Borrowers rescue plan dangerous
Governments think if they help the few borrowers unable to pay their bills they will help relieve the banking crisis. What they’ll do is encourage lots more to default and thus make the crisis worse.
Measures meant to be compassionate as well as commercial are in danger of changing the culture concerning debt. Just as the boom transformed attitudes to borrowing, the bust could change our views on repayment.
A key component of the revised US bank bail-out package is help for the sub-prime homeowners having difficulty servicing their loans; the UK government has announced plans to aid owners avoid repossession here too and there are calls to widen the scheme.
But by making it more acceptable not to pay, such packages create an environment in which fewer will make payment a priority.
One reason defaults and housing repossessions were much lower before the 1990s was that maintaining payments was regarded as more important than a new car, a holiday or a meal out. Now the loan ranks low on the list.
(Another reason, of course, is that lenders were more careful who to lend to. In the boom, banks encouraged the “no need to repay” mentality with interest-only loans, repayment holidays and offers of extra debt.)
The “needn’t pay” attitude extends beyond consumer finance to business. Late payment is a common tool of cashflow management – especially for those not managing their cashflow. Non-payment because of business failure has been regarded as an acceptable side-effect of innovation.
The stigma of debt – nevermind repossession or bankruptcy – was a powerful tool in ensuring loan repayment. Government help for debtors erodes that penalty and the more borrowers take advantage, the less the shame factor. The current economic climate will allow many debtors – corporate and personal – to blame the “world situation” rather than their own fecklessness or poor prioritisation.
Borrowers still tend to lose any equity, if not their reputation, by defaulting, but non-payment passes their problems to the bank – and now to the state.
Rather than ease the banking problem by letting debtors escape their liabilities, governments will increase the banks’ troubles. And by encouraging more people to expect help, governments will increase their own troubles too.
