Monthly Archives: May 2016

Why mortgage rates will rise with Brexit


As we near the EU referendum, Professor Alan Gregory – Professor of Corporate Finance at the University of Exeter Business School explains why a vote to leave the European Union may result in our mortgage rates rising.

This post first appeared in The Conversation.Conversation logo

Alan Gregory, University of Exeter

How Brexit would affect house prices and homeowners is one of the big questions in the build up to the UK’s EU referendum vote. George Osborne has said that mortgage rates will rise if there’s an Out vote. Meanwhile, the Bank of England’s governor, Mark Carney, is currently reviewing the possibility of an emergency interest rate cut in the event of a Brexit vote. The two outcomes would seem to be contradictory, but this is a feasible outcome if Britain votes to leave the EU.

As with most issues affecting the economy, there are several factors at play. First off, there is an important difference between long and short run rates. One of the Bank of England’s main concerns is controlling inflation – something it does by manipulating interest rates. But interest rates do not exist in a vacuum. Exchange rates, inflation and interest rates are all related to one another. There is also the UK’s balance of payments problem, which could be of vital importance.

The UK’s current account deficit was at an all-time record £96.2 billion last year, equivalent to 5.8 per cent of the country’s total economic output for the year. That is one big chunk of the economy. Strangely, this in itself isn’t a problem as, provided capital can move freely, inward investment in the UK can plug the gap. That inward investment could be foreign firms investing directly in UK businesses or foreign investors buying UK government debt (known as gilts) if they are long term.

Unfortunately, this inward investment can very easily go into reverse. Most obviously, foreign investors can stop investing in new factories, and can move their production lines abroad. For example, the new Chinese owners of Sunseeker, a top-end powerboat manufacturer, have warned of precisely that danger. Similarly, foreign investors may choose not to buy UK government debt.

Substantial shock

All this matters greatly because, with the uncertainty surrounding Britain’s future, foreign investors are seeing investment in Britain as very risky. Investors do not like uncertainty, which abounds at the prospect of Brexit – particularly regarding what kind of trade deal the UK will manage to negotiate with the EU, and how long this will take. There is also likely to be a substantial fall in the value of the pound in the event of Brexit, making it less attractive to investors to make any UK investments in the run-up to the vote.

It is a given in finance that high risks demand high returns. Thus, in order to prevent an exodus of capital from the UK, foreign investors would need to be offered increased returns. This translates into higher borrowing costs for the UK government, and higher costs of capital for UK businesses. And if UK firms have to provide higher returns to banks and shareholders, that means investments in business assets look less appealing. The result would be less growth and fewer jobs being created.

The other immediate problem the UK would face in the event of a Brexit vote stems directly from the projected fall in the value of sterling. The consensus forecasts are that the exchange rate would fall from its current value of around £1 for €1.27 to something more like parity with the euro. The latest forecast from the National Institute of Economic and Social Research think tank is of a 20 per cent fall in the value of sterling. Prior to opinion polls suggesting that exit from the EU was a distinct possibility, the level of the pound was around £1 to €1.40. All this adds up to a sharp increase in the cost of imported goods, including oil, industrial raw materials, clothing and food.

Governor of the Bank of England, Mark Carney. Bank of England, CC BY-NC-ND

Bringing all this together, Britain will face a substantial short-term economic shock if it votes to leave the EU. There is simply no credible argument that says otherwise, though there are arguments about the scale of the effect and the long-term consequences for the economy.

To mitigate against this shock, the governor of the Bank of England would naturally want to cut interest rates in an attempt to stimulate the economy, although with rates at rock-bottom there is little room for manoeuvre. The bank will be concerned about the potential inflationary impact of the fall in the pound. It must balance economic growth (which would normally suggest lower interest rates were needed) with inflation risk (which would normally trigger an increase in rates). Then there is the concern that foreign investors will demand higher returns on UK government debt.

Meanwhile, lower short term interest rates will hurt bank profits. The only way banks can recover these profits is by lending at higher rates, while offering lower rates to savers. The sad irony is therefore that neither savers nor borrowers would gain from Brexit.

A world of higher short term borrowing costs, higher long term borrowing costs and lower savings returns looks an all too plausible outcome. At the same time, investment in jobs is choked off, economic growth declines, and inflation starts to raise its head again. All combined with a worsening balance of payments position and a sterling crisis.

We have, of course, been here before – in the bad old days of the 1970s – so we know that this really can happen in the UK. The ultimate irony is that if polling data is to be believed, it seems to be the older voters, having lived through all that, that are the ones keenest to go back to it.

