11 Nov 2014, 11:46pm
personal finance
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  • Sometimes you should not be allowed to do what you want to do

    Over at the Torygraph they are fulminating gently about the hidden costs of capping payday loan charges. To most of us the action on Wonga et al seems pretty clear-cut – the cap means that they are limited to a 100% interest rate – ie they can’t charge you more than twice the original loan amount.

    A Money Shop

    This is a Money Shop. It is what a problem looks like, not what a solution looks like

    Judging by the number of money shops and assembled crap joints in the High Street, there’s a lot of demand. The apologist for wanting to make a profit out of lending money to people that shouldn’t be borrowing money is this mouthpiece for the Institute of Economic Affairs Steve Davies, on Radio 4

    Payday loan companies will no longer be willing to lend to those judged to be at a fairly high risk of defaulting. Previously, these people could arrange a short term loan from legitimate businesses. As has been the experience in other countries, we can now expect more of them to turn to often vicious loan sharks that operate entirely outside the law.

    Mark Littlewood of the Institute for Economic Affairs

    The Torygraph cited the IEAs Director-General Mark Littlewood for the gem, but it sums up what Steve said on Radio 4. And hell, if you’re the DG then I guess the buck stops there

    Now if you look at the IEA’s website you can see that these guys are basically right-wing-nut-jobs. You know the search for John Galt is strong in the hallowed halls of the IEA from the topics. Now there’s nothing wrong in having right-wing nut-jobs, humanity needs a range of views. There’s no doubt a school of thought that considers an Ermine in that category with intemperate snarls like this.

    Nevertheless there are some wickets it’s really hard to bat on. Like giving matches to two-year-olds, ‘cos it’s an affront to their yuman rites of freedom to stop them discovering fire. It being A Good Thing that uniquely among European nations ordinary UK citizens will receive their mains powered goods with three exposed wires and will have to source and fit their own mains plugs 1 with a one in three chance of a lethal outcome 2, and other things like that.

    So let’s translate what IEA DG Mark is saying here

    We at the IEA think it is a jolly good thing to lend money to people who don’t have any. It’s a decent, honest source of profit and there are a few edge cases where it’s the right answer. Obviously there’s a risk of collateral damage and totally screwing up some punters’ lives, but in the end you gotta ask yourself

    What would John Galt 3 do?

    And then do the right thing by John, natch.

    Err, yes. There are about ten good ways of using payday loans and about a hundred wrong ways of using them. Guess which ones most people use, which is why we’re having the discussion. The IEA’s bod was on t’other side to the Bishop of Stepney. The fundamental beef the IEA has is simply summed up on their website

    Regulating payday lenders will shrink the supply of credit

    Well yes, that’s the ‘king point you wunch of bankers! I am just old enough to remember a time when Britain had credit controls, before Thatcher iced them. That was a terrible time, believe me.  Ordinary people could manage to buy houses, because they weren’t allowed to borrow stupid amounts of money to pay stupid prices for a collection of stones. If you couldn’t afford to buy a TV you bought your consumer shit on hire purchase. You ended up paying a hell of a lot more, but if you couldn’t afford the repayments then all that happened is a bunch of guys with thick necks came into your house and grabbed their telly back without paying you a bean.

    Stumbling and Mumbling sums up the results of Thatcher’s easement of credit controls as a successful failure pretty well.

    her relaxation of credit controls in the early 80s had a bigger economic impact than she intended. She envisaged these as a step towards economic freedom. But they were more than that. They permitted a consumer-driven society and economy. This was not her intention. […] her vision of Britain was of a property-owning democracy of savers with moral restraint. She got indebted spendthrifts. She wanted the British people to be like her father, but they turned out more like her son.

