Wednesday, 24 September 2008

Who should take credit for the Credit Crunch?

With property sales in West London grinding to a standstill, and the news media filled with stories about the credit crunch, the turmoil in the markets and desperate action by Central Banks on both sides of the Atlantic, those of us watching helplessly from the sidelines can but wonder how we got here.

Of course, the greed of bankers, deregulation and loose fiscal regimes in the UK and USA have been blamed. It's all 'their' fault: the banks, the regulators, the government. But where, in all this, is the discussion about common sense, on the part of both lenders and borrowers? What happened to individual responsibility?

Over the past few years, on any discussion about money matters, I have always ended feeling terribly old-fashioned and conservative (with a small 'c'). I've lived through the roller-coaster of economic cycles from the 1960s onwards, and recall the strict financial limits imposed on me when I applied for my first mortgage: I could borrow only 2.5 times my own salary. Credit card and other debts were probed in the process.

I must admit that I was one of that lucky generation that didn't pile up huge student debts, thanks to the grant system and working through my holidays. Even so, I've paid off my credit card every month for 30 years, and only ever taken out one bank loan beyond a mortgage - and that was for my first - and very second-hand - car. (That Ford Fiesta was 11 years old before I sold it).

For everything else, I was taught to save first and take my time in deciding what to buy. That way, I got a certain sense of achievement out of buying an item: and still do. It takes me hours of research before buying a new camera; I try on dozens of suits before deciding which fits best.

Fast-forward to the the situation over the past few years: I listened with horror to younger colleagues at work, who had five-figure student debts ("but I don't have to pay that off yet"); five-figure credit card debts ("but I want a new (ie brand new) car, now"); and were taking out loans of 6 times their joint salaries for property ("we want a house with three bedrooms and two bathrooms. We couldn't possibly start with a small flat. We need a separate dining room.").

And all this on salaries of £30,000. In London.

At the same time, some older colleagues were cheerfully extending their mortgages by tens of thousands to pay for exotic foreign holidays, designer label clothes, new cars. I could understand it if it was for their children's education, or a house extension - but it wasn't. Again, these things were classed as essentials. The scale of some of this additional debt - which, of course, all has to be paid off with interest - made me feel queasy.

When we talked about interest rates, the reply was "they are at an historic low". Well, yes. But won't that just increase the leverage? A rise from 4% to 5% is a rise of 25%. "But the Chancellor says there will no more boom and bust". Er, yes. But do you believe him? Others say the housing market is becoming a bubble. "Then let's hope they're wrong!"

But substituting hope for prudence isn't much of a policy. We seem to have become terribly child-like in our approach to money: "If they'll lend it to me, it must be OK". And child-like in our desire for things: "I must have this now". At the other end, of course, banks have colluded in all this. But then, with the security of someone's house as the back-stop, their risk - or so they thought - was controlled. But you can bet the bank managers won't be homeless (although some junior staff might get waved good-bye).

I realise I'm going to sound terribly smug in writing this, and terribly kill-joy. But I don't take pleasure in the misery the current situation is causing: I know too many people stuck in the mire, and desperately worried. And few of us are actually immune: I need to put my own property on the market before too long, and I'm self-employed, so I'm caught up in this as much as anyone else.

That said, I must confess there is a part of me that thinks a brake on at least some of the excesses of the past decade or so might not be a bad thing. We might find better ways of spending our leisure time than shopping. It might even take the shine off the vacuous celebrity culture we've come to worship. But it's a terrible price to pay.

So, perhaps it is time to be pay heed to Shakespeare, in Hamlet, when Polonius says:

Neither a borrower nor a lender be
For loan oft loses both itself and friend
And borrowing dulls the edge of husbandry.

Or maybe time to resurrect Micawber's law..?

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