the underlying combination of factors producing the current scenario for the Bank of England and, indeed, for the British people. For the course of 2007, the Bank had supported a number of larger lenders based in the British finance market, most prominently among them, mortgage lending institute, Northern Rock.
Northern Rock is just one example of the countless lending institutions throughout the world who have struggled to remain afloat following the disastrous contractions of economy which trace their roots to the United States. To the point, the last six months have seen a tumultuous and rapidly increasingly unfolding of market events, with the housing economy taking the biggest hit. With few buyers in the possession of real assets and banks now wary to lend to all but the most resource-wealthy of borrowers, the Federal Reserve has intervened once again.
Consistent with its response to flagging market conditions throughout the Bush tenure, the United States attempted to use monetary reactionary policy to respond, lowering, “its benchmark rate six times since September to 2.25 percent from 5.25 percent, and traders anticipate it will cut by at least another quarter point this month to cushion the economy’s downturn.” (Brinsley, 1) In the midst of this, a major U.S. bank, Bear Stearns declared insolvency, requiring the Fed to step in an intervene with a multi-million dollar bailout.
To this end, “Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival.” (Brinsley, 1) This would pave the way for a much larger and more sweeping bailout package for American banks, that would subsequently provoke the same policy in the UK, as reports the Bank of England.
More than any other role, this has been the one assumed and acted upon by the Bank with looming market collapses inclining a need for fast and decisive action. Though the nationalization of private institutions would raise political and ideological hackles in the U.K. as it did in the United States, the actions of the Bank of England would reflect the increasingly normative response of bailout lending by federal policymakers. In the face of a lagging national economy, as projected by its August Report, and in the face of banking instability across the same period, the Bank of England reported that “these developments in wholesale funding markets exposed the vulnerabilities in banks’ funding structures.
During late September and early October, fears about the survival of some financial institutions culminated in acute pressures in the global financial system, which threatened its stability. In response, the UK authorities announced a comprehensive and system-wide support package on 8October. Similar initiatives were announced by a number of other countries.” (Inflation Report November, 12) Thus, a general pattern which denotes a new phase in the battle for economic robustness seems to be the placement of significant authority and determination into the hands of federal governments.
Though this is a premise which strikes apprehension into many, it is nonetheless a definite transition from the unregulated spending and private deregulation that landed the global economy in its current predicament. That stated, certain contractive incidentals reflected in the November report suggest an improvement from the projections from August, if only slightly and with little real positive implication. According to the November report, “the near-term outlook for inflation improved significantly in the wake of sharp falls in commodity prices.
Measures of household inflation expectations fell back and earnings growth remained contained.” (Inflation Report November, 5) This is, of course, not cause for the greatest of optimism given the strong likelihood that these prices will soon be elevated to previous or potentially yet higher levels in the face of even superficial recovery in the oil market. The brunt of this will be bore by consumers once again, as policymakers have thus far demonstrated a greater willingness to repay and support defaulted banks than defaulted citizens.
For the Bank of England, the housing and credit crises of the United States have meant an activation of domestic federal support roles put into place to respond to just such private irresponsibility. According to the text by Hacker (2006), there is an ever-diminishing concreteness and stability underlying the American economy with the outcome being a context of sheer risk for those without the means or intent to undertake such. That is a warning which should be shared with foreign governments, especially as the Pound inherits the inflation which has already struck the dollar so severely.
Indeed, as the Hacker text shows, such matters as the housing crisis, the drastic deficit budgeting and the current misappropriation of American monetary policy have collectively shaken a global system that had prior encouraged the entrance of so many players unfit for its rigors. Ultimately, this highlights an issue which is fundamental and devastating to all national economic systems.
With the mismanagement of the American economy deconstructing a once sturdy global free-market economy, the wealthy have wrangled through policy change and corporate corruption to shift the burden of risk to the world’s middle class citizens, leaving federal institutions like the Bank of England to employ taxpayer money to bailout the wealthy private lenders.
Associated Press (AP). (2002). Text of Statement on Interest Rate Policy. The New York Times. Online at http://query.nytimes.com/gst/fullpage.html?res=9C06E3DA143AF932A25751C1A9649C8B63
Brinsley, John. (2008). Volcker says Fed’s Be ar loan stretches legal power. Bloomberg. Online at http://www.bloomberg.com/apps/news?pid=20601087&sid=aPDZWKWhz21c&refer=home
Hacker, J. (2006). The Great Risk Shift. Oxford University Press.