Financial institutions caused the meltdown, so make them pay for debt advice, writes Bill Hobbs
When it comes to cleaning up after man-made environmental disasters such as oil spills, chemical spills and explosions, the principle of polluter pays is widely accepted. Surely then our polluting lender’s should pay the clean up costs of the consumer credit crisis?
Chillingly the headline numbers of people in negative equity, the majority of whom are under age 40, illustrate the scale of a household debt crisis that undermines any chance of economic recovery.
Over 750,000 households are now suffering varying degrees of negative equity. 40,000 have had their loans modified and 36,000 are unable to pay their mortgages. These figures are getting worse, not better. It means the number of households needing access to a modern debt advisory, debt management and debt resolution system is somewhere between 90,000 and 750,000.
Last week two influential voices were heard. Economist Peter Bacon, highlighting how household negative equity and unaffordable indebtedness would undermine any plans for economy stability and recovery, spoke of paying down consumer debt to rebuild consumer confidence. Missing his core point, most people focussed instead in his suggestion that state assets could be sold fund the elimination of unsustainable household debt.
With nearly every household experiencing a sudden and permanent reduction in household wealth and close to a million owing the vast bulk of consumer debt, a resurgence in consumer spending some time soon is slim.
The psychological impact of unsustainable levels of consumer debt has long been understood. Credit crisis trigger long a crisis in public confidence which sees a flight to safety. People reduce spending, increase savings and pay down their debts. Confidence can only be rebuilt once people are freed from unsustainable levels of indebtedness.
Three years into one of the most catastrophic of consumer credit crisis will Government finally respond? Will it deliver on a humane just and equitable debt resolution process underpinned by a private citizen’s statutory right to earn debt forgiveness?
The second influential voice of bank regulator Mathew Elderfield, called for urgent revision of our bankruptcy system to deal with the scale of the debt crisis in speech that addressed consumer mortgage debt. It appeared to be an implicit recognition of the contagion in confidence caused by the consumer debt catastrophe and the need for process of debt resolution and forgiveness.
The principle of earned debt forgiveness is widely applied elsewhere. Not so here. We have without doubt the harshest, most inhumane debt collection and bankruptcy system. One that permits the unfettered persecution of honest people who, while willing to repay, are no longer able to repay what they owe in full.
At this time the only process that helps honest people deal with their indebtedness is a public service body established to provide assistance to the most financially excluded and vulnerable in our society.
MABS, the Money Advice and Budgetary Service, while designed to help vulnerable low income households more usually long term unemployed and low income earners, was not designed or resourced to respond to the scale and impact of a national consumer credit crisis that has plunged so many households into negative equity and unaffordable indebtedness.
The costs of funding MABS’ vital and valued public services are being paid in full by the tax payer. The Government’s budgetary allocation last year was about €18m to fund its national network of independent local companies. Severe cutbacks in public service funding under a four year economic recovery plan could mean MABS financial resources will be stretched to breaking point. But should taxpayer’s funds be used to fund its debt advice and management services at all?
When MABS services are properly understood, taxpayer’s are effectively providing an indirect state subsidy to clean up the crisis caused by our banks and other consumer credit providers. As debt advice and management services such as those provided by MABS reduce lenders debt collection costs, they are enjoying all the benefits of a taxpayer funded public service without contributing one cent.
Applying the principle of polluter pays would mean that all lenders, banks, credit unions, building societies, sub-prime lenders, finance houses, credit card companies and others should fund MABS costs. Models where debt advisory and resolution management systems are paid for by lenders exist in other countries. In these they pay their fair share which is the lion’s share.
A version of this article appeared in the Irish Examiner Business Section, Monday 18th October 2010
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