    In short, the IEA need to get the idea that sometimes the puer aeturnus in us all needs some roadblocks to getting his own way. What happened with the expansion of credit was that after three decades the property owning democracy got hard for ordinary grunts because it tempted them to put too much of their lifetime earnings into the purchase cost of a house, aided and abetted by the suppliers of that credit. That trickled down to the poor, who in the past were saved from revolving credit card debt by the fact that they couldn’t get any. I recall the first Access card I got in 1979 as part of the student banking deal at Imperial College with Nat West. It scared the shit out of me because I had the voices of previous generations ringing in my ears

    Don’t spend more than you earn, son

    and yet to use a credit card at all you have to spend more than you have at the instance of the purchase. It’s the whole point of a credit card – to increase your instantaneous spending capacity.

    Wonga is out there bottom-feeding in this market. The IEA is missing the point deliberately when they assert regulating payday lenders will shrink the supply of credit

    Shrinking the supply of credit to people who shouldn’t have it because they can’t pay it back is the whole bloody point

    Earth to IEA right-wing nut-jobs

    The FCA is fighting the fire that was started by the loosening of credit controls – those indebted spendthrifts epitomising Thatcher’s legacy  by spending money they don’t have because they can. The IEA then tried to play the bleeding heart about where will the poor get their utilities from? Well, way back when I had an electricity meter with a slot for 50ps guess what happened when I didn’t have any 50ps?

    I lived without electricity until I had the money

    People did it for hundreds of years, y’know.You get cold. You get hungry. You go to bed early in the winter. There are better electricity solutions than a Wonga loan. It’s called a prepayment meter. Yes, the cost per unit is higher. But that’s just the way the world works – poor people pay more for a lot of things because of credit control, buying in small lumps and it being increasingly hard to tell the thrifty poor from the spendthrift poor, hence the Sam Vimes Boots model.

    Let’s face it, if you can’t afford the ‘leccy bill you aren’t going to get any sustainable electricity supply using Wonga, are you? The kind of situation that Wonga can help with are people who have assets, but can’t  access them for the moment. Those assets can be the value of your future work, or next year’s un-CGT-embargoed share sales . But this is a very small set of Wonga’s client base, because usually when you have enough income to generally cover your spending you are financially literate and don’t get yourself into such financial shit in the first place. Most of Wonga’s customer base are people who are on the wrong side of the Micawber principle. Their spending is too much for their income. The guys need to Spend Less or Do Without. In theory they could Earn More but that’s not working out in this economy, leastways at the bottom end.

    Wonga and the guys that the IEA are batting for basically lend money to people who they know can’t pay. They take the risk because they holler loud enough in people’s ears and garnish their credit card accounts such that the non-payment gets shifted to some other unlucky creditor – like the utility supplier or the credit card firm.

    The next line the IEA took is that all this will do is push people into the arms of loan sharks 😉 The answer to this is to crack down on loan sharks, seize their assets and if you can’t actually break their legs then at least do a Taylor Swift on their Beemers and Mercs

    Now in my view the Bishop of Stepney has an error in his thinking too, but it isn’t dangerous. He believes credit unions are the solution. They aren’t, because unlike banks, credit unions can’t lend money they don’t have. 4 So they need to persuade rich people to save with them at low returns to lend to poor people who are bad risks. Rich people don’t get rich by taking on bad risks at low returns. It’s just not how you get or stay rich.

    If he wants rich people to give money to poor people he needs to do that through the political arena, and that’s a different question. Shrinking the supply of credit to people who can’t pay it back is a start in plugging the hole. Every time you buy something on credit, you are choosing to buy it at a higher price, because you pay interest, and you are choosing to impoverish your future self.

