economonkey

Things are starting to get pretty ugly in Iceland, protesters have taken to the streets to complain about the government’s handling of the banking crisis which has seen this once prosperous western democracy collapse into the kind of economic disaster you’d expect to see in the third-world. It’s not surprising that they’re angry - just […]

In one of the most egregious examples of issue hijacking* we’ve ever seen, a report from Cranfield School of Management claims that the economy wouldn’t be in such a terrible condition if more women sat on the boards of banks, and recommends that more women should be given senior positions on the banks that have […]

You might remember that about ten years ago, when the current government was elected, Gordon Brown made a big deal about his strict new rules for government borrowing which were all part of his ‘no more boom and bust’ promise. Anyway, now that we’ve come to the end of the biggest boom in British history […]

“Economy at 60-year low, says Darling. And it will get worse.” So says The Guardian which also quotes the Chancellor as commenting, “People are pissed off with us.”
Quite.
The penny at last seems to have dropped, with Alistair Darling stating that the economic times faced by Britain and the rest of the world “are arguably the worst they’ve been in 60 years […]

Although most people have a rough idea of how the UK economy works (or, if you’re being cynical, doesn’t work), the functions of the various components and their relationships to each other can be quite elusive. We’ve covered some aspects of money on this site in the past (here, for example), but there’s more to the economy than money itself. In fact, arguably more important than money is the way in which that money is moved around the economic system of the UK.

Over the next few articles I’m going to look at each of the main institutions involved in the movement and management of money in the UK. I’ll be looking at the Treasury, the FSA, the City of London as a whole and, to start with, the Bank of England (you may have spotted the one glaring hole in this list, more important than all the rest, which I’ll cover at at a later date).

The Bank of England is not a bank in the traditional sense. You can’t deposit your money there directly, and nor can you borrow from it directly. Banks, however, can. This is the fundamental aspect of one of the Bank’s stated core purposes: to maintain financial stability in the UK economy. By lending to banks that are suffering from cash-flow problems, unusual circumstances or moronic management, the Bank can act as a buffer to prevent problems in one area of the economy spilling over into others. Hopefully.

To quote from the Bank’s own documents: “Financial stability entails detecting and reducing threats to the financial system as a whole. Such threats are detected through the Bank’s surveillance and market intelligence functions. They are reduced by strengthening infrastructure, and by financial and other operations, at home and abroad, including, in exceptional circumstances, by acting as the lender of last resort.”

You may feel a hollow laugh coming on at this point, given the last year’s experience of a crumbled, nationalised bank, a bursting bubble of overpriced housing, rising inflation - especially in food and fuel - and incomes that fail to match expenses. It doesn’t look much like financial stability, does it?

Usually on this site I write features about various aspects of the financial system, leaving Lance to concentrate on the current affairs opinion pieces. But it’s becoming increasingly difficult to remain dispassionate.

The financial system is having a bit of a wobble at the moment, rather like that earthquake that hit the UK recently, knocking a few glasses off the shelves and knocking a few minor celebrities off the front pages, at least for a day.

What has been called a ‘credit crunch’, and ignorantly predicted to be ‘over by Christmas’ (though, like the war, nobody states which year), is actually something rather more serious: in all probability it’s a return to normality. Risk is now being priced back into investments, default spreads are widening and, in general, everybody’s paying more for their money.

Which is as it should be. The last five years or so have seen a collective delusion on the part of economists, central bankers (with some exceptions), financial journalists, house buyers and consumers.

Of course interest rates will stay low (never mind inflation). Of course house prices always go up by 10% a year when wages rise by 3% (never mind the impossibility of the maths). Of course it’s different this time (no, it never is). Of course the UK has a miracle economy based on selling financial products and ever more expensive houses to each other, and doesn’t need manufacturing (unlike the Germans, for example).

To use the vernacular for a moment, it was all bollocks.

Ah, gold. So beloved of microchip manufacturers, Bond villains and high-maintenance women. This shiny, ductile, (almost) chemically inert metal has powers of heat insulation and electrical conductivity and so is often used - albeit in small quantities - in industry. It looks nice on your wedding finger too. But gold is much more than an […]