Prepare for a fall from grace

Observations on debt

Let us give due praise to Tony and Michelle Meadows. They are the Merseyside couple who borrowed £5,750 from Home Loan Northern at an annual interest rate of 34.9 per cent and who, finding that the debt had grown to £384,000, had to seek temporary court protection from their creditors. They borrowed to sustain a heroic spending spree on house improvements and other items of consumption. In other words, Tony, a salesman, and Michelle, a childminder, did exactly as governments and central bankers in Britain and America would have wished: they have kept the economy going, by spending. They did so by building up historic levels of debt.

More than a year ago, using data from Real World Economic Outlook (Palgrave, 2003), I warned in the NS of "the coming first world debt crisis". It is not confined to consumers: US and British governments, allegedly wedded to "sound finance", are running up budget and trade deficits that many find alarming.

Deregulation of the finance sector has provided the "easy money": it has crippled corporates, indebted ordinary consumers and enriched the financial sector itself. But don't expect politicians or bankers to accept responsibility. When the debt crisis comes, they will blame the victims - "reckless" individual consumers and managers. The more irresponsible politicians will blame foreigners, blacks, Jews or Islamic fundamentalists.

The crisis will validate the old saying that a banker is a man who lends you his umbrella when the sun is shining, and takes it away when it starts to rain. The governor of the Bank of England admitted as much last month when he warned consumers to "be conscious of the dangers of hubris", and said that "starting from the Garden of Eden, there can only be a fall from grace".

This was widely interpreted as a sign that interest rates will rise further. But signs of the "fall from grace" already abound. Bankruptcies and individual insolvencies in August were up 29 per cent on last year. The British Bankers' Association reports that repossessions of homes in the third quarter of 2004 were up 15 per cent over the year - reaching the highest level since the beginning of 2000. These developments should be set against a backdrop of rising oil prices, volatile stock markets and falling corporate profits.

Have pity on those corporations. According to Fox-Pitt, Kelton (FPK), the share of US corporate profits taken by the financial sector reached 38 per cent in the first quarter of this year, compared with 10-20 per cent between the 1950s and the 1980s. In other words, the financial sector has not just been milking poor childminders and salesmen. It has been milking the multinationals, too. If these companies have to shed labour to pay their debts - and there are signs of this happening now - the crisis will be grave indeed.

Central bankers and world leaders, having deregulated finance and devolved key powers to unaccountable, reckless financial markets, remain complacent, not to say downright irresponsible. They have made little effort to manage and prepare for these serious threats. Consumers and corporations will, it seems, be abandoned to the predatory behaviour of the money markets. The county courts cannot be expected to protect them all.

European bankers and leaders watch passively while the plummeting dollar exports deflation to Europe. World lead-ers continue to twiddle their thumbs as instability rises and exchange rates become more volatile. IMF economists have complained publicly about this failure of international co-ordination. For once, they are right. Unless political leaders and central banks end their collaboration with reckless financial markets, and act urgently to stabilise the global economy, there will be millions more in the same pickle as the Meadows family.

Ann Pettifor is senior associate at the New Economics Foundation