A question of interest: Is UK household debt unsustainable?

Lewis Kirkham and Stephen Burgess.

UK household debt is high relative to income. But is it “unsustainable”? Some commentators say “it is”; others say “there is no reason to worry”. To investigate, we build a simple model of the economic relationships between household debt, house prices and real interest rates which we believe must hold in the long run. In our model there is no single threshold beyond which debt suddenly becomes unsustainable, but we argue that household debt should be broadly sustainable under any rise in real interest rates of up to about 2 percentage points (pp) from current levels. We also show that falling real interest rates may have contributed around 20-25pp to the rise in the household debt-to-GDP ratio since the 1980s.

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A Closer Look at the BoC-BoE Sovereign Default Database

David Beers and Jamshid Mavalwalla

Defaults on sovereign debt – the term commonly used to denote debt issued by national governments and other fiscally autonomous territories – are a recurring feature of public finance. They are more widespread than is often appreciated, since 1960 involving 145 governments, over half the current sovereign universe. Examples include the many governments ensnared in the Latin American and Eastern European debt crises of the 1980s. More recently, there have been big bond defaults by Russia (1998), Argentina (2001), Greece (2012), and Puerto Rico (2015). On a smaller scale, scores of sovereign defaults can occur each year on one or more types of debt. Some, such as Sudan’s, have dragged on for decades and remain unresolved (Chart 1).

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Reflections on the Bank’s History

David Kynaston

Last May, the Bank organised an economic history workshop at the St Clere Estate, home of former governor Montagu Norman. In this guest post, one of the speakers David Kynaston, visiting Professor at Kingston University, reflects on more than three centuries of Bank history…

It was a huge honour to be asked by Mervyn King to write a history of the Bank. The eventual book, Till Time’s Last Sand, was published last autumn. It covers 1694 to 2013 and is based heavily on the Bank’s own archive. Fitting more than 300 years of history into a single volume was a difficult task, and condensing that into a short blog post is harder still. Here I will try to bring out a handful of key lessons from my research into the Bank’s history that might be useful for the policymakers, economists and other interested observers of today – and their successors…

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How did organisations adapt to change in the 18th and 19th century: Lessons from the Bank of England Archives…

Anne Murphy

Last May, the Bank organised an economic history workshop at the St Clere Estate, home of former governor Montagu Norman. In this guest post, one of the speakers Anne Murphy from the University of Hertfordshire, looks at what the Bank’s archives can tell historians about how business dealt with rapid organisational change at the start of the industrial revolution…

Industrialisation was not the only driver of change during the eighteenth century. Recent historiography has revealed more about the financial and organisational revolutions that helped to shape the British state and the country’s economic development. The Bank of England was at the forefront of these revolutions and a pioneer of new modes of business organisation. A business that started out in a small rented space with only seventeen clerks in 1694 was, by 1815, employing nearly 1,000 workers and occupying most of the Threadneedle Street block. Yet it has been sadly neglected as a case study. What might we find in the Bank’s archives to understand how business adapted to rapid and radical change during the eighteenth and nineteenth centuries?

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Montagu Norman: The View from St Clere

Barry Eichengreen

Last May, the Bank organised an economic history workshop at the St Clere Estate, home of former governor Montagu Norman. In this guest post, one of the speakers, Barry Eichengreen from the University of California Berkeley, looks back at Montagu Norman’s time as governor.

Montagu Norman’s aura is palpable at St. Clere. It is said that Norman spent many of his weekends and holidays at his estate in Kent, overseeing improvements and admiring the vistas. His legacy is, if anything, even more prominent at the Bank of England. Norman supervised the design of the present Bank building. His portrait, along with those of the other members of his Court, was displayed on the first-floor landing in the Bank’s main atrium; he is only a handful of governors so honored. The Bank’s recent St. Clere workshop thus provided an opportunity to ponder some of the enduring themes and legacies of Norman’s quarter-century as governor.

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‘The world turned upside down’: How the global economy was hit by the crisis

David Young

For the global economy, it was the best of times, and then it was the worst of times.  Buoyed by very strong growth in emerging markets, the global economy boomed in the mid-2000s.  On average, annualised world GDP growth exceeded 5% for the four years leading up to 2007 – a pace of growth that hadn’t been sustained since the early 1970s.  But it wasn’t to last.  In this post, I illustrate how the failure of Lehman Brothers in September 2008 coincided with the deepest, most synchronised global downturn since World War II.  And I describe how after having seen the fallout of the Lehman collapse, macroeconomic forecasters were nevertheless surprised by the magnitude of the ensuing global recession.

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‘Neither a borrower nor a lender be’: How the sterling money markets dried up

Mathew Sim

 

Sterling money markets are a critical part of the plumbing of the UK financial system. They act as the main conduit for short-term borrowing and lending between banks, and a whole range of other institutions, financial and non-financial. And the ebb and flow of activity in sterling money markets is also crucial to the Bank of England as the first stage in the transmission mechanism of monetary policy, linking changes in the Bank’s policy rate – Bank Rate – to activity and prices in the wider economy. So when things go wrong in this market, as they did during the financial crisis, the effects reach into every part of the UK economy and, given the significant role of international banks in London, beyond. So what happened in the autumn of 2008, and why?

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‘As safe as houses’: How a small corner of the US mortgage market nearly brought down the global financial system

Johnny Elliot and Benjamin King

In August 2007 problems were emerging in the US sub-prime mortgage market. Rising numbers of borrowers were getting behind on their repayments, and some investors exposed to the mortgages were warning that they were difficult to value. But projected write-downs were small: less than half a percent of GDP. Just over a year later, Lehman Brothers had failed, the global financial system was on the brink of collapse and the world was plunged into recession. So how did a seemingly small corner of the US mortgage market unleash a global crisis?  And what lessons did the turmoil of autumn 2008 reveal about the financial system?

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