The Bank of Britain: How did you spend Christmas?

Our credit cards are at their limits, our accounts overdrawn, and our houses mortgaged to the hilt. Yet even before we've digested the turkey and unwrapped our last presents, millions of us are heading for the sales, desperate to buy, buy, buy. What's driving this lust to spend? And is there any way out of our spiral of debt? James Scurlock, author of 'Maxed Out', investigates
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The Independent Online

Publishers love the month after Christmas. Fresh from weeks of over-indulging on food and credit cards, a great throng invades bookshops for advice on losing weight and getting out of debt in what constitutes the largest - and ultimately fruitless - mea culpa on earth.

While I can't predict what the scales will tell, I can say with absolute certainty that this year most Britons will have found themselves in more debt than ever. How do I know this? Not because of Christmas - the gifting thing has been a tradition for at least a couple of thousand years now, and there's no record of the three wise men having to go on a "debt diet" - but because easy credit, American-style, has landed on British shores, and the consequences of this invasion are as predictable as the opening of yet another Starbucks.

For the past several years, I have studied the explosion of consumer debt in America for my book, Maxed Out: The Book the Debt Industry Doesn't Want You to Read. For most of that time, I assumed that the United States' addiction to credit must be unique. We have long been the most infamous overspenders. Or, as our President proudly spins it, I and my fellow citizen-consumers power the locomotive of the world's economy. Yet I might just as easily have done my research in the UK, where the American model of easy, high-cost credit is creating an even bigger mess, and where the cracks are just beginning to show.

One Brit who understands our debt issues well is Mark Davis, aka Mr Piggy Bankrupt. Davis is a 27-year-old graduate of the University of Manchester who began an insurance brokerage out of school, adding huge burdens to an already staggering £25,300 he had accumulated in student debt and graduate loans.

After changes in the insurance business wiped out his profits, Davis held his breath and declared bankruptcy. Several months later, he's working for a hi-tech firm, has lost his girlfriend and is still contemplating the effect that financial failure has had on his life.

In many ways, he tells me, bankruptcy really hasn't led to many changes - his family didn't ostracise him, and he's kept the same friends (minus one). Still, he calls declaring bankruptcy the most significant event of his life. There's the knowledge that getting credit will be very expensive (though probably not very difficult), and the more troubling awareness of being labelled a bankrupt for the rest of his life.

Davis started up Piggy's Bankruptcy Site (www.piggybankrupt.co.uk) because, when he was in trouble, he found there was a dearth of information that was relevant and helpful. He remembers having questions about the bankruptcy process and the future consequences of declaring himself bankrupt, but there was only a toll-free line to call, and no one to speak to who'd actually been through it. Websites, he says, were mostly commercial, selling Individual Voluntary Arrangement (IVA) services or self-help books. With Piggy's Bankruptcy Site, he's created a forum where people can reflect on their situations, share experiences and, hopefully, make better-informed choices.

E-mails to Davis's website have spiked in recent months, presumably owing to the season. He's been contacted by lots of people worried about paying for gifts, although most people wait until they can't put food on the table, or until the door is padlocked, before they admit that there's a problem.

Perhaps that's a function of denial, or a fear of emasculation. "One thing I've come to realise," he says, "is that your role within a family can be redefined immediately [by debt]. If a man is the breadwinner, the missus becomes the breadwinner and his role is reduced, or vice versa."

The stigma of debt is something I've come to see again and again in my interviews - and the lengths people will go to to hide their debt can be both shocking and heartbreaking.

To avert the stigma, many of the people who visit Piggy's Bankruptcy Site go down the IVA route, which is similar to the Chapter 13 bankruptcy in the United States. In this, a timetable is negotiated where debts are paid over a longer period. But some IVAs are failing, Davis says, because the companies neglect to account for non-essential essentials - like Christmas gifts.

The one mystery Davis cannot solve is what has convinced Britons, of all people, to gorge on debt. To an American, this is an almost unfathomable contradiction. After all, Britain is the land of free healthcare and subsidised education, the land where understatement, restraint and modesty are virtues. Even the British colonial model was far more responsible - at least in the purely economic sense - than our own.

The British learnt to exact taxes from their subjects, while we are inclined to borrow from ours - and yours as well. Americans never quite took to the stiff upper-lip. While going broke was still an offence punishable by execution on your shores, our founding fathers were contemplating what have become among the most liberal bankruptcy laws in the world.

True, Brits invented tabloid journalism and reality television, but it is in my hometown of Los Angeles that paparazzi stalk the boutiques of Beverly Hills, broadcasting the latest (and most expensive) trends to the shopping masses, who are expected to fork out whatever is demanded for a pair of the right jeans, and to encrust their cellphones with diamonds. How else to explain $1,500 (£760) denims and $200 T-shirts?

