Business Economics 2 Essay Example | Topics and Well Written Essays - 1500 words - 1

Business Economics 2 - Essay Example 70% of bank funds were diverted to real estate mortgage. The income of families and household was diverted from buying goods and services to buying properties- houses and buildings. A large chunk of money was used in payment of debt service to banks and financial companies. The payment of debt service by the economy’s non-financial sectors interrupts the circular flow of income supposed to exist between produces and consumers. The problem of financing network became more complex. Britain faced acute credit crisis in the recent periods caused by slack lending practice by banks, financial turmoil caused by dearth of liquidity, extending risky loans to unpredictable parties and passing on to other institutions, excessive dependency on credit rating companies, over dependence on in financial markets or inadequate liquidity risk management. This has put many sectors of the economy at risk such as  · UK commercial property sector, Stock markets, First-time buyers, Buy-to-let investors, UKs sub-prime borrowers and many others. There was exponential growth of savings and debt in UK market. They were used mainly for financing the purchase of real estate, stocks and bonds. Net savings don’t increase in the economy because it is used in re lending for or refinancing assets. This process does not necessarily promote new investment in tangible assets or new factories that add to new employment. No more output is added, no more factors of production is paid. Consumption from household, which accounts for about 70% of GDP, is the basis of production. Exports add to the consumption share because it takes off consumption of other country’s consumption also. Consumption of UK in recent years had been 90% that was financed out of the real income of the country and not debt. Consumption by household should flow directly from