Debt, Complaceny and Financial Crisis
In 2008, during a briefing by academics at the London School of Economics on the turmoil on the international markets the Queen asked, "Why did nobody notice it?"
Sujit Kapadia from the Bank of England’s financial services committee offered the Queen three reasons why the crisis happened. One was that it was rare event which made it difficult to predict. He added: "People thought markets were efficient, people thought regulation wasn't necessary. Because the economy was stable there was this growing complacency,"
Complacency is something to be avoided and many authors have attempted to identify the warning signs which might accompany any slide towards another crisis. In “House of Debt”, Atif Mian and Amir Sufi observe, “… severe economic downturns are almost always preceded by a sharp run-up in household debt” and “… recessions are preceded by a large rise in household debt and … begin with a dramatic decline in spending.”
They highlighted a growing concern over the growth of credit card, bank loan and car loan borrowing. They noted that consumer credit had reached an annual growth rate of 10.9% in November 2016, the fastest rate of expansion since 2005. At the same time, the Financial Conduct Authority (FCA) drew attention to persistent credit card debt which sees customers paying an average of £2.50 for every £1 originally owed because of interest and charges.
Our workplace chaplains visit a number of retailers on high streets and shopping centres in the Black Country. The many empty shop premises we all see there are an obvious sign of a decline in consumer spending. Taking on debt may lead to an immediate increase in spending, but repayments soon reduce purchasing power, over a long period of time. New reductions in overall benefit levels will further limit people’s spending power.
If nothing is done, we run a very real risk of simply repeating our complacency.The FCA made some recommendations, including credit providers agreeing repayment plans to clear the debt quicker; or firms reducing, waiving or cancelling interest or charges where a repayment plan is still unaffordable.
Mian and Sufi would go further, advocating that persistent personal debts should, in many circumstances, be remitted. They remark, “By eliminating the debt hanging over an individual's income prospects, debt forgiveness gives people a strong incentive to find a job, which helps the entire economy.” They reference research that “… found that individuals who received more debt forgiveness saw a decline in five year mortality risk and significant increases in both earnings and employment.” (Will Dobbie and Jae Song, http://www.nber.org/digest/feb15/w20520.html). Michael Hudson ("Killing the Host") recommends a similar course.
The Old Testament prohibited lending at interest, as does Islam today. In the Old Testament context it was personal lending, exploiting people at a time of need, rather than lending which increased productive capacity, something which is vital to the working of our economy today. In “Grace and Mortgage”, the former Bishop of Worcester, Peter Selby, observes “Lending money at interest transfers money from those who need to those who already have it.”In an economy where personal lending is normal, wealth is more likely to trickle up than trickle down.
Money could be lent, but it was to be interest free, and even then there are clear provisions for cancelling debt in the Old Testament.Deuteronomy 15: “At the end of every seven years you must cancel debts.This is how it is to be done: Every creditor shall cancel any loan they have made to a fellow Israelite. They shall not require payment from anyone among their own people, because the Lord’s time for cancelling debts has been proclaimed.”
The wisdom of laws set out thousands of years ago is confirmed by modern economic research. We can scarcely dismantle our complex credit-based system immediately, but we have every incentive to take note of both economists and ancient wisdom. We have been warned of the next crisis, and the next one, and the next one….People have noticed. There is no excuse for complacency.Modern economists and biblical laws offer similar insights into how we might avoid financial crises.