On Debt, Gambling and Parasites

I was brought up by a very thrifty mother, a woman who epitomises protestant values. I never heard her say “never a borrower nor a lender be” but I suspect that is only because she didn’t know the phrase. Quite a few people from that generation are like that, a product of austerity and rationing.

Mum never had a mortgage, and was nervous when I took one on, only slowly accepting the argument that in London in the 1980’s there was no other way to get onto the property ladder. As she believes in owning rather than renting, I got my way in the end. But some of her values have stuck with me. I squirrel assets and don’t take financial risks lightly. And I have mistrust of those trying to make money from money, and even more of those making a parasitic living from providing the outlets for people to do so.

Experiences over the years have led to this musing. Through friends I have witnessed first hand how debt can lead to a sort of paralysis. And, more recently, I’ve observed the nature of advertisements now on English language TV.

It is easy to take a smug view of those in debt when one has never really been in debt oneself. My parents were moderately well off, classic Thatcher conservatives really. Thanks partly to their investment in my education and support, I’ve earned well and found it easy to avoid reckless risks.

But I now realise it is so easy to slide the other way, indeed I would say it is hard not to. There are many reasons why.

Owning property remains a laudable goal, and the need for high multiple mortgages has only worsened, and, albeit with a pause over the last couple of years, providers make it all to easy to take on the risks. Job security is a thing of the past, so the main risk factor in taking out a loan, disruption to steady wages, has intensified. The same is true of divorce.

Then there are the parasites. We were all mis-sold endowment mortgages. The way credit cards are marketed is disgraceful. Every store or item has its alluring credit scheme attached. Loan sharks abound. And, once someone is enmeshed, there are gambling and lotteries everywhere.

Meanwhile, societal expectations only intensify, as our networked world tempts us to reveal an outward affluence widely.

I fear that in some emerging countries, this could develop along an even worse trajectory than in Europe or the USA. There may be little legacy of inherited assets as a parachute. In many cultures, appearances and giving gifts matter a lot. And superstition can be part of society too, as well as gambling, legal or not.

Last Chinese New Year I attended a Feng Shui workshop interpreting the year. There are some good principles in Feng Shui, but the way everyone started making notes when the section about luck and money came around was for me disturbing.

How do people react to being in debt? It is both shaming and confusing. The pressures to appear in control are strong. Understanding the maths and budgeting is beyond most people, now there are so many variables involved. So people put their head in the sand and wish the problem away. They don’t open their mail. They accept solutions to defer a day of reckoning. Then they desperately try to reduce costs, but find they are in a vice-like grip because of the added cost of servicing the debt. Often there is no way out.

Before you smugly condemn these people, ask yourself what you would do? If we have a difficult relationship, our natural tendency is to hope it improves rather than address the problem head on. It is the same with a medical condition, or a big decision at work. We all do it, probably you as well. Consider that it may be that the only reasons you never got caught in a debt spiral might have been luck – the year you joined the workforce or bought a house for example, or the wealth of your parents. I am not so quick to condemn these days.

Back to the parasites. At least the lotteries and the gambling companies are honest. I find it so scary that every second advert on Sky these days seems to be either for online gambling, or its likely consequence, loan sharks and dodgy debt restructuring. What a testament to a society filled with pain! It is overwhelmingly the poor who gamble, often still men with money siphoned from the family. The government won’t stop it, as they get rich on the tax levied. But surely the explosion in easy gambling is stacking up social problems for the future?

My experience of the finance sector places them behind bookmakers in their probity. I recall one story from the USA from my Shell days which opened my eyes. We did a deal with a credit card company, whereby if customers took out the card of a particular company they could get discount on fuel. It was a good deal, and many applied. The problem for Shell came because most applicants were refused the card. The reason was not that they were not credit worthy, in fact precisely the opposite – credit checks suggested they would pay of their monthly balance in full, and hence be poor margin prospects for the credit card company. Since many of these people were previously loyal Shell customers who were insulted, even shamed, by the rejection, we lost a lot of customers as a result. More fool us, we should have done our due diligence on the deal.

But what does it say about the credit card company? Their margins were high, since they could afford the large discount available on fuel. Yet they obtained those margins by exploiting a vulnerable group in society, those tempted by some credit to be rolled over at exorbitant interest rates. For that same group can be captured, lured into a trap from which there is no easy escape. It is worth noting that credit card interest APR is current about 20%, while bank base rates are less than 1%. Deposits earn maybe 3%. The APR of some companies offering fast loans on Sky are over 2000%. All are hidden in small print, and in practice turn out even higher, as missed repayments lead to penalty fees, exorbitant charges are imposed for sending letters, and so on.

Think about it. Their goal is to entrap you, and then milk you hard. If in the end a debt goes bad, for the most part interest and fees from that same customer have created more than enough margin to compensate. How different is this business model from the loan shark lurking around the council estate?

This condemns retail banking, in my view. By the way, my experience with people trying to sell me investments is even worse, as a careful look at the small print usually reveals their obscene margins – for essentially nothing - and their attempts to obscure them. What about investment banking? These people are little more than overpaid bookmakers, making margins through smart hedging and laying off, certain to profit from sheer volume of trade, so long as the whole edifice doesn’t crumble around them as in 2009 – in which case the bail out will come.

And the biggest scandal of all? Such transactions are tax free! At least bookmakers have to pay a large government levy. Not so financiers. The most brilliant, constructive proposal of the last generation has been the Tobin tax, in which all financial transactions are subject to a small levy. It would have the effect of bolstering reserves, at the same time as stabilising markets, since it would be the low margin, high volume trades that would be affected.

The financial lobby (including my saintly Economist, by the way) make two arguments against Tobin. They say it is uncollectable, which is utter bullshit. Look at gambling, it works there. Compared with VAT, collection would be trivial. They also say it would reduce the competitiveness of countries who introduce it. Just like all taxes do, but it doesn’t stop us deploying them. In theory, that argument would have driven all gambling offshore, but it hasn’t. And what is something like the G20 for if not for such reforms?

Financial services have a role. Look at micro finance in India and Africa, it is wonderful. Companies need banks to finance their investments. But I become quite a socialist, and also something of a Lutheran, when I survey the horrible landscape in these areas today.

I try not to complain without offering practical remedies. A Tobin tax is one. Public awareness campaigns about gambling, like for drink driving, is another. Introduction of real international competition in banking sectors is a third.

This is soluble. Personal misery from debt is set to soar, especially in the developing world. And Diamond as his ilk trouser millions in the meantime. 2009 offered an opportunity, and the world has squandered it, and such horrible outcomes will only intensify before another such opportunity arises. How tragic.