Thursday, 3 April 2008

A moratorium on personal credit

One shouldn't give an alcoholic a drink, and a bank should not give an insolvent debtor a loan. These are simple principles. At last, banks have begun to appreciate the importance of the second one.

Today, the Bank of England's Credit Conditions survey told us what newspapers were reporting for at least a month; the banks are pulling their mortgages and tightening their lending criteria. However, the main stream media greeted this news with horror. A typical hysterical response came from the guardian, who said:

"The credit squeeze on households looks set to worsen after lenders warned they expected a further reduction in the amount of money available to borrowers."

I see it differently. The credit squeeze is making it harder for largely insolvent UK households to bury themselves deeper into the debt mire. Less credit today means fewer problems down the road. So todays credit survey from the BoE was what I wanted to hear.

If I had my way, there would be a moratorium on all personal credit. No more credit cards, home equity loans or mortgages. If you can't afford to pay for it by saving, then you can't buy it. We need to go cold turkey to finally purge our credit addiction.

Happily, banks are beginning to agree with me and seem ready to accept the idea of a moratorium on household debt. Mortgage deals are being pulled, mortgage approvals are crashing towards zero, and credit card debt is actually falling in nominal terms. By the end of the year, we may have a zero growth rate for personal credit during 2008.

Yet, there are some who think that a sudden collapse of personal sector credit would seriously damage the economy.

The damage has already been done; asset prices are already seriously misaligned, our manufacturing sector has collapsed, we have 20 percent of the workforce in the unproductive financial sector, the current account deficit the second highest in sixty years, the exchange rate is sliding, our banking system is probably bankrupt, and inflation is rising. A further expansion of credit will only make things worse.

Instead, we need to make a painful adjustment. Like pulling out a tooth, it is better if it happens quickly. There is no point dragging this thing out. Today's news that the credit tap is finally being turned off is the first tentative steps towards confronting our collective problems with debt. At last, we are on the road to recovery.


Roy of the Rovers said...

I take it that you don't have a teaser rate mortgage that is about to adjust on you


Anonymous said...

I take it people who have knew what the word "teaser" meant as they signed the contract for the most important financial decision of their life


Markbaldy said...

To be blunt, I have no sympathy with those that are in debt.
It is these people that "paid the full asking price" for property (no matter how inflated that was), thus contributing to the house price bubble we have now.
As far as the economy goes, well that is a joke - it is based like you say on unproductive financial sector and consumer spending... ooops I meant consumer borrowing!
Get out of this one Gordon "miracle economy" (NOT) Brown !!!

APL said...

UKHB: "If I had my way, there would be a moratorium on all personal credit."

Have you ever considered the law of unintended consequence?

What you are observing are ignorant people , I don't mean that in the derogatory sense. Simply that by and large, they are ignorant of finance.

One of the best ways to learn something is through personal experience. By refusing an individual credit, you cheat them of the possibility to learn from their own experience. As a result you will end up with more financially ignorant people. Not what you want I think?