In this chapter of our unique guide to the financial crisis, Cashfloat – a responsible payday loan provider – discusses how the financial crisis affected families.
- Low interest rates did help those borrowers who were on flexible rate mortgages.
- Kt was difficult for those leaving unversity to find their first job.
All Areas of Society Tackle the Crisis
There is no doubt that the financial crisis of 2007/2008 shook up society and had an immense effect on all families whether they were middle or working class. As economic growth declined many ordinary people suddenly found that their financial situation was as perilous as that of someone who was out of work or in a low paid job.
Unemployment rates amongst the middle classes were set to rise. This is because the financial sector employed many of them. Unfortunately, the financial sector suffered the brunt of the initial job losses. Working class people also suffered as jobs became scarcer. People who had previously had a lot of faith in the banking system had their confidence shaken by seeing bank runs at Northern Rock. And, the reputation of security that the big banks previously enjoyed has not yet been restored.
Savings and Pensions Lose Worth
Ordinary families lossed confidence in banks and bankers. However, they were also suddenly alerted to the fact that their whole way of life was subject to how market forces operated. For example, banks advised people to put their savings into accounts that were tracking the stock market. They often found that they got back less than they had invested. Even though some investors got back their initial funds they felt very short changed. People promised these investors large returns after leaving the funds in an account for a number of years. But they did’t get that. Pension pots were also dependent upon how shares performed. Many prudent couples who had religiously put aside money for their retirement saw their pension assets fall dramatically in value.
There were guarantees by the government that the banks could not lose the first £50,000 of savings. But, interest rates rapidly decreased. This had an impact on how much income some pensioners received as they were using interest payments to top up meagre state pensions. Savings accounts were paying out sums of interest that were well below the rate of inflation. It thereby created a situation where the modest wealth of ordinary people was in decline. In addition to this, the value of homes was also declining quickly and the availability of mortgages was reduced.
Low interest rates did help those borrowers who were on flexible rate mortgages. But for those people who had opted for a fixed rate loan it meant that their repayments stayed the same whilst their income from savings radically reduced.
Decline in Economy Causes Unemployment
Once the crisis in banking made it difficult for businesses to get credit there was an immediate effect on investment and growth. This led to large scale redundancies. Some smaller firms went bankrupt and laid off staff. Others, cut down on staffing hours or reduced their total staff. In the public sector there was also a reduction on hiring new staff and this made it difficult for young people who had just graduated to get their first job. Government offices often take on a large amount of new graduates each year. However, the downturn in the economy meant that this was no longer an option. As the effects of the financial crisis took hold, some companies froze wages, cut down on bonuses and others decided to reduce the scope of any redundancy packages on offer.
This change in circumstances led to a general insecurity about employment and future prospects. While some families were able to take steps to try and minimise the impact of the crisis, others who had little or no savings felt helpless. They were at the mercy of whatever steps the government was going to take to find a way out of the situation.
The Financial Crisis Affected Families with Low Income
Families with low incomes were the worst affected by the crisis. Many people suffered from redundancies, house repossessions, credit card debt and they were struggling to pay monthly household bills. When household income reduces it also affects social issues. Many commentators predicted an increase in family breakdown with higher divorce rates and also an increase in the number of suicides. The double whammy for people who were working was inflation and low pay rises that often led to a black hole of debt.
Once the financial crisis had taken hold in the UK, the previous 15 years of growth came to an abrupt end. The government had to bail out the banks so that the banking system did not collapse. After an initial attempt to stimulate the economy through a reduction in VAT and investment in social housing and schools a series of austerity measures were put in place. It included deep spending cuts. This was a serious attempt to decrease the UK deficit and hope that the markets would gain enough confidence to restart investment in the country.
There were cuts to public sector jobs and to benefits for those out of work. More significantly, there was rise in the number of part time positions on zero hours contracts. This meant that those employed could no longer count on a regular wage. This could have meant they had to take out short term loans to survive until payday.. These measures further added to the insecurity felt by many families.