Irresponsible Lending - Why We Suffer

Debt levels are at an all time high and yet it is claimed we are the wealthiest we have ever been. So why do so many of us rely on debt consolidation as a debt management strategy and what fuels our addiction to debt . This article examines the drivers behind Bankrupt Britain

In the good old days we knew exactly where we stood. Decision making was easy; white or brown bread; BBC or ITV; Blue Peter or Magpie; lager or bitter. If you wanted to buy a house this was again straightforward, can I afford it or not? To find out you would go to the bank, they would assess whether or not you could afford the mortgage. The house purchase would go ahead knowing full well that not only your own calculation of affordability was correct but the bank was confident that you would repay the loan. Things were easy back then. Ah!...The good old days.

Today, rampant consumerism has created a wealth of choice. Like rabbits caught in the headlights, we are confused and act irrationally. Rather than be discriminatory in what we buy, we are led down the garden path by slick advertising and marketing campaigns misleading us into thinking that our life will be better if we have 100 TV channels or that "the hero inside" can be found in the next new car or that pre-packed meals are tasty and nutritious. It appears that choice does not really give us choice. Businesses can focus spending on marketing, rather than the quality of products, safe in the knowledge that if their brand is promoted more than anyone else's, we will buy their product. Scrutiny has left the building.

Banks and building societies have a similar business model and are competing in a very ferocious market. Need a credit card? Look no further than your doorstep for special introductory offers and a free key ring if you sign up. Need a loan? No problem, turn on the telly and you'll see countless adverts offering to lend you money in the blink of an eye. Can't afford to buy a house? Wrong! Of course you can, no matter what your credit history, you can get a mortgage. There are numerous banks out their falling over themselves wanting to give you money.

But hold the horses! Can we afford our level of spending? What checks have we done to ensure we can afford all this debt ? Well, none. It's not our money so who cares? Exactly. No one seems to care; not us, not the shop keeper and, curiously, not the people who are lending us money.

So where is scrutiny? Do the manufacturers want scrutiny of their products? No, they don't. Look at the shadowy, blurry picture you get from some plasma screen TVs, which are flying off the shelves, or the razor blades which shave "closer than ever before", and you'll realise that powerful marketing has swayed us into suspending our powers of scrutiny.

If we do think about scrutinising the quality of the product, we are given the option to buy an insurance plan which will give us "peace of mind." At every turn we, the consumer, are discouraged by businesses to scrutinise what they offer. This is achieved through their advertising and marketing campaigns which encourage us to ignore the competition and buy their product, "It's a no-brainer!" as one strap line puts it.

It is no surprise that we buy into this way of life the magazines and businesses want us to live. The full frontal assault on our powers of scrutiny has caused us to overspend and overspend we have big time. But what happened to the old faithful bank which looked after our parent's money and our grand parent's money and our great-grand parent's money and so on? Where's the friendly call to say, "Mr Lindsay, we are worried that you are spending too much."? Or, "I'm sorry we can't lend you the full amount on the house you wish to purchase."

The answer is that they don't really care how much debt we rack up. We can spend, spend, spend and the banks won't give a jot. The reason for this is that they have come up with a ruse called collateral debt obligations or CDO. CDO means that they can sell our debt on. Hedge funds in particular love CDO and have until recently made a huge amount of money from these. So (surprise, surprise!) the banks won't lose if we default on a loan.

Many commentators have made the point that the financial problems suffered by many consumers in the UK are as a result of irresponsible borrowing not lending. In part this is correct, but the main culprits are the financial institutions who have convinced us that there is no need to worry about paying them back. We don't have to look any further than the 3% rate for minimum payments for credit cards, to find evidence for this. The banks are only interested in whether we can service the debt .

The irresponsible lending of banks is even more evident in the US and in particular the sub-prime mortgage sector. Here they encourage self employed brokers to convince those who would ordinarily be unable to afford a house, due to poor credit ratings etc, that they could in fact afford a house. These brokers were paid on volume of loans they supplied, which encouraged mis-selling and fraud. The banks didn't mind as they just sold the debt on in a CDO package. The banks were making money, brokers were making, hedge funds were making a stack of money and everyone was happy!

Well done the banks irresponsible lending does pay.

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