global financial crisis
Flow of funds and the UK real economy
Laura Achiro, Gerry Gunner and Neha Bora
A flow of funds framework is a way of understanding and tracking the movement of financial assets between different sectors of the economy. This blog specifically analyses UK corporate and household sectoral flows from 2000 to the present and highlights how this framework can reveal useful trends and signals for policymakers about the real economy. For instance, the accumulation of debt in the pre-global financial crisis (GFC) era by households and corporates was a warning signal that indicated several potential risks and vulnerabilities in the economy, including overleveraging and asset price inflation.
In our analysis, we look at the fluctuation of the surplus income or deficit positions for households and corporates. Fundamentally, each institutional sector runs an income surplus or deficit with one another in each period, depending on how much income and expenditure each sector has. These sector deficits require financing in one way or another, which is how the transfer of financial assets or liabilities comes into play. Net lending represents the overall surplus or deficit, and it is theoretically the same whether you look at it from the income or financial account viewpoint. The sector balance sheets track the amount of assets and liabilities outstanding after all of these flows have occurred, although the quality of the data for the sectors might vary significantly.
We discuss key trends from 2000 to the present in an attempt to understand the longer-term flows of funds in and out of the real economy. Throughout the blog, we argue that it is useful to have a flow of funds lens to provide the ‘macro’ context in which ‘macro-pru’ policy operates. In short, in this blog we state a brief case for how flow of funds can be an effective complement to the micro-data analysis which underpins the assessment of household and corporate risks in recent financial stability publications.
Evolution of the net lending positions of households and corporates
The pre-GFC era was a period of strong growth and low inflation, which coincided with a large expansion of credit. We utilise financial accounts data in Charts 1 and 2 to show how UK corporates and households substantially increased their debt burden.
Households’ net position (Chart 1) declined from a surplus in the early 2000’s to a position where the net position was close to zero, driven by strong growth in borrowing from UK banks (denoted by aqua bars), partially offset by savings inflows into banks, insurance, and pension funds (shown by purple and green bars). The increase in debt levels saw the aggregate household debt to income ratio (excluding student loans) increase between 2004 to 2008. While an increase in household debt can support economic growth through increased consumer spending, high levels of it can increase the chances of financial crisis, worsen the severity of a recession and curtail or stifle economic growth.
Meanwhile, UK corporates also increased their debt levels in the pre-GFC period as they borrowed from banks (aqua bars in Chart 2) while also taking advantage of the increased accessibility to capital markets where they issued bonds (green bars in Chart 2). Compared to households, corporates relied more on market based finance, and to a lesser extent on bank debt, and the borrowed funds were largely invested in commercial real estate and restructuring of balance sheets.
During the GFC period however, credit conditions tightened as banks withdrew credit, and this led to both households and corporates becoming net lenders to the economy. Additionally, house prices fell significantly lowering the value of collateral, and households endured job losses which made it difficult to sustain high debt levels. This fall in the supply and demand for credit can be seen from the reduction in loans from banks to households and corporates shown by the aqua bars in Charts 1 and 2. Corporates and households responded to the economic uncertainty by adjusting their balance sheets by building up cash deposits with banks, shown by the purple bars in Charts 1 and 2 from 2009 onwards.
Chart 1: Household net lending from the financial account (a)
Sources: Office for National Statistics (ONS) and staff calculations.
(a) Final data point is aggregated quarterly data in 2023 up to 2023 Q3.
In the post-crisis period, bank lending standards remained tight as seen by the lower flows of bank loans to both households and corporates (aqua bars in Charts 1 and 2) from 2010 until about 2013. Corporates were persistently deleveraging which reduced aggregate investment and credit growth in the immediate post-crisis period.
However, as disruptive effects of the crisis abated from about 2013, to the onset of the pandemic in 2019/20, corporates raised debt in the capital markets as well as through bank debt (aqua and green bars in Chart 2).
Chart 2: Corporate net lending from the financial account (a)
Sources: ONS and staff calculations.
(a) Final data point is aggregated quarterly data in 2023 up to 2023 Q3.
