Festival of Economics

Recently I attended a talk entitled “The State of Economic Recovery “ at the Bristol Festival of Economics. Speakers included Will Hutton, Margaret Heffernan, Andrew Sentence and Simon Wren-Lewis. The premise of the talk was whether the current economic “recovery” we are going through in the UK is both real and sustainable , or indeed if it can even truly be deemed a “recovery “ given the apparent structural weaknesses which are prevalent in our increasingly disparate economy.

Not only were the points raised fascinating from an economics perspective , but there were also many revelations about the finances of the banking sector, which is particularly pertinent and interesting for me given my desire to study accounting and finance related subjects at university and perhaps enter the city or entrepreneurship subsequently.

Whilst it would be difficult to succinctly and concisely summarise the divergent arguments presented by the speakers, I can list and explain some of the points which I think are paramount to understanding what is, in my opinion, merely an illusion of a recovery. Without further a due :

Banks hold Assets and Liabilities of 4.5 X GDP

The current value of the assets and liabilities held by investment banks is 4.5 X the UK’s annual GDP of £1.5 trillion. This is, in my opinion, a frightening statistic which demonstrates how much wealth and income is in the pockets of institutions, which as we have seen before, don’t really act in the public’s best interests.

5 % of these assets are linked to corporations and only 0.35 % of assets are deemed to be “innovative”

Of the huge assets owned by banks, only 5 % of them are derived from corporations, and only 7 % of this 5 %, or 0.35 % of total assets, are deemed to be derived from “ innovative “ companies. The reason for this is that “innovative “ companies present a far greater risk to banks than collateralised loans such as mortgages, and as such, given the current economic climate, banks are not willing to take excessive risks to generate profit. Instead, they would rather make loans with less risk and hence less reward to more proven consumers.

The worldwide value of derivatives is $700 billion

Another huge figure which is difficult to really explain or draw any meaningful conclusions from, but which truly demonstrates the scale of the economic behemoth which is the global financial system.

Productivity growth is decreasing

Productivity, the gap between unemployment decreases and GDP increases, is increasing at a decreasing rate, likely due to reduced investment in capital goods as a result of decreased bank lending. Productivity is of course crucial to the economic well-being of a country, an example illustrated by Henry Ford, the US industrialist who raised his worker’s wages and slashed their hours.

London can be considered a separate economy

London house prices have risen by around 10 % in a month, and wages in London eclipse the rest of the country, swaying wealth and income statistics greatly.  Perhaps an interesting indicator of how skewed economic data is, despite the average wage being £26,500 per annum, 2/3rds of people actually earn less than this

Bank balance sheets are too opaque

Banks own and use a series of complicated financial instruments which are not easy to quantify and place on a balance sheet. As a result, it is becoming increasingly difficult for regulators to monitor banks and ascertain their financial health , which is almost certainly an aggravating factor when considering the risk of another major bank collapse such as the Northern Rock fiasco of recent years.

Help-to-buy is as much a political as an economic policy

In the run-up to an election, it is of course in any politicians’ best interest to portray himself as best as possible to his electorate. As such, Right-to-buy is an excellent policy for David Cameron, raising house prices and allowing more people to get onto the property ladder. From an objective economic perspective, however, Right-to-buy is actually a profoundly flawed policy, with critics citing the possible overheating of the housing market.