The Conversation

Alan Gregory, Professor of Corporate Finance, University of Exeter

This article was originally published on The Conversation. Read the original article.

How to save underground railways from climate change flooding

Professor Dragan Savic is Professor of Hydroinformatics in the College of Engineering, Mathematics and Physical Sciences‘  Engineering department. He is also the founder, and co-director, of the Centre for Water Systems.

In this blog, Professor Savic discusses the risks posed to urban travel systems, by flooding; including, the financial implications. 

This post originally appeared in The Conversation.Conversation logo


Dragan Savic, University of Exeter

When superstorm Sandy hit New York in 2012, it caused a massive 14-foot storm surge. Several New York City subway stations were flooded and the subway was shut down for days. Although the authorities prepared well for the incoming storm, it still resulted in some $5 billion in damage to the transport system. In other words, it could have been much worse.

Water management is only going to become more important as extreme weather events increase due to climate change and the proportion of people living in cities grows to more than 70 per cent by 2050. Worse still, urbanisation increases the risk of water disasters such as floods because development reduces the amounts of permeable surfaces where water can soak into the ground, creating runoff that contributes to flooding.

This poses a particular risk to urban subways and underground railway systems, which can suffer flooding from various sources including tidal surges, river (fluvial) flooding, surface water (pluvial) flooding and burst water pipes. London Underground recently identified 57 stations that were at high risk of flooding, saying it was “only a matter of time” before heavy rainfall caused serious problems for the city’s subterranean transport network. So what can city leaders do to meet this challenge?



How deep is this issue?

Some cities are already used to dealing with flooding. The New York subway uses 700 pumps that typically drain on average around 50 million litres of water (nearly 20 Olympic-sized swimming pools) a day from the network. Before the Sandy flood, the city implemented $30 million worth of projects to prevent flooding, targeting the most flood-prone stations, installing valves to keep pumped out water from re-entering the subway and improving sewers to avoid future flooding. But the subway was still severely affected by flooding because its pump system couldn’t work once its power was knocked out.

Citizens of Taipei in Taiwan are accustomed to severe weather associated with typhoons, which the country experiences on average three to four times a year. And around 2 million passengers use the Taipei Metro (MRT) every day. As a result, the risk of flooding is high on the agenda for the MRT planners and managers.

Their stated goal is to protect against floods that reach 50cm higher than those likely to occur once in 200 years. To do this they have raised all station entrances and network openings by between 60cm and 120cm above the adjacent ground level, as well as installing flood gates and flood control structures along the river.

But when Typhoon Nari swept through Taiwan in September 2001, with one of the highest rainfall records in northern Taiwan, the resulting flash floods and the failure of several pumping stations flooded a number of MRT stations. Flooding caused 94 deaths and approximately $800 million of damage.

Thames Barrier
Andy Roberts/Flickr, CC BY

In London, this kind of flooding is highly unlikely due to the Thames Barrier, a kind of closable river gate that spans 520 metres across the River Thames and protects 125km² of central London tidal surges. This means that Underground stations within the tidal Thames floodplain are pretty safe. It was designed to protect against all but the kind of floods that would likely occur only once in 1000 years.

But other rivers in London that flow into the Thames, such as the River Lee, the Silk Stream and the River Wandle, still pose some risk of fluvial flooding. Climate change is also making extreme rainfall more likely in the UK, which in turn might increase the risk of surface flooding of Underground tunnels. Even more likely is flooding from London’s water 31,100km of water mains. For example, in June 2012 water from a burst water mains founds its way into the tube, flooding the Central line for 26 hours.

Not an easy fix

In principle, there are two ways of mitigating flood risk: structural and non-structural. Structural measures include engineered solutions to reduce or avoid possible impact of flooding, such as building levees and tidal barriers. Non-structural measures don’t involve physical construction but are instead about reducing risks and impacts in other ways, through policies and laws, public awareness and education. This includes things such as making sure building work considers its impact on flood risks, preventing loss of permeable surfaces, and better forecasting and early-warning systems.

Several measures apply directly to underground transport systems. For example, cities can install backup power for pump systems to reduce or avoid the potential for infrastructure damage when power outages occur, and clear flooded tunnels more quickly. Similarly, flood gates and raised entrances at stations could allow the underground transport system to continue operations even during floods.

Some new technology includes subway “plugs”, being developed by the US government, which look and work like big balloons. They can inflate in just a few minutes to help prevent water from entering underground tunnels. When not in use, the plug packs down to a small storage space in the tunnel, ready for remote, immediate inflation in an emergency.

