Legend has it that when David Astor was editor of The Observer, someone had to explain to him what a mortgage was. "Do you mean to say that you are all in debt?" he asked his staff. David Cameron - who's inherited £30 million and is married to David Astor's step-great niece - seems to be similarly astounded by his inferiors' indebtedness:
This Government has presided over a huge expansion of public and private debt without showing awareness of the risks involved...Under Labour our economic growth has been built on a mountain of debt.
What this misses is that increased government and consumer debt has been a way of reducing aggregate economic risks. After 2001, there was a danger that falling shares prices and lower capital spending as the tech bubble burst would plunge the UK (and world) economy into deep recession. This was averted by increased government borrowing and lower interest rates that stimulated the housing market. Increased debt was therefore a force for stability.
And as any family with debts knows, higher debt makes us more vulnerable to the unexpected. In short, the increases in debt in the UK have added a new risk to economic stability.
This seems to assume - as the managerialist class must - that people are incapable of judging risks for themselves. But what if consumers have decided that it's safer to borrow more - because the risk of unemployment is low and because stable-ish inflation means stable (and lower) real interest rates? Higher consumer debt might be a sign of confidence in New Labour's macroeconomic management, not (just) a threat to it.
Over the past decade, the level of personal debt has trebled, to £1.3 trillion. We owe more than our entire national income. So now when interest rates go up, the impact on homeowners escalates.
True. But over the same time our bank deposits (let alone other wealth) have also doubled. At £910 billion, these deposits are more than a year's disposable income.
Insolvencies have quadrupled in the past 10 years, and are now at record levels. Someone goes bust in the UK every seven minutes.
What this doesn't say is that part of the reason for the rise was the relaxation of bankruptcy laws in 2004. The number of insolvencies has actually fallen in the last six months, by 9.3%. And in Q2, the 26956 insolvencies in England and Wales represented around just one in 1600 people. That suggests insolvency is an idiosyncratic problem rather than a macroeconomic one.
There are plenty of reasons to deplore New Labour's economic record. But higher consumer debt isn't one of them.
C'mon. New Labour keeps claiming that Gordon Brown, unlike the wicked Tories, has abolished Boom 'n' Bust so I figure that we are entitled to probe why are seeing all this turmoil in the financial markets and ask about just who presided over the unsustainable House-price Bubble, about how personal debt grew to over £1 trillion and about whether the magnitude of personal debt is now a looming threat to the stability of the economy.
Seems to me that GB can hardly claim due credit for the continuing growth of the British economy ever since we dropped out of the European Exchange Rate Mechanism in September 1992 but repudiate all responsibiliy for the emerging downsides.
Try:
"An American crisis that could harm an awful lot of reputations here — including Gordon’s"
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2469833.ece
Posted by: Bob B | September 17, 2007 at 01:20 PM
I'd argue that GB shouldn't take credit for what's gone right either, eg this:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2006/08/little_thanks_t.html
Politicians over-rate their impact upon the macroeconomy, for both good and ill.
Posted by: chris | September 17, 2007 at 02:08 PM
As long as foreign indebtedness hasn't changed much then any rise in borrowing will mean a rise in savings. But I suppose its the distribution that matters, no? If there are 'savers' and 'borrowers' in two very distinct camps, then that might be a problem (it might not, it could be the 'old' and the 'young' which would make sense).
I agree about Cameron though, and Osborne, one would imagine.
Posted by: Matthew | September 17, 2007 at 02:09 PM
Bob B "we are entitled to probe why are seeing all this turmoil in the financial markets and ask about just who presided over the unsustainable House-price Bubble"
It's two sides of the same coin.
You can only regulate banks up to a point, they will always be one step ahead. So given that you can't stop people lending and borrowing, what a government can do is to have a land value tax that increases when land values increase (and using proceeds to replace Council Tax/IHT/SDLT/CGT and to fund e.g. local authority spending).
Thus dampening house price bubble (that causes all sorts of grief) and redirecting cheap borrowing into either productive activity (good) or share price bubbles (in which case, not so good, but who cares? You don't have to buy shares do you? You are better off paying off your mortgage).
Here endeth today's lesson.
Posted by: Mark Wadsworth | September 17, 2007 at 08:41 PM
Mark - If there is any political or economic problem for which a land value tax is not a complete solution, please let me know.
Posted by: Bob B | September 17, 2007 at 11:04 PM
Alistair Darling, the Chancellor, on Monday offered to guarantee all Northern Rock deposits, regardless of size, which amounts to an improvement on the regular guarantee:
"Banks are covered by the Financial Services Compensation Scheme.
"If you have up to £35,000 on deposit then you would, in the event of insolvency, get back all of the first £2,000 in your account and 90% of the next £33,000.
"That would be a total of £31,700 per person in compensation, or to look at it another way, a loss of £3,300.
"But any money above the £35,000 threshold might be lost altogether."
http://news.bbc.co.uk/1/hi/business/6994746.stm
The question is, what is to be done if the enhanced guarantee doesn't work and the queues of depositers withdrawing their deposits with Northern Rock don't abate?
Suggestion: Offer a guarantee + 10 per cent?
Comment.
Posted by: Bob B | September 17, 2007 at 11:22 PM
I think the government will end up nationalising the bank, if not in name.
Posted by: Matthew | September 18, 2007 at 10:58 AM
What Mathew said - it is the distribution of debt that is the key to it. And how big it is relative to income. You wouldn't want to be like the US owing lots of money to foreigners (an enormous amount relative to exports) having blown it on current consumption.
Posted by: reason | September 18, 2007 at 11:14 AM
In the US nearly 750,000 owners are in trouble – this is up about 96% for the first eight months of this year (2007). You must first asses your ability to make payments on your loan before you consider the steps that need to be made to stop foreclosure and the refinance options available to you. If you are buried in debt then you may not b able to carry the burden of even a lower payment. You must ask yourself if the lower payment is better for your budget than getting in a lower rent situation. If saving your home from foreclosure is a viable option to consider then you must make contact with the lender who is trying to foreclose on your property. It is likely that they are already in contact with you so this may be easy to do. If you are several months over due you might need to make up a payment or two to negotiate with them to stop foreclosure. You can also show proof of your progress to refinance your home and stop foreclosure. The loan company or lender you are dealing with may have private investors that can help you out. Many foreclosure investors are in constant contact with lending institutions seeking loan opportunities for foreclosure properties.
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Posted by: new homes for sale | April 15, 2008 at 10:52 AM
The people are incapable of judging risks for themselves. But what if consumers have decided that it's safer to borrow more because the risk of unemployment is low.
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