Chill out about the debt bubble?

Not yet.

What role did high levels of household debt play in generating the crash and what do they mean for our economy over the next few years? 

Well-worn questions, you might think. And no shortage of people have asserted answers.  Following 2008, a whole new crunch-lit genre of books emerged to explore this. There is – or perhaps, was – something of a post-crash orthodoxy that the rise of easy credit, fuelled by run-away rewards for the super rich, and a squeeze elsewhere, encouraged ever greater borrowing. 

A favoured narrative, often echoed by the coalition, is that debt ballooned as consumers (and home buyers) went on an irresponsible binge – it was all demand-led.  Others argue, particularly in the US, that exploding debt reflects an act of policy – whether explicit or implicit – to increase the supply of easy credit for low and middle income groups who were seeing their wages stagnate.  From this perspective, it was less a story of families living beyond their means and more about coping when their means stopped growing. 

More recently, however, there has been a counterblast to these prevailing views.  The FT’s economics editor Chris Giles, a leading authority on our current economic predicament, maintains that fast-rising household debt should be greeted with little more than a shrug of the shoulders. Ben Broadbent of the Bank of England’s MPC makes a similar case. Higher debt is essentially about mortgages and it reflects rising house prices (let’s leave to one side for now the fact that rising debt and assets signifies a big transfer between the generations, benefiting the old at the expense of the young). And once we do take assets into account we find that the net financial position of households is roughly similar to the position twenty years ago. Relax.

Nor should we get het up about the banks having undertaken an orgy of easy and ill-judged lending. Few of the loans made to UK households have turned nasty. Banks made stupid mistakes, to be sure, but they mainly came in the form of bad loans made overseas, not in the UK (as highlighted in this good blog by Ben Chu discussing the speech by Broadbent). 

So, rather than fret about the enormous size of our debt overhang and what it means for our future growth prospects, we should move along and worry instead about something more meaningful.

This account is right, of course, to point out that not all the growth in household debt is problematic.  Plenty of households will have borrowed  more for an asset (a house) that is worth a bit more, and achieved this by taking on a debt they are capable of servicing. Nothing much wrong with that. But in scoring this point, advocates risk downplaying a bigger one: debt still matters.

First, the distribution of debt burdens across different income groups is important.  Aggregate data often conceals far more than it reveal. As the chart below shows, at the bottom of the income distribution the growth in consumption appears to have massively outstripped increases in income – unsustainably so.  (A health warning is necessary here: survey data on the lowest - and highest -  incomes can be highly imperfect, so a degree of caution is warranted on the precise numbers, but the overall pattern is likely to be correct). 

Source: NIESR analysis for the Resolution Foundation

What was driving this growth in consumption is less clear cut. Part of it is likely to be underlying shifts in the cost of living that bore down hard on low income families. Another element will have been increased mortgages (though the proportion of the poorest holding a mortgage barely rose from 1997-2007, so this isn’t likely to be the only thing going on here). And if the UK consumer is anything like their US counterpart, high levels of inequality may have played a role in generating ‘trickle-up consumption’ – whereby lower income groups strain to keep up with the spending of the affluent.  

Second, we shouldn’t be complacent about the number of bad loans or repossessions. Depending on the definition applied, between 5 per cent and 8 per cent of mortgages are  currently in forbearance – an agreement between mortgagors and their bank which usefully allows repayments to be rescheduled – but this stay of execution cannot be expected to last indefinitely or resolve the underlying affordability issues that hang over many households.

Third, the revisionist argument is in danger of downplaying the risks – potentially scary ones – of what might happen if, eventually, interest rates rise before we have strong household income growth (a point highlighted on this blog before).  True, at the moment, with the economy crawling along the floor and the euro-zone teetering on the brink, talk of higher interest rates feels very far-fetched.  But with inflation still stubbornly above target, and the Bank yet again claiming it will be another year before it falls into line (meaning inflation will have been above target for most of eight years) the medium term outlook for interest rates remains uncertain. At some point the interest rate hawks will regroup – and eventually a more normal level will return.  

All this matters greatly because a high debt burden means many households are already highly exposed; we just tend not to talk about it much because the headline Bank rate is so low. Consider the current burden of servicing mortgage payments for low to middle income households.  It is broadly similar, incredibly you might think, to the burden faced in the late 1990s when interest rates were 5 to 7 per cent. That’s partly due to the rapid growth in interest rate spreads, and partly due to the greater stock of household debt. 

An increased burden: proportion of gross income accounted for by mortgage payments among low to middle income owners

Source: Resolution Foundation 

Which takes us on to the final point: the extent to which the burden of debt will continue to bear down on UK consumers – or at least a sub-set of them. The truth is no-one really knows whether or how far household debt needs to fall. If we listen to McKinsey, we’d believe that the UK is only just beginning the painful adjustment – behind countries like the US – and it could take a decade before the ratio of UK household debt to disposable income returns to its pre-bubble path.  Other analysis  argues that to be "sustainable", household debt needs to fall from the current level of just below 150 per cent relative to income to nearer 115 per cent - a process that is likely to take until 2019 (after fiscal balance has been achieved). If so, deleveraging as well as public austerity will be a drag on consumers.  

Four years on and we’re still to have a full reckoning with the crisis. UK household debt didn’t cause it all. And high levels of debt aren’t always bad in themselves.  But we’d be silly to be sanguine.  The debt mountain makes us highly vulnerable, and will be living with it for some while yet.

