The worldwide economic disaster that began in 2007-2008 was fueled, in large part, by dodgy loans, such as irresponsible mortgage lending. Millions of ordinary people suffered great losses as a result, and some are still struggling. The struggle isn’t made any easier by speculations that we may be headed for yet another catastrophe.
Is another meltdown likely? It depends upon whom you ask.
Though undoubtedly some institutions and a few individuals realise benefits from a sour economy, most are presumably keen to prevent a recurrence of what we’ve just been through. And in recent years, legislation has been passed and policies enacted to circumvent another crash. One result is that, at least for the time being, most lenders, amongst them mortgage lenders, have enacted more stringent criteria for borrowers. Once burnt…
Still, some observers have expressed concern that the UK economy could be headed for trouble again due to another “credit-fuelled binge.” Bank of England data released in July 2015 showed that UK business lending experienced the sharpest fall in at least four years in June, while mortgage lending and consumer credit expanded at a pace that had not been seen since before the financial crisis. Mortgage approvals continued to increase (though remaining below pre-crisis averages), whilst consumer credit grew at the fastest pace in almost a decade. But some experts argue that increased business lending rather than consumer lending is what we need for substantial economic growth.
The Office for Budget Responsibility (OBR), the Government’s official forecaster, said it expects the household debt-to-income ratio to keep rising until the end of the decade, returning to its pre-crisis peak of just under 170 percent at the beginning of 2020. This actually represents a downward revision of the OBR’s previous predictions, part of the reason for the revision being “an assumption that tighter mortgage lending conditions will prevail for a longer period”. The forecaster also believes that more people will have their credit card and loan debts written off over the next few years. That’s not really good news: consumers are expected to get deeper into debt but fewer will be able to pay off that debt.
But other observers aren’t quite so pessimistic; experts at the EY ITEM Club, which uses the same economic model as the Treasury, believe the debt-to-income ratio will rise only gradually over the next few years. And some economists believe that more people will be more cautious about taking on debt. That remains to be seen; overall the public has a short memory, and the state of “irrational exuberance” can apply to individuals’ purchasing decisions as well as to investment choices.
One person’s struggle is another’s bonanza.
Now that the economy is by most measurements in recovery, lenders have been aggressively working to rid themselves of the bad loans of the boom years and focus on a healthier future of lending to British households and businesses. In August 2015 PricewaterhouseCoopers (PwC) reported that British banks had outpaced their EU rivals in a rush to sell unwanted loans, and they were expected to shed €60 billion (£42.6 billion) of assets this year, an increase from €21.5 billion in 2014. Their success is attributed in large part to the eagerness of buyers – most notably US investment groups – to grab a slice of the British market, perceiving the loans as a good way to cash in on the UK’s relatively strong economic recovery.
So whilst many average middle-class people are still financially stressed, the big wheelers and dealers are, for all practical purposes, cashing in on past blunders. That’s to be expected; it’s a given that no matter how disastrous an event may be, someone is going to find a way to make money from the ruins.
Even so there’s reason to hope that some of the hard-learnt lessons from the past few years have at least somewhat lessened the likelihood that history will repeat itself. Again, that remains to be seen.
Notwithstanding more restrictive lending policies and arguably saner rules and regulations, a borrower who doesn’t exercise good judgment can still get into trouble. One common mistake is the failure to research all available loan options, which can result in a borrower choosing a lender that charges excessive rates or has a poor customer service record. Another pitfall is missing payments or defaulting on a loan, which can sink a borrower more deeply into a financial pit from which escape is difficult.
So the onus is still on the individual borrower to choose carefully and handle the loan responsibly. As individual consumers we may not be able to prevent another wide-scale economic meltdown caused by the irresponsible actions of institutions that are “too big to fail”. But we do have the power to prevent a personal financial disaster caused by our own poor choices, and that’s a power we should be exercising no matter which way the economic wind blows.
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