But for all this useful engineering, we do have to realise that there is no feasible way to provide total flood prevention and there will always be some risk of flooding. That means we need to become more resilient to flooding when it does occur through prevention, preparation and planning. This way we can develop early warning systems, limit exposure to flooding and the damage it causes, and organise more effective recovery.

The Conversation

Dragan Savic, Professor of hydroinformatics, University of Exeter

This article was originally published on The Conversation. Read the original article.

Why give to charity? A Romantic view of helping the needy

Dr Andrew Rudd is a Lecturer in the College of Humanities’ English department; his research explores the moral imagination’s role in shaping literary cultures and communities,

This post first appeared in The ConversationConversation logo


Andrew Rudd, University of Exeter

“Is it possible I could have steeled my purse against him?” the Romantic essayist Charles Lamb asked in 1822, writing about a man who sat each day by the road begging alms. “Give, and ask no questions.” Today, charities must answer plenty of questions before they can persuade an often wary public to untie their purse strings.

The charity sector as a whole is facing a wave of scrutiny. A glance at some recent scandals suggests that the root of this discontent lies in a perception that the direct connection between the individual giver and the recipient has broken down; that the charity is not acting as we would if we were delivering the aid ourselves. On an almost daily basis, we read complaints that charities are too large, or spend too much on back-office costs, or use aggressive fundraising techniques, or have become distracted by political campaigning.

‘Give, and ask no questions.’ enki22/flikr, CC BY-ND

The government’s commitment to spend 0.7 per cent of GDP on international aid rankles with many because taxpayers have no direct control over how the money is spent, or whether it should be spent at all. And the collapse of Kids Company in 2015 sparked further questions and concerns about how charities operate.

And yet the idea that charitable giving is something we weigh up in our own minds is a relatively recent invention. Traditionally, the church taught that it was good to give to charity for the benefit of one’s soul, no questions asked. It was only after the Enlightenment and the French Revolution, when traditional sources of authority began to fall away, that individuals had to make up their own minds about when to give to charity and why. The Romantic movement, which reflected a new focus on emotion and individualism, has a lot to teach us about the questions we tend to ask today when giving to charity and the reasons why we give to charity at all.

Seeing and giving

William Wordsworth, contemplating the ruins of Tintern Abbey (once a centre of monastic almsgiving) wrote that the “little, nameless, unremembered acts of kindness and of love” that make up the “best portion of a good man’s life” could be found in the natural world, now that religion could no longer provide all the answers. For him, nature could inspire moral goodness just as Tintern Abbey’s monks drew inspiration from daily prayer.

In another poem, The Old Cumberland Beggar, Wordsworth wrote that seeing the objects of charity kindles benevolence in us and throughout the whole community. The visible presence of poverty reminds us of the good we have done and what we have yet to do.

But what if our minds are in no fit state to reshape society in our own image, asked John Polidori in his lurid tale The Vampyre? His bloodsucking villain Lord Ruthven (modelled on Byron) lavishes “rich charity” on the “profligate” and the “vicious” man in order “to sink him still deeper in his iniquity”, while the virtuous man who has suffered innocently is turned away “with hardly suppressed sneers”. Polidori’s nightmare philanthropist spends money on the worst possible causes, reminding us how individual caprices can skew charitable priorities.

Charles Lamb. Wikimedia Commons

Lamb’s essay, A Complaint of the Decay of Beggars in the Metropolis, tried to banish such egotism. He argued that begging was “the oldest and honourablest form of pauperis” and taught us not to value our own dignity too highly. The “all-sweeping besom [broom] of societarian reformation” is what happens when we think we know best, tidying away the emblems of poverty that act as “the standing morals, emblems, dial-mottos, the spital sermons, the books for children, the salutary checks and pauses to the high and rushing tide of greasy citizenry”.

For Lamb, the beggar was a defiant figure – “the only free man in the universe” – and it is better to be deceived by fraudsters than not to give to charity at all.

Romantic literature teaches us that many concerns about charities today, such as how effectively money is spent, are perpetual ones which, extreme cases aside, we should learn to accept. It reveals to us how important our feelings have become when we decide how to give to charity. But as Lamb wrote, we are not always in the best position to judge what needs to be done. If we had time to do everything ourselves there would be no need for charities at all. Sometimes it is better to step back, accept that running a charity isn’t easy and let good charities get on with the work on our behalf.

It also reminds us that charitable organisations are filling in for individual acts of charity that we cannot perform ourselves. By pointing out the power and pitfalls of imagination, the Romantics help us to navigate the complexities of the charitable encounter and to know when to step back and let a responsive and realistic charity sector carry out its work.

