On consumption, banks and Christianity

I have to confess to a certain smugness of late which I am making a serious effort to throw off. As a Christian who also happens to be a practicing accountant with a training in economics, the current economic climate is providing abundant food for thought.

For a number of years it has been clear to me, and I am sure others, that things could not continue as they were going. I remember discussions with friends and colleagues back in the 1980’s, concluding that the only way to make money out of one’s house is to trade down. This of course was out of the question for anyone with a family. As the 1990’s rolled on we talked about the spiralling cost of mortgages with young couples on anything less than two professional salaries effectively being priced out of the market in many parts of the country. Hindsight is easy, but as the new century turned it was increasingly evident that the more expensive houses and mortgages became, the less would be available out of household incomes for spending in the shops. Ultimately, there had to come a point where consumers could no longer afford to buy the goods necessary to keep their employer’s in business.

Except that consumers had found a way out of the problem – credit cards. After they had borrowed from their mortgage on the back of ever rising property values, consumers reached for their wallets and flexed their flexible friends. Once the limit on one card was used up, out came another to take on the increasing debt burden. Let’s not mention the banks just yet in this sorry tale. We can come to them later.

At this point in the plot, the Christian in me cannot help but observe that in the space of 20-30 years there has been a subtle but significant change in perceptions of wealth. There was once a time (remember Granny?) when if you wanted something, you saved for it. If you couldn’t afford to save, you did without. In economic terms, consumption was a function of historic income and savings. Somehow along the way that has changed. There is now an expectation, particularly among the young, that whatever is desired can be had, and had right now. Current income isn’t a problem other than in providing sufficient surplus each month to pay something towards the credit card balance. In other words, consumption is now a function of some multiple of current income.

Again, acknowledging the wonderful value of hindsight, it was still possible to recognise that the consuming population couldn’t continue growing their debt forever. Some might, by increasing their incomes, but this was never an option for the population as a whole. Arithmetically there has to come a point for any borrower where the amount of surplus income available to repay a mounting debt is less than the interest added each month. Beyond that point, the debt simply runs out of control.

So where do the banks fit into this? In the good old days when banks had managers in them, they took deposits and out of those deposits made loans. (This is slightly simplistic, but only slightly). Then the banks cottoned on to a wizard wheeze. If they could borrow money, they could lend even more and make even bigger profits. And what better opportunity to lend than to a nation of consumers with inflating house values and an appetite to consume like there was no tomorrow? Now, it has always been recognised that any bank which lends money will face bad debts at some point. Therefore, prudence (and banking regulations) dictate that the banks maintain a level of easily liquidated assets on their balance sheets. These can be cashed in if needed. Call it a rainy day fund. They all did this but ended up holding assets worth less than face value and possibly worth as little as nothing. Lets not go into sub-prime lending and collateralised debt obligations just now. So when the wheel comes off the cart and banks can no longer borrow the funds they need to lend to people that need to consume – the bubble that has been expanding for two decades suddenly explodes.

Banks stop lending to businesses because they don’t have the funds to lend. Businesses lay off their workforce because they have gone bust or fear doing so. Employees stop flexing those credit cards in the shops, leading to more businesses going bust and round we go again.

So who was it got us into this fine mess? Here is a Christian answer. If consumers had listened to their Grannies and learnt to distinguish between need and want, they would not be saddled with crippling debt and the possibility of losing their home. If banks had understood the folly of lending to individuals for spending on holidays and restaurants, then their balance sheets would not have been so vulnerable to a global setback. True, in this ‘if only’ world economic activity would have been a lot less than we have seen. We would have fewer cars, smaller televisions and only one winter coat instead of four. But perhaps, like Granny, we might see value in things other than material possessions. Money is useful but that is all. Once it becomes our God then we are lost.

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