The global financial crisis that took place in the year of 2007 had a worldwide economic shock. It led to a recession in many economies worldwide and one of the economies hit was the UK economy. It has the highlighted the exposure of the British economy to global financial changes and the need for banking reform.

First of all, how was the economic shock felt on a global scale?

Due to globalisation, in order for financial institutions to move money across on a global scale and across borders, government have removed barriers allowing the global financial system to be more open for the sake of the banking sector. As a result of this open network of money flowing between countries, firms, governments and financial institutions worldwide positively impact other firms and other sectors that are connected in this “financial network”. However, also as banks found they were running short of money and their spreadsheets were going into losses, these financial problems spread quickly to other firms and institutions through this open network. This was later known as a liquidity crisis as banks need money in the form of cash — known as liquid assets-to meet their immediate needs. This is known as a bailout. Tow bailouts took place during the 2007–2008 financial crisis. The first bailout was with the firm Bear Sterns for $25 billion. The second was a bailout from the US government for the whole of Wall street worth around $700 billion. This large amount was split between firms such as JP Morgan, Morgan Stanley, Citi group, Wells Fargo and the Bank of America.

Both of these bailout were met by huge amounts of backlash from the general public and mostly taxpayers. They believed that it was unfair for these top firms to be being bailed out for the problems that they caused themselves and for these smaller scale businesses to suffer the consequences of their mistakes.

This was also a big problem because every business in the world needs finance in order to function. So with the whole banking sector down and contracting, it pulled down the rest of the economy and firms in all the other sectors. An example of the direct result from the banking sector to other industries is the — car manufacturing industry.

So how did this all effect the UK economy?

The UK economy is built on the tertiary sector — providing financial goods and services for clients worldwide. Therefore the large presence of financial institutions in the London and the city’s role as a global financial centre meant that it became a global magnet for capital flows for risky investments. This made the UK economy especially vulnerable when risks failed and then governments had to intervene.

However, the UK faced severe downturn. Thousands of businesses of all scales — small and big closed down. This led to an increase in unemployment rates and the fall in the UK’s GDP was greater than any other since the Great Depression of the 1930’s. As the economy has shown virtually no growth, house prices also fell significantly as a result. On the other side, the unemployment rates in the UK increased by much less than anyone expected considering the remarkable decrease in the country’s GDP. This is as the UK labour force is more flexible than previously thought. Additionally, wages have fallen in real terms allowing other employers to buy labour for cheaper, reducing the pressure on employers. Furthermore, the employment services nationally improved and helped put many into other jobs.