2008 finacial crisis

What was the 2008 Financial Crisis?

• Global banking crisis → recession.

• Banks had made risky loans.

• Credit markets froze.

• UK economy contracted sharply.

Main causes? 2008

• US sub-prime mortgages.

• Housing market crash.

• Banks packaged and sold risky debt.

• Weak financial regulation.

what was the impact on the UK

• Recession (2008–09).

• Credit crunch.

• Rising unemployment.

• Falling confidence and spending.

how much did unemploymet rise by 2008

Unemployment: 5.2% → ~8%.

what did intrest rates fall by

Interest rates: 5% → 0.5%.

how much was spent on bank bail outs

Bank bailout: £500bn.

what was the lowest GDP reached

6%

how much was VAT cut by 2008

VAT cut: 17.5% → 15%.

what did the UK goverment do?

• £500bn bank rescue package.

• Part-nationalised banks (RBS, Lloyds).

• VAT cut: 17.5% → 15%.

• Increased government spending.

• Interest rates cut to 0.5%.

• Introduced QE (2009).

what was the fiscal policy used

Policy:

• VAT cut: 17.5% → 15% (Dec 2008–Jan 2010)

• Increased government spending.

• Higher welfare payments as unemployment rose.

How it helped:

• Increased AD by encouraging consumer spending.

• Lower prices boosted confidence.

• Government spending supported jobs and incomes.

Costs of the fical policy

• ❌ Increased government borrowing.

• ❌ Added to the budget deficit.

• ❌ Consumers may have saved the extra money instead of spending it.

what was the monetray policy intret rates 2008

Policy:

• Bank Rate cut from 5% (Oct 2008) → 0.5% (March 2009).

How it helped:

• Cheaper borrowing for households and firms.

• Lower mortgage repayments.

• Encouraged consumption and investment.

• Increased AD.

what were the limiteations to intrest rates 2008

• ❌ Limited effectiveness because banks were reluctant to lend (credit crunch).

• ❌ Households focused on paying off debt rather than borrowing.

• ❌ Interest rates could not fall much below 0.5% (liquidity trap).

What QE was used to help fincial crisis

• March 2009

• 2009–10 (Global Financial Crisis): £200 billion

• Injected liquidity into banks.

• Encouraged banks to lend.

• Lowered long-term interest rates.

• Boosted asset prices and confidence.

• Increased AD.

limitations of 2008 QE

• ❌ Banks still held onto cash instead of lending.

• ❌ May have mainly benefited wealthier households through rising house and share prices.

• ❌ Difficult to know how much QE actually increased growth.

• ❌ Risk of future inflation if not unwound carefully. and trickle down

what was the peak budjet deficit

In 2009–10, the budget deficit peaked at around 10% of GDP (about £153 billion).