Hamish McRae: Bring back the usury laws

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The Independent Online

So should we all, as the man from the Bank of England urges, spend more to pull the economy out of recession? Or is that compounding the mistakes of the past, when Britons went on a spending spree on borrowed money, for which we are now paying the price? And anyway, if the economy has to rebalance towards more investment as we are also being told, surely that must mean less consumption?

Well on the face of it, it looks as though we are indeed starting to spend again. The revised GDP figures out yesterday confirm that growth was strong in the second quarter, with consumers running down savings to maintain their shopping spree. That is in contrast to the pattern for the previous 18 months or so, when savings were being rebuilt. This positive attitude seems to have carried on through the third quarter, for the CBI's distributive trades survey for September, also out yesterday, shows that retailers were even more buoyant than they were in August.

So, for the time being at least, the economy will be pulled along by all of us. Since consumers account for two-thirds of final demand, if consumption grows the economy will grow. It is a simple as that. But we cannot run down savings forever, and there must be a nasty possibility than some people at least are buying things now to avoid the 20 per cent VAT rate that will hit us in January.

But there is something much bigger here than how strongly consumption will grow in the next few months. The issue is whether we are at some sort of longer-term turning point, the retreat from the "buy-now, pay-later" society, both at a national and a personal level.

The central point here is the extent to which we defer gratification. To what extent do we consume now even though that will mean we will have to consume less in the future?

Start with the national debate. One of the really interesting changes in politics is the one over the morality of public borrowing. To caricature a little, the old centrist view, accepted by all parties, was that it is, within reason, all right for the state to borrow more, provided it used the money to fund socially-advantageous projects: hospitals, schools, and so on. The new view, which we are increasingly hearing from the Coalition and, I suspect, will hear from Labour when it has sorted itself out, is that borrowing imposes a burden on our children and grandchildren. Accordingly we have to be very sure that we are not using borrowing to consume now at their expense later.

There are practical arguments against state borrowing, of which the most relentless is that if you over-borrow you have to pay higher and higher rates for the money, as Ireland and Greece are finding now, or simply cannot borrow at all. But it seems to me that to rely on the financial markets to impose discipline is a bit of a cop out, quite apart from the fact that they are unreliable at this policing role. The moral argument of the need to respect fairness between generations is surely ultimately more important and it is good to see politicians now making this case.

The moral argument can be applied to personal borrowing too, but start with the practical. Three years ago people were able to get 125 per cent mortgages, whereas now the top percentage is more like 90 per cent – there are a few higher ones about but at disadvantageous interest rates. So the market is imposing the discipline now that it should have done during the boom years. Indeed had it done so then house prices would have remained more stable and a lot of misery would have been avoided.

But the market does not seem to be controlling credit card borrowing. True, the cards are no longer landing on our doormats and the outstanding credit card debt is stable. But if you look at the adverts you see them offered with interest rates of 35 per cent and more. That cannot be morally right. No one should have to pay that sort of rate. For the first time in my life I find myself wondering whether there should be usury laws: no loans should be legal if the interest rate is more than, say, 10 percentage points above the RPI.

If that were to happen, it would mean that some people, particularly those with bad credit records, would not be able to borrow. Credit would shrink. For some people that would be unfair, an intrusion into the previously free credit market by the regulators. But that was the situation in the 1950s and 1960s. Access to consumer credit was tightly regulated and while you could buy big ticket items such as cars on hire purchase, for most things people had to save up first.

You cannot un-invent the credit card, nor would you want to. Nor will we retreat swiftly from the convenience of paperless transactions – governments around the world like these because they can be tracked, whereas it is much harder to monitor (and tax) cash payments. But if attitudes to government debt are at some sort of turning point it is at least plausible that attitudes to personal debt may be turning too. If that is right, then we will have begun the long retreat from the never-never society. We will gradually come to save more and spend less, at least proportionately, despite the urging of the monetary authorities to do the opposite.

Germany becomes the engine of growth once more

German consumers seem to be spending more too. After a decade of stagnation, consumption is rising strongly, with retailers more optimistic than at any time since the early 1990s. If they are right (and other consumer confidence surveys suggest they are) Germany might end up becoming again a growth engine for the whole of Europe. Since the rise in German consumption is more sustainable than the rise in British, this is good news. Since Germany is Britain's second largest export market, it is good news indeed.

h.mcrae@independent.co.uk

For further reading

'Popes and Bankers: A Cultural History of Credit and Debt, from Aristotle to AIG,' by Jack Cashill (2010)

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