Economics - Economic Policy - Discuss and critically evaluate the Essay - 1

Economics - Economic Policy - Discuss and critically evaluate the rescue and stimulation packages by the UK Government since the start of the credit crunch in 2007 - Essay Example It is in this backdrop, we analyze the factors leading to the crisis and the efficacy of the rescue and stimulation packages introduced by the UK government to improve the situation. According to the Banking Guide it has been an episode of financial instability that was, arguably, the most serious since the 1930s. It states â€Å"The risks of negative equity (where mortgages are greater than the value of the property) became a reality and mortgage defaults hit record highs. Banks have lost the trust which is a pre-requisite to the efficient functioning of credit markets†. The table as given in Appendix I shows the fall in the world’s major equity markets since June 2007, and the cumulative change from 30-6-2007 to 10-10-2008 in the case of ‘FTSE All-share Index’ of the UK is negative by 40.9%. The habit of borrowing by the individuals and corporate bodies ingrained predominantly in the US culture at a staggering level which over the period of time made the financial structure in the country vulnerable. As a lighted  match to a  train of gunpowder, the subprime crisis acted as a trigger for the collapse of the leading banks. The cases of isolated bad debt in the banking system could be a normal phenomenon. However, when it has become impossible to quantify the bad debts in the nation as a whole, the system became victim to the crisis. This unprecedented phenomenon has arrested the flow of capital and liquidity, fundamental to the banking system. It is a vicious circle and the banking system has been clogged up completely due to growing suspicion among the market players. The bank finance locked up in subprime mortgages and housing development projects has paralyzed the system as a whole. The bailout plan was formulated under the Treasury Secretary, Henry Paulson, who h ad been the Chairman and Chief Executive Officer of Goldman Sachs earlier.