When Provident Financial lost £1.7bn in share value a little over a week ago, a handful of people asked whether this was a Northern Rock moment. The Provident extends high-interest loans to low-income people, and as such could be seen as a bellwether in the manner of a sub-prime mortgage company, the first to go under when debt becomes unbearable, the signal that credit is, once again, about to crunch.
The immediate anxiety, voiced by the economist and Green party MEP Molly Scott Cato, was that the financial system may have done something perilously stupid. Again. “If they’re bundling up these assets and selling them on, that will be much more serious,” she said. This is, of course, what determined the depth of the last crash, the wheeze of the collateralised debt obligation, which left no one able to distinguish between a good debt and a bad one. Ten years on from the start of the crash, we could get bitten by the same manoeuvre that everybody has spent the past decade saying was a terrible idea.
Yet financial recklessness would only be kerosene on an already-lit bonfire: the real threat of a recession is not from a few bad debtors bringing down a system that is unable to disaggregate them from all the other, decent debt. It might be helpful to discard the terms “good” and “bad” just to lay this notion to rest, that some people are a good bet and others aren’t. The real problem with debt is that there is just too much of it.
Provident, incidentally, told a different story about its doldrums: it had dallied with some automation – replacing doorstep lenders with iPads – and it didn’t come off. In the quest for the ever-cheaper employee, it underestimated how much its business relied on human judgment. This is plausible: and I don’t just choose to find it so because it kicks against the prevailing narrative that only employers create wealth, and employees are dispensable drones, waiting to be rationalised into cheaper, zero-hours drones. Morses Club is a very similar business, and its share price hasn’t moved.
But if the debtors at the bottom aren’t at crisis point yet, the signs of a surfeit of debt are everywhere. Alex Brazier, executive director of financial stability at the Bank of England, warned last month that consumer loans had gone up by 10% in the past year, with average household debt having already eclipsed 2008 levels. He warned against the economy having to sit through “endless repeats of the ‘Debt Strikes Back’ movie”.
There is something obscurely insulting about being warned about household debt by the Bank of England
There is something obscurely insulting about being warned about household debt by the Bank of England. It never warns employers about stagnant wages, or the government about the benefit freeze. It only ever mentions these in terms of the impact of inflation, as if any consideration of the human decisions behind them are too political for comment. But personal debt, miraculously, isn’t political at all.
But that doesn’t make Brazier wrong. Edward Smythe of the campaign group Positive Money, breaks it down: “If you look at total outstanding consumer loans, in July, they’re at £200bn, an £18.5bn net increase every year.” Households spent more than their income by £17.5bn in the first quarter of this year. Economists are interested in where that money comes from – whether it’s access to credit, selling assets or spending savings. The government is presumably, in some dusty corner, interested in why that money is needed, whether it is a result of pauperised wages– real wage growth is negative and looks set to decrease – benefit changes, or some rush of blood to the head where we all suddenly need Sky Sports and cigarettes but aren’t prepared to work for them.
The sources of all this debt are changing: about half the net increase was in personal contract purchase car loans. Four in five new cars are now bought by PCP – an inherently unstable system that leaves both consumers and car manufacturers exposed. It’s a bit like a mortgage system for cars, except you don’t own it at the end, ideally you wouldn’t be living in it, and while a housing crash has been seen before, nobody yet knows what a car crash would look like. Student loan debt is counted separately from consumer loans, and stands at £13bn a year. However much you think you’ve accommodated student fees into your picture of Britons’ finances, it is always astounding to consider how life-changing that decision has been for the younger generation.
Other debts are lower in quantity but perhaps more telling: problem gamblingaffects about 430,0000 people – a figure that has risen by a third in three years – and costs public services, including mental health, police and homelessness interventions, £1.2bn a year. Meanwhile, funeral debt has reached £160m, with charities calling for a better social fund, coupled with greater transparency on fees from funeral directors.
Expanding credit, as we know from the noughties, can make economies look very healthy, generating spending and a certain devil-may-care nonchalance, but not indefinitely. At some point, servicing the debt becomes so onerous that discretionary spending becomes impossible. The classic canary-in-the-mine watcher doesn’t wait for a bank collapse but simply looks at the growth figures. That’s what led Credit Suisse to conclude in July that Britain was “flirting with recession”, and had a 38% chance of a recession within six months. Just on the balance of probabilities we are due a downturn – no decade has passed without one since the 70s. Very few people, outside the delusional bubble of Brexit enthusiasts, are forecasting much growth.
The grownups are starting to agree that this is merely the way of the world: we have booms, we have busts – we endure. There is some kudos to be gained from recognising and naming the first warning signs, and some reputational damage to be done by naming them wrongly, too soon. Yet this would not be recession-as-usual. The buildup of debt has come not from a decade of living slightly too well, and ready to face the consequences: it has come from a decade of stagnant wages and austerity.
Nobody could have predicted how much the last crash would cost the taxpayer. But we know now, and that’s not all we know: we know that cutting public spending causes untold hardship to very little discernible benefit; we know that quantitative easing delivers its windfalls more or less entirely to the top 5%, and if any government dealing with the next recession can even afford monetary financing, it must be overt, and have a general, identifiable social purpose. We also know that austerity comes with a narrative – the demonisation of poverty – which has a catastrophic affect on politics.