UK ‘facing 2008-style crisis’ after mini-budget and market chaos


Fall of the Pound against the Dollar Metro Graphics

The pound plummeted this week – but it’s just the latest chapter in a story of decline over several years (Picture: Metro.co.uk)

Ministers, investors and economists are taking stock after a remarkable week in which the UK’s financial stability was plunged into serious trouble. 

After seizing control of the Conservative party, Liz Truss and Kwasi Kwarteng walked into the Commons last Friday to announce their tax-slashing plans feeling on top of the world.

Following a record currency slump, the Bank of England’s emergency market bailout and an unprecedented political battering which has seen Labour surge to dizzying heights in the polls, it’s safe to assume they don’t anymore.

Metro.co.uk spoke to London School of Economics’ Dr Ethan Ilzetzki to try and make sense of it all.

The associate professor called it a ‘true crisis moment’, adding: ‘What’s happened since last Friday has the potential to unravel into an economic crisis that could be as big, if not bigger, than the 2008 recession.’

When markets opened on Monday having had two days to digest the implications of the chancellor’s unfunded giveaway, the pound hit its lowest ever level against the dollar. 

Despite the ‘symbolic value’ of this slump, Dr Ilzetzki said: ‘What happened this week goes well beyond the pound.

‘The value of the pound is going to affect regular households in the price of some imported goods or when they go on holiday but this is not going to be life-changing for them. 


ONE EDITORIAL USE ONLY. NO SALES. NO ARCHIVING. NO ALTERING OR MANIPULATING. NO USE ON SOCIAL MEDIA UNLESS AGREED BY HOC PHOTOGRAPHY SERVICE. MANDATORY CREDIT: UK Parliament/Jessica Taylor Handout photo issued by UK Parliament of (left-right) Chief Secretary to the Treasury Chris Philp, Prime Minister Liz Truss, Chancellor of the Exchequer Kwasi Kwarteng and Minister for Levelling Up, Housing and Communities, Simon Clarke following the Chancellor's mini-budget in the House of Commons, London. Issue date: Wednesday September 23, 2022. See PA story POLITICS Budget. Photo credit should read: UK Parliament/Jessica Taylor/PA Wire NOTE TO EDITORS: This handout photo may only be used in for editorial reporting purposes for the contemporaneous illustration of events, things or the people in the image or facts mentioned in the caption. Reuse of the picture may require further permission from the copyright holder.

Plans authored by Liz Truss and Kwasi Kwarteng have sent shockwaves through the markets (Picture: PA)

‘What could potentially be life-changing is the fact that interest rates are going to rise pretty rapidly as a result of both the economic situation overall and then exacerbated by the budget last week.’

He fears the ‘pending mortgage refinancing crisis’ is now all but inevitable as the Bank of England will be forced to ramp up interest rates.

Soaring inflation meant a rise was already a dead cert but the mini-budget will force them to go harder and faster, which is terrible news for homeowners.

Dr Ilzetzki said it will result in ‘simply unaffordable’ repayments and fears ‘there’s going to be a substantial share of households that just won’t be able to meet their monthly mortgage payments or be able to put food on the table once their mortgage expenses are paid’.

He warned: ‘This will make the cost of living crisis we were talking about three months ago look like small potatoes.’

The decline of the pound against the dollar, often treated as a proxy for the general health of the economy by some observers, has been declining for decades.


A pedestrian walks past resdiential properties displayed for sale in the of an estate agents' in London on September 30, 2022. - The plan for top-to-bottom tax cuts, financed by a borrowing spree, have unnerved financial markets, alienated the International Monetary Fund and caused tensions with the Bank of England (BoE). Most immediately for UK voters, it is driving up costs including for home mortgages, as market interest rates surge in the middle of the worst cost-of-living crisis in generations. (Photo by ISABEL INFANTES / AFP) (Photo by ISABEL INFANTES/AFP via Getty Images)

Rapidly rising interest rates could cripple homeowners and cause a big retraction in the UK economy (Picture: AFP)

Economists like Dr Ilzetzki caution that GBP-USD is a crude measure and just one of many that tell a story but it’s clear that since 2008, things have only been heading in one direction.

