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article imageOp-Ed: Debt relief — The solution for the Euro crisis?

By Alexander Baron     Dec 29, 2011 in Politics
The lead story on BBC News this morning was the huge rise in young people taking out debt relief orders. There is a lesson here for nations.
Some background to debt relief orders and one man's story can be found here. Let us though look briefly at how this phenomenon arose in the first place.
Although surprisingly debt predates the existence of money, hire purchase, buying on the never never, on tick, or whatever term or euphemism is in current use, is equally surprisingly a new phenomenon. In 1955, Chuck Berry released a song called No Money Down which was an allusion to “the salesman's pitch that I usually got when buying my first few cars”. Chuck's first car was a 1934 V8 Ford, for $10 down and $5 a month. It was only with the rise of so-called consumerism and ordinary people buying things like refrigerators, vacuum cleaners, television sets, and of course automobiles, that there was a mass market for such small scale credit purchases. Think about it, what material possessions did the average person own before the 20th Century? A few books, maybe a musical instrument, a chess set...everything else was work related or had some necessary function.
Hire purchase or some sort of credit has been useful or even indispensable for most of us at some time. How many people would own their own homes were it not for mortgages? And how many of us can afford to buy a new car or boat outright?
Of course, whenever someone buys goods or services on the instalment plan there is a potential problem. What if the buyer falls ill, or for some other reason can't pay (or repay in the case of a loan) the full amount? Defaults and potential defaults have led to the creation of an entire new industry (with associated problems) in its own right, including the now infamous PPI scandal. Although the lenders concerned, including banks, are partly to blame for consumer debt, it has to be said that many people have only themselves to blame, buying things they don't need or seldom use just because they can.
There have been extreme cases of people squandering money, with or without credit. The following are three of the most disgraceful cases.
Viv Nicholson won over £150,000 on the football pools in 1961 - worth over £3 million in today's money. It took her the best part of 15 years, but the woman who told the press she was going to “Spend, spend, spend!” finally went bust, although her novelty value has been her salvation.
Another person to whom the media was always kind was full time alcoholic and part time soccer player George Best, who was declared bankrupt in 1982.
The most extreme case though is serial abuser Mike Tyson, who managed to fritter away a sum that beggars belief, although like Viv Nicholson, he has novelty value.
Of course, most ordinary people don't have this good fortune. If they can't keep up the payments on their cars, they will be repossessed. If they can't repay comparatively modest loans, they will end up in the county court, and perhaps suffer the ignominy of bailiffs seizing their household goods. And if they can't keep up their mortgages, well, there are tent cities all over the once great nation of America that testify to what may happen to them.
It goes without saying that neither Mike Tyson and certainly not any of the banksters and speculators who have caused the current crisis, will ever end up there.
Debt relief orders are a new innovation; they were designed to assist people at the bottom of the economic ladder, and there is every indication that they do. Who wouldn't like to walk away from a crippling debt after a year of austerity? To literally have the slate wiped clean?
Of course, the downside is for the creditors. It can be argued that it is unfair to penalise them; if a company sells a consumer a product on the never never, and as a result never never gets paid, that is not only a loss of profits but an out of pocket expense. The government has though deemed that so many people have fallen into the credit trap - for whatever reason - and that it is causing so much suffering and human misery, including to families, that creditors will have to take the hit.
Now let us apply this to the international situation, in particular the current so-called Euro crisis, and the countries bearing the brunt of it, first Greece, then Italy, and who knows who next?
What are the so-called creditors, the IMF and others demanding? Basically, austerity and more debt. If cancelling a hire purchase debt is unfair to a store or other creditor, cancelling the Greek debt or the Italian debt is not, the reason being that this debt is money that never existed in the first place.
Imagine this scenario: your neighbour asks you to lend him £1000 to buy a new car, and you do so out of the goodness of your heart. He takes the money, and heads straight for William Hill, where he backs a racing certainty in the 3.30 at Newmarket. Unfortunately, the horse is pulled up lame, and meanwhile your neighbour has done a moonlight flit. You are a grand out of pocket.
Now what happens if instead he manages to wangle this money out of his bank? What does his friendly bank manager do? Does he take £1000 out of his pocket and give it to him? No, he does not! All he does is writes down the following:
Assets: The Man Next Door £1000 (motor fund)
Liabilities: The Man Next Door -£1000 (loan)
Your neighbour withdraws that money and gives it to William Hill, and when the bookmaker pays that lost bet into his own account, £1000 of new money has been created.
And when your neighbour fails to repay the bank? At some point in the not too distant future, this debt will be quietly written off. Certainly it has not been lost from anyone's account, as the banks would have you believe when they tell you they lend the money of their depositors to the creditworthy (or not so creditworthy in this case).
Only one mainstream economist has recognised the reality of irredeemable debt. You can find Steve Keen describing his remedy on YouTube, here for example.
Will anyone listen to him or anyone else who tells it like it is? Probably not, at least not until the economic situation becomes even worse than it is with hyperinflation and mass so-called unemployment.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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