In the shadow of a debt mountain. Photo: Getty Images

Gavin Kelly is chief executive of the Resolution Foundation 

Matthew Lewis/Getty
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120 years on, and rugby league is still patronised as “parochial”

Even as Leeds and Hull Kingston Rovers do battle in the 2015 Challenge Cup final, the century-old conflict between rugby league and rugby union isn’t over.

When Leeds and Hull Kingston Rovers step out onto the hallowed Wembley turf on Saturday afternoon it will be a celebration, regardless of the result. The final of rugby league’s oldest competition is expected to be watched by over 85,000 fans, with countless more watching on the BBC. And the reason for celebration? This year’s Challenge Cup final falls on rugby league’s 120th birthday. 

Saturday will mark exactly 120 years to the day that the custodians of 22 clubs rendez-voused at the George Hotel in Huddersfield to split from the amateur Rugby Football Union (RFU). The teams who formed the guerrilla organisation were dependent on millworkers, miners and dockers who unlike their more affluent and privately-educated southern counterparts, could ill-afford to miss work to play rugby. As such, the Northern Football Union (which later changed its name to the Rugby Football League) announced its separation from the RFU and immediately accepted the principal of receiving payment for playing. Taking the schism as a declaration of war, the RFU struck back by issuing lifetime bans to any player associated with its northern kin. 

Neither league’s revolutionary spirit nor the promise of a pay cheque lead to a change in fortunes, though. It remains, according to one journalist, a “prisoner of geography”, ensnared by its older kin. Wembley is its parole, the chains are off, for but a short while, as league earns a pass out of its Northern confinement. Union, on the other hand, is the dominant code in terms of finances, participation numbers and global reach, while league is still viewed as a “parochial” sport. 

To understand why league is viewed as parochial, and union global, the writings of the Italian Marxist Antonio Gramsci on cultural hegemony are particularly useful. Union embodies the resource-rich and powerful historic bloc, institutionalised through its strong standing within public-schools and its big-business connections. League, on the other hand represents the downtrodden and plucky subaltern. Its agency has only stretched so far as to command superior TV figures perhaps a ringing endorsement from the masses.

In order to quell its fellow oval-chasing brethren there are examples of union shockingly suppressing the spread of league. In France the 13-a-side code had overthrown union’s dominance as hundreds of clubs switched to le treize towards the end of the 1930s. As the Second World War divided France, union bigwigs held office with members of the Nazi-collaborating Vichy government who were persuaded to outlaw rugby league once and for all. 

On 19 December 1941 a decree forced league clubs to hand over kit, stadia and funds to their union counterparts. The game has never fully recovered in France, although two Frenchman are in contention to play for Rovers on Saturday – Kevin Larroyer and John Boudebza, testament to the art of treizistance.

There are other instances of union dignitaries stifling league’s growth in places as wide-ranging as Japan, Serbia, South Africa and Italy. Examples exist in the United Kingdom too. Cambridge student Ady Spencer was banned by the RFU from playing in the Varsity Rugby Union match having enjoyed the rigours of league as a youngster in his native Warrington. The incident was subject to a parliamentary motion in 1995 being condemned as an “injustice and interference with human rights”.

But even as rugby union followed its heretic sibling into professionalism a century after the split there’s little to suggest the relationship has changed, highlighted this year through the case of Sol Mokdad. A Lebanese national, Mokdad will be watching the final in Beirut with friends, but it’s a far cry from where he was just a few months ago – locked up in a jail cell in Dubai at the behest of UAE Rugby Union (UAERU). 

“I moved to the UAE in 2006 and set up rugby league there a year later. I was arrested for fraud and for setting up a competition without the UAERU’s permission,” he tells me. “I was baffled as they’re a completely different body. It’s like the Cricket Federation demanding that they control all baseball matches. We’d just got a huge deal with Nissan to sponsor our competition which the UAERU weren’t happy about. They said I’d impersonated their president in order to get the money which was a complete lie. They weren’t too happy that we were getting a lot of exposure in western media outlets too, because I’d suggested that the UAE would be a good place to host the World Cup, that’s where it all started to go wrong.”

“I was at a corporate event when I got a phone call to say that UAERU had ordered my arrest. I tried ringing my mate George Yiasemides who was the COO of UAE Rugby League. He’d promised to help me out, but he didn’t want anything to do with me. He sold me down the river. I was chucked into a cockroach-infested cell. The bathrooms were covered in s**t  and I was locked up for 14 days with no contact with the outside world.” 

Eventually an agreement was reached and all Mokdad had to do was sign a document which would guarantee his release, subject to conditions. Easy enough right? But as he explains it wasn’t. 

“They sent me to the wrong police station and when I eventually got hold of the document they’d added conditions I hadn’t agreed too. I had to make a public apology on all of our social media, destroy all documentation and was told that I was financially liable for any damages or legal fees that may come up in the future. Any monies gained from our sponsorship was to be handed over to the UAERU, as well as having to agree to never participate in any rugby activity in the UAE again.”

Homeless, broke and jobless, Mokdad returned to his native Lebanon and he is unsure of where his future lies. “I definitely want to stay in the sport however I can. It was incredibly hard to leave what I’d created in Dubai.” he says. “I still think about it now. It was so surreal.” 

He’s backing Leeds in the final, in case you were wondering. Although it all makes Saturday’s game seem rather irrelevant if in 2015 you can be jailed for establishing a sport. Perhaps it shows more than ever, that after 120 years of separation, rugby league is still trying to shake off the shackles of its older brother.