Dr Eamonn Butler responds to Damon Gibbons and Carl Packman

Written by Searching Finance Wednesday, 14 May 2014 19:25
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May 1st, at the Society Club, Soho saw the launch of Damon Gibbons' new book 'Britain's Personal Debt Crisis' as well as the publication of the revised and updated version of Carl Packman's 'Loan Sharks - The Rise and Rise of Payday Lending'. In attendance was Dr Eamonn Butler, director and co-founder of the Adam Smith Institute.
Here he offers his own views on debt in the UK:
It's easy to blame the credit industry for people who get into trouble and for trapping people in debt. And to say that it's capitalism and finance that caused people to get into debt in the first place. But who actually controls credit in the UK?
The answer is the Bank of England, and it's the Bank's inept policies that created the boom-bust cycle. Low interest rates and loose money encouraged people and firms to borrow, and banks to pursue their demand. In the boom, every deal worked so the banks were motivated to lend - and borrowers to borrow - far more than was prudent. Eventually the money ran out (thanks to the Bank of England realising they'd overegged it) and then clamping down far too hard - and the rest is history. 
If we had genuine market interest rates and politicians and central bankers had less power, people wouldn't get in to these pickles.
Sure, like any forward contract, people need transparency and it is right that the cost of credit should be properly highlighted. That is just good market management - you need clear information for markets to operate and for people to make rational economic decisions. But in reality there are few good ways of doing this; small loans have high management costs, so APR figures look astronomical. 
I don't like the middle class assumption that all kinds of small credit transactions are inherently a wicked conspiracy against the borrower. Those of us who have been on the breadline know that quite often you need to borrow short term to keep the show on the road. You also know that it costs. But it's a rational choice.
In macroeconomic terms, we certainly have a borrowing problem. The government is borrowing far too much, and households are borrowing more and running down their savings. Again, why is that? Well, it could be because the Bank and the politicians are have created another fake boom through housing subsidies, quantitative easing and cheap credit (with the Bank rate at the 'emergency' level of 0.5% for five years now). So again, it's party time and everyone is borrowing too much. I don't blame business for that. I blame the authorities. Stable credit policies would lead to a much more transparent and straightforward consumer credit market.
Last modified on Wednesday, 14 May 2014 19:39

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