In 2020, the world was hit with a different kind of crisis that had economic effects on households and corporates
Charts 1 and 2 evidence how the shift in financial imbalances following the Covid pandemic were a stark contrast to the effects of the financial crisis. Concerns about commercial bank viability during the GFC led to a contraction in credit availability that had negative effects on the real economy. On the other hand, the pandemic initially led to a fall in demand due to lockdown restrictions and economic uncertainty. Households and corporates both accumulated savings leading to an overall increase in deposits with UK banks, with household and corporate deposit accumulation (purple bars in Charts 1 and 2) reaching a peak in 2020.
The pandemic saw the household net lending position increase to a historic high of around £180 billion, (Chart 1). In the meantime, corporates reduced their debt levels especially corporate bond issuance (green bars) as some parts of financial markets closed for a period of time in 2022 for the riskier borrowers reflecting additional caution by investors (Chart 2). The majority of large corporates refrained from substantially increasing their debt levels, although small and medium enterprises still took out debt on favourable terms offered by government-backed schemes as seen by the aqua bars in Chart 2, mainly for precautionary purposes. The corporates’ precautionary borrowing saw liquidity improve as they built up cash buffers with UK banks (purple bars in Chart 2).
And in the aftermath of the pandemic, built-up deposits have unwound
More recently, the costs of essential goods have risen faster than household incomes, and many households have been driven to save less and draw on their pandemic savings, to afford rising costs of living and debt-servicing costs. Households have also lowered their debt accumulation, particularly of mortgages, as seen by the shrinking aqua bars in Chart 1 which represent the loans from UK banks. Taken together, these two pressures on households have led to lower deposit flows into UK banks.
Corporates also responded to higher interest rates by repaying debt (green and aqua bars), thus increasing their net lending position (Chart 2). The deleveraging reduced corporates’ gross debt to earnings ratio to 275% in 2023 Q3, down from its pandemic peak of 345% in 2020 Q4. While the aggregate position of UK corporates has improved, there remains a tail of corporates with high leverage. These highly leveraged corporates are associated with a greater probability of distress and refinancing difficulties. Similar to households, corporates are showing a reduction in deposit levels with UK banks in recent data (purple lines in Chart 2).
Summing up
This blog sheds light on how the flow of funds framework can help policymakers understand the wider macroeconomic developments affecting households and corporates. Using the flow of funds framework, our narrative highlights several trends in the borrowing behaviours of households and corporates in different time periods. For instance, we observe certain trends for both households and corporates, such as, in the pre-GFC era, we saw credit expansion in the household and corporate sectors that ultimately reduced the resilience of the real economy during and after the GFC crisis. More recently, during the Covid pandemic and the years that subsequently followed, households and corporates experienced shifts in their debt levels owing to the government stimulus measures such as enhanced unemployment benefits for households, and government-backed loans for corporates. As economic conditions recovered in the immediate aftermath of the pandemic, some corporates started deleveraging while households reduced their debt levels. Understanding these flows from the financial account is important to gauge the subsequent accumulation of assets and liabilities in the real economy as it helps policymakers to set the ‘macro’ context. Therefore, in this blog we argue that flow of funds is an effective complement to the micro-data analysis which underpins our assessment of household and corporate risks in recent financial stability publications.
Laura Achiro and Neha Bora work in the Bank’s Macro-financial Risks Division and Gerry Gunner works in the Bank’s International Surveillance Division.
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Scandalous Blaming of the Poor: UK austerity politics
As outlined in this series of blogs, Scandalous Economics is a collection of essays that explores “how scandals – and scandalous uses of and/or neglect of gender – have helped narrate the Global Financial Crisis (GFC) into political oblivion”, as Aida Hozić and Jacqui True outline in their introduction. Principally, there is the scandalous neglect of feminist insights on inequality in all major books on the crisis – whether by Mark Blyth, Daniel Drezner or Thomas Piketty.
Johnna Montgomerie and I argue that this is a critical missed-opportunity to challenge the root causes of the crisis: the very structure of finance-led growth that intensifies along established inequalities of gender, class, race, ethnicity and/or sexuality. Scandalous Economics is a corrective to the scandalous neglects in the GFC scholarship that brings together scholars whose work retells the story of the causes and consequences of the crisis paying particular attention to its gendered and racialised nature.
