Credit cards are obsolete. Is consumer debt heading the same way?

The technological history of credit.

Slate's Matt Yglesias, in a post about the effect higher bank capital requirements could have on the real economy, gives a brief overview of the changing nature of credit in America:

Once upon a time credit overwhelmingly meant business credit, which then expanded into the personal sphere primarily in the special case of houses and what you might call household investment goods (cars, large appliances). That then metastasised into the all-in culture of consumer debt and credit that we know from the past 25 years.

Yglesias' point is that high capital ratios will reverse that trend, boosting the price of consumer debt while making corporate debt cheaper. This, he adds, might not be a bad thing, "disproportionately encouraging business borrowing to finance investment while discouraging consumer borrowing to enhance consumption".

But what I find interesting is how that "metastasisation" of a relatively small field of debt into the widespread credit economy we now have was born. It was, broadly, a technological imperative, as the Financial Times' Isabella Kaminska points out:

The credit component in credit cards came into play because in the “old days” extending credit was the easiest way to transact remotely without the use of physical cash.

Any alternative back then would have involved waiting hours (if not days) for the merchant to call your bank, who would then verify who you were, who would then make a deduction from your account, who would then send an instruction to the merchant’s bank, whose bank would make a corresponding credit, who would both use different parties to clear and confirm the transaction. Sometimes by post.

It was basically much easier (from a velocity point of view) for a bank to guarantee to the merchant that you were good for the money by means of a piece of plastic. The transaction would take place and you would then owe the bank, whilst all the settlement processes continued on in the background. If you didn’t pay, it was between you and the underwriter bank. The merchant was covered. You were probably black-listed.

Initially, then, the fact that credit cards enabled people to freely and easily spend beyond their means wasn't deliberate — it was a by-product of the real aim, which was just to let people pay for things. It wasn't quite a bug in the system, because card issuers were always more than happy to let people pay off their credit card bills in instalments, racking up healthy interest payments in the process. But it was hugely important in getting the concept of borrowing to pay normal daily bills into people's heads.

Nowadays, of course, that technological imperative is nonexistent. Although they will take every possible opportunity to delay payments, squeezing marginal gains from the extra interest, banks are capable of transferring money instantly. At the very least, the fact that debit cards are now possible renders the initial rationale for credit cards obsolete.

Of course, if this apotheosis of the credit economy is something which is worth pushing back against, as Yglesias suggests, then doing so by just raising interest rates is about the most damaging possible way. People have got used to boosting their standard of living with easy credit, and until they can achieve the same standard without resorting to credit, making it more expensive to borrow could backfire heavily.

Credit cards. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.