Yet I only became aware of the problem in Britain a year and a half ago when an American professor I interviewed told me that he was being flown to London with the Princeton economist Paul Krugman, to commemorate a dubious milestone: Britons' accumulation of over $1 trillion in consumer debt. The British, he said, were in a panic. Credit-card executives were grilled before Parliament; the Queen was warned of consequences; the Financial Services Authority was investigating.

I decided to take my investigation further afield. Despite having interviewed several British expats living in America for my book, I was intrigued to see for myself whether the problem really was as bad as it seemed.

I arrived in London at the height of this year's Christmas buying season - an especially promising time and place for an investigation. Tourist shopping districts such as Bond Street and Oxford Street were glittering, although fewer Americans were in town, owing to the dollar's 15-year low against the pound.

But my destination was decidedly un-tourist-friendly: a meeting of Debtors Anonymous, the 12-step programme for debtors who have come to believe that the problem is something more than mathematics; that it is an issue of behaviour, an addiction, a spiritual deficiency that can only be addressed by reprogramming one's guiding principles.

The first step at Debtors Anonymous is this: "We admit we were powerless over debt - that our lives had become unmanageable." The meeting I attended was in the basement of a Methodist church in the West End, sandwiched into a small room, slotted between a salsa class and an Alcoholics Anonymous fellowship.

DA jealously guards the confidentiality of its proceedings, so I will not divulge specifics. Suffice it to say that there were men and women present, and that the issues raised in the confessional-like sharing sessions involved student loans, the abandonment of bank accounts due to excessive (and perhaps illegal) fees, and, of course, the overwhelmingly imminent expense of Christmas gift-buying.

In the middle of the room were a number of placards bearing slogans such as "Plastic is not a precious metal" and "Debtors are people who cannot afford to be themselves". The meetings are democratic and straightforward, and end with a prayer.

I found myself bonding with a woman who alternated between recognising herself in the slogans and wondering: "What am I doing here?" She didn't spend much, but didn't earn enough either. In a city as expensive as London, it is somehow possible to become indebted on the basest necessities.

Earlier, I had privately met "Joe", a government worker. "It's fashionable to be an alcoholic and a drug addict," he lamented. "The one thing that's taboo is being in financial trouble."

Like Mark Davis and others, Joe's pattern of "debting" began with student loans and never stopped. He declared bankruptcy two decades ago. Now he's in a new marriage and has managed to save by obsessing over every aspect of his financial life - by writing down every purchase and every scrap of income, even a penny found on the street. "I changed," he says, "when I admitted that I was powerless."

Suicide, one of the recurring themes of my research at home, emerged in the conversation with Joe, as well as with others. On another website, a man who lost his job talked of wanting to "disappear", a euphemism that is hauntingly familiar, especially when he envisions himself walking into the Thames and never reemerging. One of the subjects I researched in the States was a woman who drove her car into the Ohio river and drowned. In both cases, the individuals were being called several times a day by debt collection agencies (DCAs). Countless blogs confirm that the collectors' weapons of choice - wounding pride, humiliating, threatening ruin of reputation - are exactly the same here as in the States. On the debt collection sites, it's a very different story - breathless articles on explosive growth and a frantic search for new employees.

Although no one I interviewed blamed their problems on larger forces, a glance back over news stories of the past few years reveals why financial problems have become so widespread and so intransigent. There is the purchase of the most expensive house in the history of mankind in London, epitomising the stratospheric rise in the cost of housing. There is the scaling back of Government assistance in education and healthcare, including the case of one woman who was denied cancer treatment because of its high cost. There's the study showing that the British are relying on their credit cards to buy necessities such as motor fuel and groceries, even as the former chief executive of Barclays Bank admits that he would not himself use a credit card because of its high cost.

So living in Britain has become increasingly expensive; services and other public goods are being scaled back (which means that their cost is being shifted on to the backs of the public); and large, trusted financial institutions are teaching us to become more dependent on a product they know to be so harmful that their own executives won't use it. The UK bears a striking resemblance to the United States.

Strangely, it is the Tories who have now taken the lead on sounding the alarm with a report titled Breakdown Britain, which estimates the number of citizens in financial crisis at eight times the official number, calls the society "increasingly dysfunctional" and warns that the financial industry's predations may lead to criminal behaviour.

