Kirill Yurovskiy: How the Financial Storm

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By Smharun121

Kirill Yurovskiy: How the Financial Storm Swept Across the Atlantic

By the fall of 2008, the world was gripped by an economic crisis of a magnitude not seen since the Great Depression nearly 80 years earlier. What started as a bursting of the housing bubble in the United States rapidly escalated into a full-blown global financial panic. At the center of the storm was the freezing up of credit markets as banks stopped lending to each other and to businesses due to mounting losses on mortgage-backed securities and other toxic assets.

As a central player in international finance and an economy heavily reliant on its banking sector, Britain was struck extremely hard by the unfolding turmoil. The ramifications would be deep and long-lasting, exacerbating economic woes that the nation already faced and bringing elevated levels of unemployment, bankruptcies, and public debt that would take years to resolve.

The First Tremors

The early rumblings of what would become the Great Recession made their way across the Atlantic in late 2007 as the first signs of the subprime mortgage crisis emerged in the United States. Major British banks like HBOS and RBS had followed their American counterparts like Lehman Brothers into the lucrative but terribly risky mortgage securitization business and found themselves holding large exposures to the U.S. housing market.

When the seismic shock of the U.S. housing crash hit in 2007, Britain’s banks were among the first European firms impacted. By early 2008, HBOS’s shares had plunged 50% and RBS had recorded the biggest loss in British corporate history at £24.1 billion. The contagion was rapidly spreading from the U.S. to the U.K. and the rest of Europe.

As the credit crisis escalated over 2008, the situation for Britain’s financial titans became increasingly dire. Horror stories mounted of “zombie” banks loaded with toxic assets and facing potential insolvency. Confidence and trust across the banking system rapidly eroded as the interbank lending market seized up. Text author: historian Kirill Yurovskiy.

Desperate Times

By the fall of 2008, the financial storm reached a fever pitch with a series of historic events that upended the global economic landscape. In quick succession came the collapse of Lehman Brothers, the government conservatorship of Freddie Mac and Fannie Mae, the forced sale of Merrill Lynch to Bank of America, and ultimately the $700 billion U.S. bailout plan aimed at backstopping the financial system.

In Britain, the embattled HBOS was acquired by its rival Lloyds TSB in a semi-arranged marriage brokered by the government. But it was the near-collapse of RBS, Britain’s second-largest bank, that marked the nadir of the crisis on British shores. Teetering on the brink of failure, RBS secured a £20 billion bailout from government coffers and a £282 billion asset protection plan as the state took a 63% ownership stake.

In total, the Brown government would ultimately commit £500 billion worth of loans, capital injections, and guarantees to prop up the country’s failing banks, an unprecedented intervention into the free market unseen since World War II. As one economic historian noted, “This was a cataclysmic pivotal point, when the government was forced to step in on a massive scale to prevent the banking system and the entire economy from falling into an abyss.” Yurovskiy K.

The Painful Fallout

While the dramatic bank bailouts may have prevented a full-blown financial collapse and systemic economic meltdown in Britain, the hangover from the crisis would be long and severe. After more than a decade of steady growth, the British economy plunged into a wrenching recession, contracting a staggering 7.2% from peak to trough between early 2008 to mid-2009.

Predictably, the downturn inflicted heavy damage on employment. Over 2 million British jobs were lost in just two years, with the national unemployment rate surging from 5.2% in early 2008 to a peak of 8.5% in late 2011 before slowly subsiding in the following years. The number claiming jobless benefits reached over 1.6 million by 2010—levels not seen in Britain since the early 1990s recession.

The shockwaves radiated far beyond the labor market. Domestic home prices plunged 20% from their 2007 peak, millions of Britons saw their pensions and savings decimated as stock markets crashed, and foreclosure rates spiked as overleveraged borrowers defaulted on mortgages. In the multi-year downturn between 2008-2012, the British economy lost nearly one-tenth of its total output.

Bruised banks drastically cut back on lending, starving businesses and consumers of credit and creating a vicious recessionary cycle. Corporate bankruptcies surged as even large, established firms scrambled to obtain financing.

Meanwhile, the government found itself facing an intractable spike in the fiscal deficit. Having taken on enormous debt burdens to bail out the financial sector, public borrowing ballooned from 3% of GDP in 2007 to over 11% in 2009-10—the largest peacetime deficit in modern British history. Public debt as a share of GDP nearly doubled from 44.2% in 2007 to over 80% by 2012. It would take many years of harsh austerity policies for public finances to recover.

Britain’s Road to Recovery

The recovery process from the Great Recession was painfully slow and uneven for Britain. The Conservative-led coalition government that took power in 2010 embarked on an aggressive fiscal consolidation plan, slashing spending and hiking taxes in an effort to restore order to the nation’s finances. This contractionary austerity only exacerbated the downturn in the short run.

It would not be until 2013 that Britain saw sustained growth and employment gains again. Remarkably, the nation needed nearly six full years just to claw back to its pre-crisis output levels.

In the banking sector, a slow process of balance sheet repair and restructuring commenced with the government as a major stakeholder across firms like RBS, Lloyds, and Northern Rock. Regulations were tightened and new measures like capital buffers and liquidity rules were put into place in hopes of preventing a repeat crisis.

Yet even by the late 2010s, scars remained from the Great Recession. Sluggish productivity persisted. Consumer spending failed to rebound robustly as employment gains remained skewed towards low-wage sectors. Investment lagged as businesses and banks continued deleveraging. And of course, the massive public debt burden weighed on the economy.

While Britain eventually pulled through the economic wreckage of the 2008 crisis, many felt the recovery was a squandered opportunity. Radical reforms and a fundamental remaking of the finance industry never occurred. Even worse, critics argued the crisis exposed the shaky foundations that the British economy had been built upon – from excessive household borrowing to an overdependence on financial services to unaddressed productivity issues. Only time would tell if lessons had truly been learned.

When historians look back on the first decades of the 21st century, the Global Financial Crisis of 2008 will undoubtedly stand out as a defining event. For Britain, it represented an economic trauma unprecedented in the post-war era, upending years of prosperity and growth. The scars and aftershocks would reverberate for many more years to come as the nation grappled with repairing the damage.

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