Our contribution in the volume highlights how historical memories of austerity as ‘difficult but necessary’ are evoked to rebuild silences around the deeply unequal process through which austerity is made possible. Key silences resonate around how ‘the household’ sector (more so than ‘private’ sector) has borne the majority of costs for bailing out the banks as well as absorbing most spending cuts to public services. Indeed, why the bank bailout policies were not a scandal perplexed even the then Governor of the Bank of England, Mervyn King, in his testimony before MPs in 2011:
The price of this financial crisis is being borne by people who absolutely did not cause it…Now is the period when the cost is being paid, I’m surprised that the degree of public anger has not been greater than it has.
Feminist political economy provides the only relevant set of conceptual tools to understand how public welfare for corporations is justified and yet public welfare to households vilified. The non-scandal of public subsidies to the Financial Services Sector is in effect the ‘strategic forgetting’ in the political economy of welfare reform in Austerity Britain. This reform program in the UK has been designed and justified using the discourse of scandal and unsustainable costs to taxpayers. Our contribution challenges such forgetting by looking at how poor women with children were made targets of scandal in post-crisis Britain, depicted as burdens to the public finances. These women became objects and subjects of reform to fix ‘Broken Britain’ in the process. Austerity is a new form of ‘governance by lifestyle’ that has put a sharp focus on ‘families’ as subject/objects of reform. This is pivotal to the gendering of the process of welfare reform. We demonstrate the significance of these reforms showing how they evidence a fundamental shift in the role of social policy from addressing the causes of poverty to managing (or governing) the effects of poverty.
‘Governing by Lifestyle’ allows policy-making to design new ways of governing using crass stereotypes rather than actual evidence. In practice, this means policy makers are able to cast their bureaucratic gaze on the lifestyles of ‘private’ households. The ‘strivers’, the ‘skivers’, the ‘Troubled Families’ are not actually in receipt of substantial amounts of public money but they are at the forefront of the State-led moral reform initiatives. Bankers, by contrast, are in receipt of trillions in public subsidies and tax-payer guarantees; however, ‘Banker Bashing’ is strictly forbidden by policy makers because criticising professionals for their ‘coke and whores’ lifestyle is supposedly an anathema to rational, liberal policy making. However, the post-crash UK economy has seen a worrying shift in which a state-led (or the party political elite) initiative to morally reform the life choices of the underclass is causing harm to wider society. Indeed, this political norm took a dangerous turn with the rhetoric of ‘Broken Britain’ (although the rhetoric has now changed, the practices remain the same) seeking to legitimise the Austerity narrative through actual social policy. As a result, the ‘skivers’ and ‘generations of workless’ that actually do not exist in any empirically observable reality must now be found, identified and reformed with minimal democratic oversight and even less evidence of the rationale for such reforms.
Austerity in Great Britain shapes government and media discourses about the poor as being a burden on tight public finances, justifying cuts to welfare and design of new interventions targeted at disciplining the poor. These policies and cuts demonstrate how scandalous economics can be a classic bait and switch so infamous in the mortgage finance market before the 2008 crash; while it is the City of London and the failure of austerity-led growth that actually cause high public debt levels it is “troubled families” and the like, that require government intervention in order to bring public finances into the black. State policies here displace the real causes of financial crisis and obfuscate structural inequalities. They remake “society” by casting economic problems, which could be addressed through economic policy, as social problems, individual problems, and problems of troubled families, which to the anathema of Hayekian neoliberals can be addressed through social (engineering) policy.
The Scandalous Economics of Abortion Access in the USA
Abortion is routinely portrayed as a dominant feature of the American ‘culture wars’; yet this categorisation misunderstands the fundamental place that reproductive choice has in women’s economic position in society, and the way that lack of access to reproductive healthcare compounds numerous intersecting inequalities.
In the US today, the battle over reproductive rights is a primary site at which gender and crisis intersect. The framework of ‘Scandalous Economics’ illuminates the way that the normalisation of the current economic (dis)order also entails an economic reordering of gendered social relations. In this post, I want to draw out some of the volume’s themes to think about the crises of reproductive rights in the USA where the politics of scandal are being rapidly mobilised to erode women’s bodily autonomy and reproductive choice. The conceptual and empirical contributions of Scandalous Economics are timely and essential for understanding gender politics, even outside of areas traditionally understood as economic and as we move further away from the beginning of the (ongoing) Global Financial Crisis.
