Way back on 27th November 2009, I attended the PNE Group annual lecture with Charles Bean, Deputy Governor of The Bank of England titled ‘Is the great recession over?’ and here’s a summary of what I write about it at the time.
Firstly, he started by giving a bit of background about the causes of the recession. Much of it you will already know from watching the news or reading the paper but it was interesting to hear it from someone in the ‘eye of the storm’ as it were.
1. Previous record of great stability leading to complacency and relaxed attitude to investment risk.
2. Low interest rates. The US Federal Reserve kept interest rate low meaning it was much easier to access funds and cheaper to borrow.
3. Savings and investments from around the world, particularly Asia / China encouraged investors to put into riskier investments.
4. Failings in international financial markets such as securitisation, sub-prime mortgages, credit default swaps which in principle looked like would work and make the world economy more robust. However, loans sold through securitisation were still held within the banking system as a way to get around legislation. Fine in principle if just one bank doing this but they were all at it and so merely offloading the bad debts to each other.
5. Some of these new ‘products’ were very complex and so difficult to value – the natural reaction of investors is therefore to shun them, making them harder to move out of the banking system.
6. Distorted incentives leading to the selling of sub-prime mortgages to people with no means of paying them back.
7. City trader bonuses paid on short term results which inevitably lead to people taking more risks.
8. Belief that the public sector / Government would step in and rescue the banks (which they did)!
But why was there such a drastic impact on the World economy? All the above factors coincided with a fall in GDP (Gross Domestic Product) across the globe by 5% in 2007, followed by extreme caution. in September/October 2008 which led to the global recession.
Basically, he thinks that the current economic downturn is not yet over. The deficit for 2010 will be between 10-12% GDP and we are therefore going to see a negative impact on the Public Sector (cuts in spending / possible job losses / pay freezes).
‘Quantitative Easing’ (putting more money into our economy to boost spending by buying assets from private sector institutions or UK government bonds aka ‘gilts’) seems to be having a positive effect. (See http://www.bankofengland.co.uk/monet…e-pamphlet.pdf).
There are signs that the UK and World economy seem to be improving. Charles mentioned that the UK Office for National Statistics had recently showed contraction in the UK economy of 0-3% but said that other indicators and data suggested that it was much healthier which makes it much harder to know for certain. Economy seems to be bumping along the bottom. Either way, the likelihood for 2010 is that the recovery will be slower and more drawn out for this major recession than a ‘normal’ one.
The depreciation of Sterling should encourage more UK exports (which is a good thing is that’s your line of business), but will lead to an increase in export costs.
Overall, there are good signs for the UK economy as a whole, and the Bank of England’s November ‘Inflation Report’ said that we should expect a growth rate in the economy of 2% in 2010, and 4% in 2011. At the time of the lecture in November, press commentary on the report had implied that it was overly optimistic, however Charles Bean said that 4% growth rate is still below pre-downturn economy.
He rounded up by saying that there was still a long way to go, and that we should expect a long and protracted recovery from the deepest recession since the warm although we were in a better position than some would have us believe.
Finally, he closed by saying that “Entrepreneurs are the best people to spot gaps in the market, help the economy and get us out of the recession, NOT politicians”!
So, take heart everyone, our future success lies with you!
Sadly, Charles Bean didn’t have time to answer any of my questions but I hope that the above info is interesting / of use to some of you. A couple of questions that he did answer from the audience are below;
Question 1: Regarding the collapse of Lehmans Bros., did we not have a similar problem 10yrs ago with the collapse of Barings Bank? Have we not learned anything from that?
Answer 1: Barings was a result of the actions of a single ‘Rogue Trader’, rather than failings throughout the banking system. However, the collapse of Lehmans had a much greater effect on the economy as the banks were all buying and selling toxic assets from each other and therefore the failing of one impacted all the rest.
Question 2: Are all banks the same, or are some better than others? Should consumers be choosing their banks more strategically rather than merely on the customer service they provide, how nice their branches look inside or short term incentives to bring in their business?
Answer 2: Charles Bean obviously didn’t want to seem to favour one bank over another so simply said that all banks have different ways to fund their activities and more expertise in certain markets than others. He recommended shopping around and going to the bank that gives you the best service as they should all be trying their hardest to win your custom and earn back your trust. He also reminder people that there is currently a de factor 100% guarantee for depositers, and advised spreading money around rather than putting all your eggs in one basket.
For more info from the Bank of England visit: www.bankofengland.co.uk