    Thatcher apparently believed people had morals when it comes to money. History has proved her wrong

    I had the bad luck to look for a job in the aftermath of Thatcher’s first recession, so I’m probably not a balanced critic, but it appears that Thatcher believed that people had principles, even when it comes to money. Bless. I’m not sure I buy this interpretation, but let’s run with it

    Presumably she didn’t foresee her property owning democracy ending in a BTL property owning oligarchy, and giving the market power over lending meaning that lending would be advanced  to NINJAs in times of plenty leaving seven lean years and counting that ruin whole generations. In the end asking for any politician to have a crystal ball that shows true across thirty years is a big ask, and even if she did set a wrong course the ghost of Thatcher past could reasonably challenge the weak hands afterwards of failing to steer the ship of State away from the sandbanks.  There are some people who have principles when it comes to making money, but not enough. Somehow you have to regulate an ever increasingly complex system that is global, not national in scope and staffed by the finest minds money can buy, while your regulators are the civil servants of nation states.

    Wonga et al are obviously parasitic enough that regulation isn’t hard, though I’m sure Wonga will find some way round the rules and their customers are desperate enough not to face up to their problems that they’ll comply. But for now the cat is ahead of the mouse. Anything that pisses the IEA off is probably good for the country as a whole.

    The trouble is that it isn’t just the poor who are drunk on credit The middle classes are drunk on it and passed out on the kerbside with the bottle in their hands. Those high house prices are still there. One way of regulating credit is increasing interest rates, but there’s no taste for that because of the massive keening noise that would ensue 😉  Now that we’ve cracked down on poor people spending more than they earn with Wonga, it’s time to move on to the overstretched middle classes in their zombie households. Their pay is falling behind inflation. Somebody should step up to the plate and stop them borrowing money to spend more than four times their salary on a house. And demand that they have a convincing answer for the question “how are you going to pay off the capital before you retire“?

    No doubt the IEA will come over all John Galt on me and say well, it’s a free market, why shouldn’t these numbskulls borrow loadsamoney to buy a house with? To which the answer is that they jack up the price of commodities like houses until every bugger has to borrow loadsamoney. Even if they don’t want to buy, their rent goes up to service the capital. It’s not a victimless crime.

    I’ve accepted most of the fault in overpaying for a house early on, But some of it was because I was competing as a single man with couples desperate to get their MIRAS double tax relief before the door closed on that. We’re not all independent actors on the stage when a shitload of easy credit is dropped from helicopters, precisely because it is a market. Thatcher can perhaps be forgiven for the stupidity of thinking she’d get savers rather than spendthrifts, the experiment hadn’t been tried. But we have thirty years of research that shows give a Brit easy credit and s/he will chuck it into housing which will go up in price to soak up the credit. Where it festers – if they had to spend it on meals out at least restaurateurs would get some of the money and it would enter the economy. As it is the money just goes to make the land and bricks dearer, and no, the answer isn’t a land value tax it’s to stop feeding the Beast  in the first place. Credit isn’t just bad for poor people. It’s bad for homebuyers too.

    Sometimes you should not be allowed to do what you want to do. For your own good and that of the people around you. Reining in Wonga is the hors d’oeuvre. It’d be nice if the mortgage market were the main course one day.

    Notes:

    1. this was the situation in Britain before February 1995 when commonsense prevailed in the  face of resistance from manufacturers. There’s a bunch of old fossils reminiscing about the lost art of UK mains plug wiring which tickled the vintage geek in me.
    2. there are six ways of wiring a plug, assuming one wire to one pin and nothing left out. If you wire the green and yellow earth wire to the live and it’s a Class I device like a kettle, then if you plug it in and grab hold of the tap and the metal case it will piss you off deeply if you are lucky, and kill you if you aren’t lucky
    3. John Galt was the protagonist in Ayn Rand’s Atlas Shrugged, with the motto “I am not my brother’s keeper”
    4. That in itself is no safeguard – the branch manager of the Ipswich credit union looted £100,000 of savers’ money. Although it’s claimed this didn’t have any effect on the ISCU, I note it is no longer in existence

    “The answer to this is to crack down on loan sharks”. And how exactly do you thikg the Fred Karno’s Army that constitutes our Criminal Justice System will manage that?