In 2015, anti-choice activists released undercover films which (falsely) purported to show misconduct by Planned Parenthood regarding the disposal of fetal tissue. These videos sparked a wave of anti-choice activity by legislators and activists, who began efforts to remove federal funding from Planned Parenthood. Perfectly encapsulating the productive power of scandal to “generate both new meanings and reassuring boundaries” (True and Hozic, introductory post), the Planned Parenthood video scandal functioned as a visible and emotionally charged vehicle to boost existing efforts to erode reproductive rights by cutting funding at the state and federal levels. This is but one indicative sign of a larger shift in the attacks on reproductive rights, which mobilise broader ideas of economic crisis, government overreach, and the need to defend ‘the taxpayer’ from misspending of public funds. In late 2015, then-Republican presidential candidate Jeb Bush expressed this prevailing discourse when he said: “I’m not sure we need half a billion dollars for women’s health issues”.
The reproductive rights of American women, though tenuous and under constant threat, are due in large part to legal gains which protect the right to abortion under the 14th amendment right to privacy (established in Roe vs. Wade, 1973). Despite legal challenges which have led to increased restrictions, the core of Roe has held, guaranteeing women a constitutional right to abortion. Given the legal status of abortion, anti-choice advocates have increasingly turned away from the courts and sought to restrict access to reproductive choice through economic means, chipping away at the practical capacity for women to seek out abortions to which they are legally entitled.
Most visibly, this strategy has resulted in numerous state-level laws which restrict the ability of women to access abortion by requiring onerous waiting periods between initial doctor’s visit and the termination procedure. These restrictions are particularly harmful for women who live in states with few clinics that perform abortions, because they require most women to make long drives and stay several nights away from home to be near the clinic. Indeed, burdensome restrictions which force clinic closures mean that five states – Mississippi, Missouri, North Dakota, South Dakota and Wyoming – have only one abortion clinic. Such laws make reproductive choice all but impossible for the wealthiest women who have the time, funds, and support networks to make these trips.
The attacks on Planned Parenthood therefore represent only the most recent example of efforts to erode reproductive choice for low income women in the USA. Planned Parenthood is an essential provider of reproductive healthcare for women; it is moreover the only source of healthcare for many low-income women. In December 2015, the US Senate passed a bill to de-fund Planned Parenthood. At the state level, Ohio, Wisconsin, Alabama, Arkansas, Kansas, Louisiana, New Hampshire, Texas and Utah have defunded Planned Parenthood. Planned Parenthood is legally barred from spending any federal funding on abortion services, yet this fact features little in the public discourse.
These examples, among many others, demonstrate that the numerous and sustained attacks on reproductive rights have increasingly mobilised an economic logic to restrict access. Moreover, they demonstrate, as the Reproductive Justice movement has long stressed, access to reproductive healthcare is the product of a broader array of compounding socioeconomic inequalities which render the language of ‘choice’ and ‘freedom’ wholly insufficient for conceptualising the experiences of women at the intersection of multiple forms of oppression. The right to abortion is constitutionally protected in theory, but the stark inequalities which stratify American women mean that access to abortion requires resources, not merely rights.
As the Scandalous Economics volume demonstrates, the American union of religious fundamentalism and neoliberal economics that has resulted in this multi-faceted assault on reproductive rights is but one manifestation of the way that post-crisis economic governance has eroded women’s access to rights and resources. The purported need to scale back federal spending provides a convenient cover for a strategic and concerted program of restrictions on the access to reproductive choice, the effects of which are concentrated on restricting the freedoms of low-income women.
Sex, Lies and Financial Crisis
Pervasive lies and scandals inflected by gender and race/ethnicity are the early-warning devices for financial crises and the symptoms of their wilful forgetting.
Over the last month the turmoil in financial markets underpinned by the slump in global – and especially China’s – growth has caused alarms to go off. Some commentators have speculated that this is the return of the financial crisis; that February 2016 looks an awful lot like September 2008 before the collapse of Lehmann Brothers; that even America’s economy is not strong enough to buoy the world economy up; it may not even be strong enough to keep itself afloat.
