The next credit crisis will hit consumers, not banks

Packman looks at the findings that the boom before the bust was caused by growth in the consumer credit market, and asks what happens when it inevitably fails.

 

Recently, I reviewed Stewart Lansley’s new book The Cost of Inequality.

In it, he notes that the share of the net income of the UK’s top 1 per cent shrank from 12.6 per cent in 1937 to 4.2 per cent in 1978. It then started to rise and then up to 10 per cent by 2000 – a similar figure to 1930. The share of the top 0.5 per cent followed suit.

All the while, the share of the wealth of the bottom 50 per cent has been shrinking from 10 per cent in the 1980s to six per cent in 2002, and real incomes in UK have been near-stagnant since 2005.

The boom period from 1997 to 2007 managed to keep most people happy, most of the time, not by facilitating wage increases, or even decreases in wealth inequality; in fact, as Matthew Whittaker for the Resolution Foundation pointed out:

“Incomes of the bottom three-fifths of the UK population failed to keep rise with rising prosperity and their share of national income fell from 40 to 33 per cent between 1977 and 2008”.

No, it was sustained by, as one report notes:

“The dramatic growth in the mainstream consumer credit market.”

The foreward of the same report points out that:

Athough the UK’s “technical recession” has ended, for many the “practical recession” is in full swing with households feeling the effects of the economic crisis more sharply than they were two years ago.

We’ve seen how worrying household debt figures are, with forecasts showing a rise from 160 per cent of income last year to 173 per cent by 2015. The silver-lining, however, was that at the start of this month, the UK had seen a three-year low on personal insolvencies.

But to this, Joanna Elson, chief executive of the Money Advice Trust, added:

“It is noticeable that the fall in insolvency figures is driven entirely by a drop in bankruptcies, whilst the cheaper remedies, Individual Voluntary Agreements and Debt Relief Orders (DROs), have both risen.”

In short, by saying we’re at a three-year low in insolvencies misses out a vital element of the whole picture.

However, more worrying still, the extent of the household debt crisis relies on what action the government will take on the economy right now.

When I spoke to professor George Irvin recently, the economist and author of the 2008 book Super Rich, he told me:

If national income is to start rising again, either government must increase borrowing for investment (increase public debt) or households and/or firms must increase borrowing (private debt).

The problem with the latter course of action is that the financial and manufacturing sectors are awash with cash, but they’re not investing. That leaves government as investor of the last resort, but Osborne doesn’t want government to invest!

We’re gridlocked. And who will pay? Lower and middle income households will. It’s the effective privatisation of debt. The other debt crisis.

In the report by the University of Bristol and the Money Advice Trust, they pointed out that in 2011 there was the widespread perception that mainstream consumer credit was difficult to come by. Furthermore there was the perception that if a personal loan was applied for, in the risk averse banking age, and turned down this would inevitably damage their credit rating.

At the same time as this, a new sector, a foreign import from the US, offered unsecured loans, no questions asked, quickly, but expensively. It’s the payday loan industry.

Peter Crook, the chief executive of Provident Financial, the market leader for doorstep loans, said after assessing the effect of George Osborne’s Spending Review of 20 October, 2010:

“We may well see a growth in our target audience.”

Provident have indeed been growing – though I think it is now more than ever, in the “practical recession”, that a growth in his target audience will be seen.

The credit crunch affected world economies, and everyone knew about it. This coming household debt crisis will affect many of the most vulnerable and excluded in society, and it may be easier for the government to subtly ignore it. They couldn’t do it with the last crisis, but they could with this one. It’s up to us to make sure they don’t.

See also:

“You’ve never had it so good” has never been so wrong: Review of The Cost of Inequality – Carl Packman, February 19th 2012

Class, inequality and the state at the Fabian conference – Carl Packman, January 17th 2012

Inequality must be ended to prevent another financial crisis – Stewart Lansley, January 11th 2012

For our economic health we need a one-off tax on the one per cent – Stewart Lansley, December 10th 2011

Everything you know about the ‘Thatcherite consensus’ is wrong – Stewart Lansley, October 6th 2011

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