UK Economy, 2001 - 2006
Like the US, Ireland, Spain and many other western countries, the UK experienced a double bubble in both housing and the stock market in the early part of the twentieth century.
This period is generally believed to have started after the Dot Com Crash came to an end in 2001.
It was characterized by easy credit. Towards the end of this period, it became common for mortgage lenders to offer anything up to 125 per cent loans, with a mortgage of 90 per cent to 95 per cent of the house, and an attached unsecured loan, at higher interest rates. Another high interest rate mortgage was the ‘Self-certification’ loan. In this structure, the borrower would certify their income levels, without needing to supply proof. They became known as ‘liar’ loans, for obvious reasons.
In hindsight both of these arrangements seem absurd, but with house prices as much as tripling between 2000 and 2006, and with little government appetite for oversight or regulation, it seemed like a good idea at the time.
The London Stock Exchange (LSE) and FTSE 100 Index (comprising the 100 largest companies on the LSE) continue to rise to record highs, driven by the financial services industry, which represented 25% of public company profits during the boom times.
Indeed, the City of London, or Square Mile, is still the financial capital of the world for many markets and asset classes, and works closely with global financial centres in New York, Frankfurt, Hong Kong, Tokyo and beyond.
Since the financial and residential sectors are a larger part of the economy in the UK than in the US, it is not surprising that the country has been impacted harder than its Anglo-Saxon partner across the pond.
UK Economy 2007It all started so well, but by the time it ended the wheels were coming off the British economy.
House prices peaked in September and started to drop, although still in a fairly orderly way.
However the US Sub-Prime crisis had made it harder for banks with high leverage ratios to access funds in the wholesale marke. The Sub-Prime crisis meant that some banks were having trouble paying back counter parties. Trust and confidence waned and wholesale markets started to freeze up.
British bank Northern Rock had built its business model around leverage and wholesale market funding. By September 2007 it was unable to rollover its short term debts and it was forced to turn to the Bank of England as lender of last resort.
Once this news became known publicly there was a run on the bank. Worried deposit holders withdrew 1 billion GBP on Friday 14 September 2007, and a further 1 billion GBP the following Monday. Shares dropped by 32 per cent and 40 per cent on those two days, forcing the UK government to guarantee all deposits. These events marked the start of credit crunch in the UK.
The British government insists it would have been fine if not for the US sub-prime crisis. In official documents it has said “the global economy was growing strongly when the sub-prime crisis hit. In the UK, the economy was close to trend, inflation was close to target, public sector debt was relatively low and unemployment remained low. The US economy was the first to slow, but the crisis quickly spread to other advanced economies.”
Most economists, however, believe that the UK was headed for trouble anyway, with its stock and property bubbles and low savings rate.