Monday, April 28, 2008

It's really a debt crisis !

We are all now aware of the credit-crunch. The official explanation, as far as I can gather, is that of blaming the Americans for their sub-prime mortgages. If you don't buy that then some complexity is added about slicing and dicing these mortgages up into a financal product that allows the debt to be sold (or bought perhaps ?) but with no one knowing who owes or owns what.

Still not convinced ? The you should blame all those evil young men with their testosterone in banks and perhaps city bonuses and the asymmetric nature of risk and reward in the city. ( I could almost buy into this idea ).

But what about our attitude to debt ?

After all we are calling the current problem a credit crisis. The problem being that there is suddenly no-one willing to lend money without a clear idea of what backs that request for cash (except central banks willing to either turn trees into bank notes or get the tax payer to cough up). But the underlying problem is we, as a society, have long term debts fuelled by short term credit, and we can't pay back the debts without some tricks like inflation or defaulting.

In addition we seem to, as a society, load up with all the debt 'we can afford'. In the economic competition for assets like houses - he who takes on the most debt wins the house.

It appears that the old building society model - savings and mortgages in balance - has been replaced with vast piles of foreign cash. Which foreigners have all the cash ? It'll be the gulf Arabs and China. They have been smart - getting out without having to cover the underlying problem of the debt - we're now doing that as tax payers.

They have learnt their lessons, it wasn't always like that - the last major debt crisis was in South America, and was funded by oil money badly lent out.

There are those worried about the large debts being taken on, by individuals and governments. The Archbishop of Canterbury has sensed something is wrong - but reaches for the usual woolly Marxism as his answer.

But debt is itself a problem, as the Arch Druid should understand! You are under obligation when you are in debt. In old testament times debts were not allowed to go on beyond a certain time period 7 years and money lenders weren't exactly popular in Jesus time. Islam outlaws it - but there are people willing to get round that. Perhaps Williams should focus on this aspect.

But we live in a world where being in debt in now normal. I can remember how keen the blue chip company I used to work for was to encourage its graduates to buy houses - get a mortgage and you won't leave (didn't work in my case). I almost wonder if it isn't seen as a wider stabilising factor by government.

Yet we see it as normal that everyone has a mortgage. If you don't you're missing out on the rising property market, and worse it will be impossible to climb aboard latter on.

But what if credit wasn't so freely available ? The answer appears to be the value of some things (assets where their is competition due to scarcity) will drop. Houses, for example, might cost less - as long as immigration (demand) is managed. Surely this would rebalance our society for the better ? People could buy their first house without signing away their future life's earnings for the loan which in effect comes from a foreign country.

So would tighter credit controls mean we would have cheaper houses ? (Sounds good). So who benefits if credit for house buying is allowed to be supplied in industrial quantities ?
  1. The banks - who charge for all this.
  2. The government - who taxes in proportion to property value (stamp duty, council tax, and being English old and ill NHS tax ).
  3. The lenders who get interest.
  4. Asset holders who buy cheap and can sell in a rising market.
I suspect we justify the damage this debt does by item 4. We all hope to enjoy large unearned benefits from holding property (greed - another point for you to note Dr Williams). So we are all in debt. Apparently many people with mortgages own less than 20% of their homes.

So here's the political (and moral Dr Williams) question - should the state allow credit to be housed around like this, especially considering who is ultimately supplying it ?

Eventually the left is going to come up with their answer, when they get round the problem of New Labours very close relationship with the 'Financial Industry'. ( By the way - Labour is almost insolvent and owes millions of pounds to a few key individuals. They are hardly in a place to lecture just yet - but soon they will dump Gordon Brown and New Labour and blame the whole episode on everyone else. Then Socialism will return to its vindictive roots.)

At that time the right of centre will need a better answer than just let the markets decide ( which clearly no government of whatever political make up is willing to do when push comes to shove and high street banks look like going bust ).

We need some thinking on debt, and the lack of savings. I can't help thinking Mrs Thatcher would have explained all this is straightforward terms that would have been denounced by every academic economist, and any hairy bishops, in the land and then proven to work - much to their annoyance.

Debt is the elephant in the room right now ... how odd that we are drowning in it and yet talk of credit.

Note: Sorry this is a little rambling - but I'm trying to get my head round what's going on at the moment - feel free to add links in comments to any good commentaries you've seen.

PS I know someone at a local Citizen's Advice and apparently the enquires on debt problems are rocketing right now ...


wildgoose said...

Absolutely. I've been telling all and sundry that the current crisis was on the cards for well over a year. I make no special claims of prescience - you only have to look at how badly Northern Rock's share price performed in the months leading up to the crisis starting in August. Lots of people knew, they were just playing chicken, not wanting to be the first to bail out whilst there was still some profits to be made.

Fortunately I learned my lesson early. I bought my first house in 1990 just as the market peaked. I was briefly paying a 16.9% interest rate. The recession kicked in and there was little or no work and as a recent graduate I was starting with no financial assets.

Having done that house up, (new bathroom, new central heating boiler, etc.) I sold it at a loss in 1996, buying my current house in effect as a first time buyer all over again - but with the aim of paying off my mortgage as fast as I could, (which I nearly have).

Fortunately, by not taking on huge debts I should be in a position to ensure our 3 children don't start their working lives in huge debt from tuition fees (which are free to Scots of course).

Sooner or later debt has to be repaid. I just took the attitude "If you owe you are owned".

aSteve said...

I think you're uncovering the same stuff as I have over the past year.

The one 'elephant in the room' that I see you are missing is securitisation.

I highly recommend this site - it is, as far as I can see, the body promoting securitisation within the financial services industry. The quarterly statistical releases are eye-watering if you read them from the perspective of your blog entry.

P.S. I found you from Alice Cook's blog - where I also replied.

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