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Dec 27, 2007
Behind every statistic on debt lies a very personal tragedy. An estimated 45,000 homes will be repossessed next year. In January the Consumer Credit Counselling Service will receive a predicted 34,000 calls from the desperate and the indebted.
Such indicators are seized upon by those attempting to read the runes of our increasingly fragile economy. But the patterns they find mask individual stories of homes lost and furtive calls to faceless debt counsellors.
The banks are the easy villains of the story, doling out cheap credit to anyone who asked nicely, regardless of their circumstances. But this is a subtler story than a pantomime of riches-to-rags consumers and the big bad bank manager. For every blameless victim ringing the helpline, there are countless more who knew their plastic cards had lost all elasticity and their mortgage was an albatross, but kept on spending.
In the first hour of yesterday’s sales, £1,000 a minute was spent in House of Fraser at its Lakeside, Thurrock store. Footfall was 29 per cent up on last year. Credit crunch – what credit crunch? The headlines may blaze with warnings of economic meltdown, but the car park at the shopping centre was nearly full by 7am. We are like addicts, embarking on a shopping spree to sate our desires, despite knowing that the comedown is going to hurt. It seems, this year, as if fear of that comedown is perversely fuelling even more excess than usual.
Our relentless desire to spend and the complicity of the banks have forged a £1,000 billion debt mountain; now the avalanches are gathering momentum. The debt mountain was built on the ready availability of cheap credit and a cultural shift in the way we perceive money. Debt stopped being something we acquired out of necessity and repaid with alacrity. Rather, it has become normal to be permanently indebted and to service this debt by moving it continuously between lenders happy to play the game in their bloody battle for market share. But the lenders are no longer willing or able to play. Five interest rate rises and a credit crunch are putting the squeeze on borrowers.
In the unfolding story of our debt crisis, we have reached the dramatic apex. We are poised at the moment of tension, not quite sure if the ending will be sad or happy. We have victims aplenty, even if some of them are simultaneously the villains of their own story. We have a cast of villains ranging from Adam Applegarth, the chief executive of Northern Rock, to the now humbled Masters of the Universe who brought world debt markets to a shuddering halt from their Wall Street towers. We have sufficient villains to keep us booing and hissing until next Christmas. But do we have a hero?
The candidates are hard to spot. The tripartite authority in charge of our finances consists of the Treasury, the Bank of England, and the Financial Services Authority. None of the triumvirate of Alistair Darling, Mervyn King or Hector Sants can be said to be bestriding the financial world like a colossus. Mr Darling, in particular, has enjoyed a tenure more hapless than heroic.
It is easy to knock them. But there is little in the UK financial system so cynical and downright nasty as the US sub-prime mortgages that precipitated this crisis. Labelled Ninja mortgages – no income, no job, no assets – these were loans sold to poor Americans regardless of whether they could afford the repayments. Lenders did not care if they could meet the repayments. The whole idea was that the price of the properties would rise and that any repossession value would more than compensate for any bad debts.
Back home, while Northern Rock is proof that outwardly sophisticated financial engineering can bring down a company under the noses of the tripartite, it is difficult to envisage the sale of individual products as invidious as Ninja mortgages in the UK. Our home-grown scandalous offerings, such as split-capital investment trusts, were not callously designed using the premise that profits are best reaped from a built-in failure mechanism.
But there is no room in the current climate for complacency and there are areas of real concern; chiefly the sale of individual voluntary arrangements, a form of bankruptcy-lite, used by debtors as an alternative to insolvency. The murky world of IVAs needs looking at if the coming financial storm is to be contained.
While the primary story remains the collapse of the debt mountain, sub-plots are emerging about the kind of sales tactics used to persuade desperate debtors that IVAs are their best hope. Lenders are closing their doors to practitioners of IVAs, and yet the ones who survive operate largely in an unregulated environment. This must change.
Our putative heroes have had some severe embarrassments this year, and it will be difficult to make it to the end of 2008 with their heroic credentials buffed and burnished. But they have to start their quest somewhere.
Source:
http://business.timesonline.co.uk/tol/business/columnists/
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