You thought it was over but the Global Financial Crisis (GFC) has not yet ended – the cycles of bust, apparent recovery, and austerity with no ‘boom’ in sight endure. Crises tend to be long-lasting because they are generated by structural tensions and political actions and because they have grave, painful, and often violent ongoing consequences; but crises are also construed by narratives, visual imaginaries and public performances that frame and interpret them in particular ways – compressing the time to respond and delimiting the possible responses. The consequences of the GFC should be apparent to all by now – high youth unemployment, extreme indebtedness, declining real wages and state services, ever increasing political and economic inequalities, high rates of suicide and domestic violence, stagnation and deflation, political extremism. But, at least in the rich world, we continue to be distracted by profoundly gendered and racialised debates about immigration and border control, affirmative action, Planned Parenthood and/or the nature of our family unions.
With all this white noise, how would we even know if a genuine financial crash is imminent or if we simply need a survival guide for the new normal of slow growth? In Scandalous Economics: Gender and the Politics of Financial Crises we argue that lies about economic decision-making, purported by powerful, often conservative, elite (fe)male subjects talking up rock solid markets, and scandals involving sex and moral outrage against ‘others’ are the early-warning devices for financial crises and the symptoms of their wilful forgetting.
What better early-warning sign of a possible crisis than the scandalous – gendered – narratives of wilful forgetting on display this January at Davos, Switzerland, where the global elite meet annually to plot challenges and solutions to problems of the world economy? According to the theme of this year’s meet, the Fourth Industrial Revolution is well under way and it will be delivered by women. So say Davos men who represented 93% of the participants at the gathering. Women were again a minority among the movers and shakers. But those who were there – the TED women of the global economy – had an important role to play: to share messages of hope and optimism in the face of political and economic uncertainty and to sell digital disruption as the panacea for the world’s increasing inequalities, including gendered ones.
Gathering at The Girls’ Lounge, “a really special place,” the women of Davos were also concerned that the narrative about gender in the global economy needed to be changed. They suggested developing “a different vocabulary for moving the needle so that gender equality can be discussed as a business, growth and diversity issue—not a women’s issue.” Thus it was suggested “gender inequality” could be substituted with “talent” or “archetype inequality” to help speed up diversification of corporate boardrooms, an imperative in the unending quest for better financial returns post-GFC. In short, proposed these CEO gals, among them Sheryl Sandberg of Facebook and ‘Lean-in’ fame, if women could just forget about being women (“girl entrepreneurs” would suffice) – they could lead the world to the new dawn.
And yet the crisis has never left us.
As the doco-pic, The Big Short, nominated for best picture at the Academy Awards this month, exposes, financial markets are lies built upon lies where banking institutions pretend there’s value in the products they are selling us and we pretend to believe them. The fundamental flaws in this consensus only unfold in times of catastrophic economic downturns, thus confirming Mary Poovey’s analysis that financial crises are always also “crises of representation,” opening the chasm between value and its vernacular representation – money.
Scandals, we argue, thrive in times of financial uncertainty because of their productive power. They represent a specific genre of crisis narratives; as highly publicised stories about personal transgressions they are intrinsically gendered and the perfect stop-gap measures for the “crisis of representation.” When the ground seems to be shifting, scandals can generate both new meanings and reassuring boundaries. In the aftermath of the GFC, they have pushed financial crisis away from the political limelight where the politics of our economic life in common could be publically debated. Just think of the running headlines – from DSK to General Petraeus, from Julian Assange to Payton Manning, from Bill Clinton to Hillary Clinton, from Donald Trump to Donald Trump. Scandals put women back in their place by seemingly doing them a favour. And so, ever since the GFC, the ‘spectre of gender’ has been paradoxically visible in both scandals about the sexual exploits of men and in rational arguments about the returns from women’s inclusion in the financial order.
If this taster of the goings-on at the pinnacles of global governance is not enough to persuade you that gender is back – and with a vengeance at this ‘ensuing crisis’ moment, then we entice you to read the rich plurality of contributions from around the world in our volume. The feminist political economy analysis featured in Scandalous Economics promotes a way of seeing beyond the silences and the scandals that have constructed an impoverished field of policy options. Feminist analysis helps us think ethically about the global political economy starting from the social relations that constitute its institutions and practices. Let us share a hint from Scandalous Economics: when trying to understand the recurrent crisis follow the women and the narratives in which they are featured; where women are mentioned or neglected may tell us more about the future of the global economy than watching, or [worse] predicting movements of the stock market.