Yet, if American history is any guide, debt of this magnitude has built up an inertia that is as futile to resist as it is counter-intuitive. Debt has a smoothing effect and an air of inevitability; it has the ability to disguise its own consequences, at least in the short term. When our US national debt passed the trillion-dollar mark in the mid-1980s there was a brief uproar, but then President Ronald Reagan blamed the media and everyone seemed to forget about it. The $1 trillion in consumer debt that caused so much panic in the UK two years ago has shot up by 30 per cent since then, and the world has kept on turning - hasn't it?

The ballooning number of personal bankruptcies and IVAs give the lie to the notion that we can borrow our way out of debt. And it seems self-evident that banks cannot continue to profit from customers who are going broke. Yet, in the short term, that's exactly what they're doing.

And if America continues exporting its easy-credit model - and the recent news that Bank of America is keen on acquiring Barclays suggests that the invasion is far from over - the situation in the UK will probably get worse before the banks return to a more traditional business model and more prudent underwriting standards.

In the meanwhile, bankruptcies will continue to hit records; people will use high-interest credit as a backstop to keep their place in the middle class (including using credit cards to make interest payments on other credit cards); branches of Starbucks will continue to proliferate; and wise old souls will observe that society is regressing into a feudal state with only two classes - the owners of capital and those who rent it from them. Politicians will wash their hands and say that nothing can be done because the financial industry is too large and too woven into the fabric of society to be regulated.

The contradictions will foster a stubborn - but slippery - uneasiness, a suspicion among many of us that something just isn't quite right. In a period of unparalleled prosperity and stability, respectable people will slide into poverty - slowly at first, then with lightning speed. As free-marketers defend the sovereignty of the national currency, the demand for Visa and Mastercard tender will make the value of sterling less and less relevant.

As industry executives warn against regulating their sleek new profit machines, arguing that it is up to the consumer alone to inject responsibility into their system, they themselves will pledge the assets of their constituents at an astonishing rate in order to save their wealthiest citizens and corporations from the spectre of higher taxes, increasing the burden of the already maxed-out working classes. As the level of debt rises to more and more absurd levels, you will see inventions such as credit cards issued specifically to pay medical expenses; collection agencies hired to go after soldiers wounded in battle; the sale of personal information from public to private entities, and back again; and perhaps even a new bankruptcy scheme which reverts back to the 18th century - that is, a bear trap where lifelong imprisonment is the norm and death the only way for the majority to get out from under.

All of these scenarios have played out in America and, at one time or another in the very recent past, each has been heralded as a solution to a problem that most of us are loath to admit exists. If this sounds absurd, it is. If it sounds entirely implausible, I urge you to read Maxed Out. Believe it or not, it gets worse.

The good news is that there is nothing inevitable about the American experience. First, the British press seems to be more concerned about the issue (for example, the BBC's exposé on questionable bank fees two weeks ago).

Second, the British Government seems to be taking steps to address the worst cases of abuse by the financial industry - reminding those companies and its citizens that they are not, after all, above the law. The Office of Fair Trading recently ruled against banks and financial services companies that have been charging illegal fees in flagrant violation of UK laws, and capped credit-card fees at £12. In the United States, unlimited fees were made entirely legal by the Supreme Court less than a decade ago. Still, the fact that financial corporations in the UK are acting so brazenly - so American - seems more than a little telling.

Is the financial industry shaking in its designer boots? Probably not. I recall a conversation with a provincial minister in Canada who observed that, unlike the United States, his country had usury laws (interest rates above 60 per cent are prohibited). But the laws went unenforced. Why? He seemed to think the police were too busy with "real" crime to go after a bunch of bankers.

But there is another reason. Many of us in America, Canada and the UK can no longer live without easy credit; the threat of our plastic being taken away is terrifying, not only to politicians who expect the economy to grow year after year, but to us, who have become conditioned to believing easy credit will always be there. I suspect the Office of Fair Trading will find itself playing chicken with the credit-card companies, who will threaten to remove the punch-bowl and bring the party to an abrupt halt if they are not allowed to charge the fees and interest rates they've become accustomed to. In a preemptive strike worthy of Donald Rumsfeld, an industry spokeswoman reclassified penalties as "service fees" in an effort to remain within the law.

The great 19th-century liberal historian Lord Acton once predicted a climactic showdown between the people and the banks. He may finally be proved right; that is, if people cannot stop borrowing and the banks cannot stop enticing them to ruin. As Charles Dickens remarked of the time leading up to the French Revolution: "It was the best of times, it was the worst of times." At the moment, it is the best of times for the owners of capital. But for the rest of us, it is a very different story.

Maxed Out by James Scurlock is published by HarperCollins (£12.99). To order a copy for the special price of £11.99, call Independent Books Direct on 08700 798 897, or visit www.independentbooksdirect.co.uk

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