    12 Nov 2014, 1:13pm
    by Neverland

    reply

    You don’t have to look hard to see the current government policy on personal finance isn’t very joined up:

    – on the one hand we have the BoE starting to regulate much more closely the amount banks can lend, limiting a potential government exposure, while on the other hand we those insane “Help to Buy” loans, jacking up a direct government exposure

    – on the one hand we have NEST and compulsory saving into personal pensions and on the other hand we the government minister for pensions saying that its perfectly fine for people to spend their pension savings on a lambourghini

    Add to this cocktail a Β£75bn pound a year annual government deficit plus a whopping current account deficit and I don’t reckon we are that better off than France and Italy, we just imported a lot of foreign people and capital into London to make it all appear a lot better than it actually is

    “Thatcher apparently believed people had morals when it comes to money. History has proved her wrong.” Spot on ermine. But she didn’t need to wait for history to prove her wrong, it had already done so. She only needed to look back.

    However, somehow she was under the delusion that the only “greedy” people were the trade union members she was intent on destroying. A mistake that has meant we now have an enormous wealth inequality problem that hinders prosperity and will eventually cause social unrest to the extent that even the very rich behind their security gates might start to feel the pinch.

    @Cerridwen

    Our police state is perfectly set up to deliver security to the rich

    Riot in London – that’ll be the water-cannon and a criminal record for you sonny. Riot in Birmingham – who cares? Ill-judged comment on Facebook – prison

    Right now our whole “service economy” relies on dragging in capital and rich people from abroad to fund our twin public spending and trade deficits

    @dearieme we have less gangsterism than in the 1960s so something must be working. Personally I think Taylor Swift is onto something – publicly trash the assets of the vainglorous SOBs when you nut ’em.

    @Neverland > we just imported a lot of foreign people and capital into London to make it all appear a lot better than it actually is

    I hadn’t thought of it like that, but I can’t see what’s wrong with it. Maybe the city state a la Singapore is closer than we think!

    @Cerridwen although I’ve blamed Thatcher for much that is wrong in housing particularly, in all fairness the Thatcher administration finished in 1990, there’s been getting on for a quarter of a century for the problems ot be fixed. Some of the trouble is summed up by the Grauniad – they assert that basically the opposition surrendered. I do wonder where the bid ideas have gone, listen to recordings of politicians of the 1960s and 70s and they are talking about ideas, listen to many of them now and it’s all about how to manage the economy. It’s the ‘To Have or To Be?‘ of Erich Fromm, reflected in the leaders we produce. I guess we chose ‘to have’ over being.

    @Ermine, I definitely think that there should be more controls on certain products. It’s a good thing that the risk of electrocution from badly-wired plugs is less – was this one of the many good things to come from the EU?

    Financial products are another one. There should be clear illustrations when taking a loan of how much it will cost in total – ideally with a 100% personalised illustration, eg “if you borrow to buy your new Ford it will cost you twice as much, if you saved Β£x instead then you could buy it after only y months” sort of thing.

    If, after that, people *still* f-k up then well, it’s back to personal responsibility again πŸ™‚

    @misterquirrel I’m actually a lot more dirigiste than many in the PF community. Indeed. going along with the you should not be allowed to theme -:

    Things that lots of people get into trouble with, such as loans, I believe should only be advertised factually. I would go as far as forbidding ads that are designed to appeal emotionally, and shoot first and ask questions later as the regulator. Just as well for the economy that I’m not God for a day, eh πŸ˜‰

    F’rinstance, I don’t think anybody can say anything good has come out of the 1986 relaxation in the rules allowing solicitors to advertise.

    I’d forbid food advertising showing people, just the food, and where it shows the food it should be an example of the food at the point of being ready-to-eat, not sprayed with hairspray and recoloured to make it look better.

