Two: The global financial crisis and the UK government’s role

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Following the 2010 general election, a coalition of Conservative and Liberal Democrat politicians came to power. They have a markedly different approach from New Labour to handling the long-term effects of the 2007–08 global financial crisis and subsequent recession. The circumstances that led to the global crisis and how the turmoil in financial markets was handled by the New Labour government will be considered first. This is important, as senior Coalition politicians claim that the country’s financial deficit is simply due to New Labour’s financial mismanagement, when clearly it is not. The first part of the chapter will consider:

  • New Labour’s approach to the economy and financial management;

  • the effects of deregulation of the banking system on UK mortgage lending and the role of the financial regulator;

  • sub-prime mortgages in the US and the effects of mixing these with tradeable bonds;

  • poor financial management in UK banks, leading to nationalisation and recapitalisation.

The chapter will then move on to look at the impact of the global financial crisis on New Labour’s spending plans laid out in the 2007 Comprehensive Spending Review (CSR). It will consider how additional government investment in rented housing and tax foregone were used as strategies to encourage economic growth in the face of the recession that followed the upheaval in the international banking system and money markets.

The way this issue was dealt with in the 2010 general election is then considered. The Coalition government continues to downplay the global financial crisis and chooses to blame New Labour for the financial deficit that it inherited.

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