Masters of the Universe, Slaves of the Market
This is an edited version of a piece that appeared in the European Financial Review and relates to the work I have recently conducted with Stephen Bell concerning our jointly authored monograph Masters of the Universe, Slaves of the Market and an article published in the British Journal of Politics and International Relations, which was awarded the best article prize for that journal in 2015.
The banking and financial crisis that peaked in 2008 and that destroyed many of the major US, UK and European commercial and investment banks in the key New York and London markets was, as the former Chairman of the Financial Services Authority, Lord Turner, puts it, ‘arguably the greatest banking crisis in the history of financial capitalism’. Very few bankers fully understood the scale and complexity of the new financial markets they had created, with their vulnerabilities and huge ‘systemic risks’ and their capacity to inflict economic carnage on a vast scale. Our book seeks to establish a clear account of what happened during the crisis, why it happened, and what can be done to prevent another crisis from occurring.
We argue that the origins of the banking crisis can be gleaned from answering an obvious but rarely-posed question – Why did the financial and banking systems in the core economies of the US and UK implode, whilst the banking systems in other countries such as Australia and Canada, did not? Such comparisons provide a vital clue: banking crises, or their absence, we argue, are largely driven by the nature of the banking markets found in each country. We provide a detailed comparative analysis showing how, even within an apparently globalised financial system, the behaviour of individual banks has been shaped by nationally specific market contexts. We find that banking markets with high levels of bank competition that produce strong profit pressures on firms as well as low returns from traditional lending encourage risky forms of bank trading activities and leverage that are prone to produce financial crises. In the US and UK, highly competitive banking markets squeezed traditional lending and placed bankers under intense pressure to re-engineer their balance sheets in the search for additional profits, largely in highly leveraged mortgage-backed securities trading. The origins of the financial crisis can be traced back to losses in these markets in the US. It was the collapse of these markets that triggered the banking crisis which began in 2007. Such market structures and pressures were pronounced and strong in the US and UK, but weaker in the Australian and Canadian markets. This is why the latter banking systems did not implode.
It is ironic that the institutional and structural pressures that were to have such a devastating impact were largely created prior to the crisis by bankers and supportive state elites in the core financial markets. The key changes were part of a wider process of liberalisation and the increasing financialisation of core economies. There was a revolution in banking that propelled bankers and financiers towards new wealth and power. It was a period in which they were widely seen as Masters of the Universe. Once the crisis was triggered however, bankers were quickly overwhelmed by forces they had not anticipated and could not control. They were thus revealed also as Slaves of the Markets; conditioned and then overwhelmed by forces they had helped create.
Our approach allows us to isolate key drivers of the origins and scale of the crisis from the long list of causal factors produced in many accounts. It is true that plentiful credit, imprudent mortgage lending, the collapse of the US housing market, and lax bank regulation were a part of the story. But these were not the primary factors that actually drove banks and the behaviour of bankers. Regulation, for example, was largely permissive; it allowed but did not fundamentally drive bankers in the direction they took, especially in pursuing trading and massive leverage structures. Market dynamics were far more central in shaping what bankers did. Our analysis thus distinguishes between more fundamental causal factors such as market dynamics and those that were merely permissive. We point to the impacts of banking liberalisation and ‘financialisation’, especially the rise of intense market competition in recent decades, the associated decline in traditional banking as markets were squeezed, the rise of new attractive trading opportunities, and the build-up of debt and system complexity and risk in the core markets.
What explains the other form of variation we observe? Why didn’t the large Australian and Canadian banks join the party and crash? We can show that the nature of banking markets and the intensity of competition between the largest banks were an important cause of the crisis because different types of market shaped different forms of banking behaviour across countries. This national variation is something that is often overlooked within existing accounts of the crisis. Banks in Australia and Canada largely avoided trading in ‘toxic’ securities not because of tight prudential regulation or oversight in this arena but because they were operating in different kinds of markets, especially in relation to the level of competitive pressure and the nature of profit opportunities. These markets were structured by public policies that controlled competition and embedded an oligopoly that shielded the large banks from takeover pressure. These banks also mostly had a traditional rather than investment banking culture. In the markets they occupied, these bankers could make high profits through traditional lending practices. They thus avoided the fate of most of the bankers in the core US and UK markets.