He pinpoints two big events – the 2008 crisis and Brexit – that have compounded the UK’s economic woes and says ‘it may turn out that Friday was the third such big event’.

In that time, Gordon Brown was voted out of power and there have been four Tory prime ministers, none of whom have managed to return the country to substantial growth.

While the blame for big inflation-fuelling events like the Covid-19 pandemic and war in Ukraine can’t be laid at the government’s door, Dr Ilzetzki says there is a pattern emerging.

He said: ‘At the risk of entering into a political debate, I was really racking my mind this week trying to think of other examples of so much self-inflicted harm by policymakers on their country as we have seen in the past decade in the UK.

‘I just can’t think of many such examples. 


Boris Johnson and Theresa May’s premierships were defined by Brexit in different ways – but neither got the economy fully back to growth (Picture: AFP)

‘It begins with unnecessary austerity in 2010 at the exact time the economy needed stimulus – now we’re seeing stimulus at the exact time the economy needs to cool down a little.’

He’s reluctant to get involved in the Brexit debate but says there is a demonstrable ‘lack of willingness of policymakers to actually confront the true challenges that departure from the European Union creates’.

Dr Ilzetzki continued: ‘The Conservative Party seems to have believed its own rhetoric, that Brexit would be an easy process, but it’s been eight years now and we just haven’t resolved some of the major issues in our relationship with our main trading partner.

‘All this is just the combination of unnecessary self-harm and so yes, unfortunately, I think that a great part of the pain we are feeling has been unnecessary.’

Echoing an expression coined by Donald Rumsfeld, he urges the government and Bank of England to be on the lookout for booby traps – or ‘unknown unknowns’ – in the financial system after this chaotic week.

The former US secretary of state once memorably observed that there are known knowns (problems we know are out there) and known unknowns (problems we haven’t identified but suspect must be out there).


David Cameron and George Osborne

David Cameron and George Osborne’s attempts to return the economy to growth via austerity failed to get the results they hoped for (Picture: Getty)

But the really scary ones are the unknown unknowns – the problems that haven’t even occurred to us yet.

We got a taste of that this week.

Few outside the trading world had heard of a ‘liability-driven investment’, a type of complicated financial practice pension funds employ to keep their balance sheets looking healthy and which relies on government bonds being stable.

But when the chancellor’s speech sent the bonds market into freefall, all of a sudden exposed pension funds were at risk of collapsing and the Bank had to pour in billions to stop a real meltdown.

The affair resembles the 2008 crisis, when the world scrambled to figure out what a ‘collateralised debt obligation’ was and wondered how these technical trading products few had heard of had helped bring down the world economy.

When the Bank meets on November 3, interest rates are certain to rise significantly in a bid to push down inflation and the mortgage repayment crisis will begin.

Dr Ilzetzki continues: ‘In addition to that entirely predictable crisis – which I hope policymakers will get ahead of rather than wait until it explodes – there are unknowable snakes in the grass.


The towers of the Canary Wharf financial district are seen looking east from the City of London in London, England, on June 12, 2022. (Photo by David Cliff/NurPhoto)

There are fears of more turbulence in the UK’s financial sector in the coming weeks and months (Picture: NurPhoto)

‘We don’t really know what’s lurking in the shadows of the financial system and what happened this week with the pension funds is a good example of that. 

‘As far as I can tell there was no let’s say monkey business involved here – the pension funds were doing their best to try and manage the pensions in a sound way – but when the financial markets move so rapidly, there are always going to be institutions that are just not prepared for the new realities. 

‘That was what we saw this week with the pensions. I would bet that there are also some unknown, still to be seen vulnerabilities in the UK financial system that will be uncovered in upcoming weeks or months. 

‘But given that they’re unknown, it’s hard to predict how severe they would impact.

‘The mortgage problem is a known known, so we’ve got to address this right away and get banks and mortgage providers ready for households that are just unable to pay.

‘The unknown unknowns? Well, I hope our financial regulators are doing their jobs.’

Get in touch with our news team by emailing us at [email protected].

For more stories like this, check our news page.

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