The Conversation

Andrew Rudd, Lecturer in English, University of Exeter

This article was originally published on The Conversation. Read the original article.

Future of religious education under threat from drive to make all schools academies

What impact might converting schools into academies have on religious education? Dr Rob Freathy, Associate Dean for Postgraduate Research and Deputy Director of the University of Exeter Doctoral College, unpicks the Department for Education’s white paper to look at the risk of alienating faith groups

 This post first appeared on The Conversation Conversation logo

Rob Freathy, University of Exeter and Stephen G. Parker, University of Worcester

Religious education is no stranger to controversy. Determining which religions should be studied, and how and why, is often a fraught process, particularly where the teaching of certain religious beliefs over others is concerned, or if children are being indoctrinated into a particular faith.

Despite the importance of making sure young people today have a good level of religious literacy, the recent Department for Education white paper, Educational Excellence Everywhere, makes no reference to religious education (RE). But its proposal that every school in England should become an academy by 2022 has important ramifications for the subject.

Since 1944, local education authorities (LEAs) have been required to produce agreed syllabuses for RE in state-maintained schools without a religious affiliation. These are agreed unanimously by representatives of different religious persuasions, alongside teacher associations and the LEA. Since 1988, LEAs have also been required to establish Standing Advisory Councils on Religious Education (SACRE) to advise the local authority on matters connected with RE.

But academies and free schools, whether with a religious affiliation or not, do not currently have to follow an LEA-agreed syllabus for RE. Anecdotal evidence suggests that many such schools are continuing to do so, even though there is no statutory requirement. It is possible, however, for other schools to exploit the available freedom and develop their own syllabuses. In such cases, we would not know what aims, methods and content for RE each school is selecting for its lessons. This presents a risk.

The white paper calls for the establishment of a clearly defined role for local government in education more generally, but says nothing about RE. This is a glaring omission.

Still at the centre of British life?
John D F/, CC BY

Religious powerbroking

For more than 150 years, the position of religion in publicly-funded schools has been a matter of profound controversy – so much so that a dual system of church and state schools emerged. When the 1902 Education Act created LEAs and gave them responsibility for funding church schools through local rates, it met with opposition from non-conformists and secularists. This was vociferous enough to dissuade the government from attempting significant educational reform for the next 40 years.

Later, in the period between the two world wars, when LEAs sought to establish secondary schools, they met with opposition from Anglicans who were worried about the RE that secondary school pupils would receive. In certain areas of the country, the support of Anglicans was obtained once they had been given the opportunity – alongside non-conformists, teachers and local councillors – to determine the RE syllabus provided in LEA primary and secondary schools. So locally agreed syllabuses emerged as a political means of managing religious sectarianism to enable educational reform to occur.

This was never more appreciated than in World War II, when the population became galvanised around a vision of social, educational and spiritual progress. It was in this context – in fear of communism, fascism and Nazism abroad – that daily collective worship and weekly RE lessons were made statutory in LEA schools in the 1944 Education Act.

A lot has changed since that act was passed. England has experienced religious pluralisation and a de-Christianisation of society. At the same time, there has been a centralisation of educational policy, devolution of powers to schools and the establishment of non-Christian faith schools.

But there have also been continuities in the form of the established Church and political rhetoric around “Christian Britain”. Nor has religious controversy disappeared, especially around the powder keg of religion in schools – as the allegations over extremist teaching at schools in Birmingham in the Trojan Horse affair illustrated. So it is still vital that politicians negotiate religious differences with caution and careful consideration.

Risk of alienating faith groups

If agreed syllabuses and SACRE are now to be replaced by a new statutory structure for determining the RE curriculum, then those responsible for planning these new arrangements will have to show the same political nous and fervour as the architects of the 1944 Education Act. If no such statutory structures are put in place – to provide checks and balances for the RE curriculum – then there is a risk that individual schools might ignite religious controversy in the way they teach the subject.

Even if religious groups no longer continue to have a statutory voice in determining the RE curriculum, it is probably wise to develop a new local or national mechanism. Through this, religious and other communities with a vested interest in the subject could enter into dialogue with those with responsibility for determining the subject’s aims, methods and content.

The alternative is to disenfranchise and marginalise faith communities, creating less mutual understanding and more disagreement.

The Conversation

Rob Freathy, Associate Dean for Postgraduate Research and Deputy Director of the University of Exeter Doctoral College, University of Exeter and Stephen G. Parker, Professor of the History of Religion and Education, University of Worcester

This article was originally published on The Conversation. Read the original article.