    One of the things that has vastly improved my quality of life and reduced spending is ruthlessly icing advertising – ad-block plus and Ghostery on the internet and scrapping my TV, although I never watched much TV – having worked in it does that to you. I truly believe advertising is a parasitic evil on society creating spurious wants and hammering people’s self-esteem as well as creating needless consumption that future generations of humans and wildlife are going to hate us for. As your last post indicates, we are incredibly rich these days, so why are we are so damned miserable? Often because we are induced to make seriously crap purchasing and financial decisions. I like to think I can think for myself but it isn’t true with a lot of modern advertising, so it’s better to bust it all out of my life and when I have a material need or want I hit up Google/duckduckgo and go look for an answer.

    I struggle with the Adam Smith Institute personal responsibility narrative though I didn’t choke on Atlas Shrugged. The reason I struggle with it is because it’s not a fair fight – In the red corner there are the finest minds money can buy get together to tell you a false story about how Brand X is going to transform your life. In the blue corner is a standard issue Mk 1 human mind, not that much changed since prehistoric times. The advertisers have studied their opponent a damn sight more than the punter has studied his enemy. It’s not that surprising that the punter gets taken to the cleaners – again and again and again.

    “@dearieme we have less gangsterism than in the 1960s”: how would either of us know?. Your rant was just the same sort of rant I can remember against Hire Purchase in the late fifties. And when you reach the difficult question, of what would happen if Emperor Ermine had his way, all you can come up with is a “crackdown”. Just imagine the USA decades ago: “But Grandma, if we have Prohibition won’t people buy from bootleggers?”. “No, my little chickadee, because we will have a crackdown.”

    @dearieme
    Actually, 95% of people that use Wonga haven’t even heard of loan sharks and 98% wouldn’t use them.

    http://podcast.ft.com/p/2392

    @Ermine

    That list of legal prohibitions sounds a lot like the sort of system they have in Germany

    Its not a particular criticism as Germany seems have done quite well out of this approach

    I cannot simply pass without a comment when reading a ‘financial blog’ and ‘Thatcher bashing’ in one.
    (for those who don’t get it, Thatcher-bashing is typical for financially illiterate)

    I say it as a foreinger, you Brits have such low esteem for your greatest leaders it’s pitiful.

    Mrs. Thatcher has earned what you’re eating through until today and soon you will run out.
    Regarding the houseowning democracy, she is not to be blamed for a bunch of Northerners’ lack of mathematical ability.
    I’d like to see the aforementioned MMM run through balance sheets of people from that era and pass a few sarky comments.

    They took the mortgages out, they planned their life, their professional development and family life. It was their responsibility, they blew it.

    This working class bonanza that’s reaping through modern UK will be your downfall.

    Wake the hell up!!!

    Quite – see this -> http://www.bbc.co.uk/news/business-30175365

    With inflation tamed (for how long, who knows, maybe we are going the way of Japan), lenders need to take a long term view and can’t rely on inflation to ensure there customers will be able to payoff a mortgage. Taking out a mortgage that you would still be paying off in your 70s is insane. The MMR is the right way to go, more of this please.

    @Bart WTF? I appreciate Thatcher has her fans, and I have indulged in Thatcher bashing but not particularly here. Thank you for the laugh though. Even Mrs T in her wildest dreams didnt’ actually believe she singlehandedly earned everything. And in the north it appears you can buy a house for Β£1 so you definitely deserve a MMM punch in the face if you cock that up. It’s the SE that the insanity rules. A jolly good day to you too, sir πŸ˜‰

    @EP the spectre of deflation in housing is ghastly, negative equity with knobs on.

    A straight age cutoff seems a little rough – if you buy a house in your 40s but also have half the equity it isn’t so bad. Indeed Nationwide’s criteria seem eminently reasonable!

    […] herself admired prudence, so I am told, so this was a backfire. I can do no better summary than pinch this from Stumbling and Mumbling […]

    […] herself admired prudence, so I am told38, so this was a backfire. I can do no better summary than pinch this from Stumbling and […]

    […] or later we are going to have to nail this problem. Sometimes you shouldn’t be allowed to do what you want to do, and the litany of commonplace consumer cock-ups with credit is getting longer and longer. […]

     

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