Monday, November 06, 2006

Fisking Ruth Sunderland in the Observer.

I have never been found of the Grauniad or it's sister papers except they do provide some good laughs when quoted in Private eye.

However this article caught my eye as some one on linked to it.

Lets work through the air headedness of it.

"The latest crop of insolvency figures is horrific."
How good of you to notice.

"Loan addiction, as any debt counsellor will tell you, is as destructive to individuals and families as alcoholism or gambling, and we have become a nation of binge borrowers."
I'm not going to ask either what this means of what evidence backs this up as I doubt there is any. However people being in debt over there heads is an obvious problem and causes all sorts of problems. People can get used to living beyond there means because their credit rating has just given them lots of cash. So they spend up to their limits and pay the minimum payment or a bit more until the banks either increase their credit limit or they apply for another card.

"One major culprit is lenient insolvency legislation, which came into effect in 2004 and has encouraged people to walk away from their responsibilities."

I see. Would this be the Enterprise Act 2002 which in part amended the Insolvency Act 1986? It seems this rather silly statement assumes that people borrow lots of money in full knowledge of the new insolvency rules. Some how I doubt that very much as they are not that kind for people who like like they have run up massive debts prior to pulling the plug. Besides which most people live in total ignorance of the law. I suspect the problem might be that people can get what ever credit they like on things like credit cards as long as they are prepared to pay silly interest rates which they are not fully informed about.

"This was the brainchild of Gordon Brown, who wanted our system to be modelled on that of the US. The idea was that a more forgiving regime would encourage entrepreneurship."
Seems like a good idea to me. That said I think in the US credit card debt may not be provable in bankruptcy. That said in some states you get to keep the family home no matter how big it is.

"Yet company liquidations have fallen slightly, showing that the legislation has misfired. It is individual consumers who are behind the surge."
And? banks are more careful about lending to companies. Besides which if a company goes bust, it may well be the case that this causes personal insolvency for the owner or directors so we would need more information about where the debt came from to be sure.

"Bankruptcy-lite is not pain-free, as a borrower's credit rating will be flattened. But much of the stigma attached to insolvency has been removed - with predictable results."
Well in that case Gordon has achieved exactly what he set out to achieve. Therefore entrepreneurs will not be bothered about sailing close to the wind and will be more willing to take risks. Good. That said it does cause problems for borrowing more money.

"The only winners are firms such as Debt Free Direct and Accuma, which are cashing in by advising on IVAs."
Really? What about the people who have been the victims of irresponsible lending? Don't they win to some extent as well?

"The banks are seeing a tidal wave of bad debts, which prudent customers will end up funding."
Well, presumably prudent customers will decide not to deal with irresponsible banks. That is the free market after all.

"According to one industry executive, at least 2 million Britons are irretrievably indebted and will only clear their loans if they win the lottery. That is a major social problem."
I see. And just which bunch of shysters lent them this money? Did they not ask how much these people were earning or indeed what other debts they had? No. Why? Because they would rather lend the money, make a killing, and then get airheads to plead poverty for them in the press.

I wrote an article on this subject on the 2nd of October which you can read here. I detailed the steps banks could take to protect themselves. They choose not to. I list them below:

However the banks could also try responsible lending. They could when issuing new credit cards, ask:

* Have you got any other credit cards?
* If so what is the limit and balance?
* Can we see some statements please?
* Have you just been making the minimum payments?
It should of course be noted that Insolvency law comes under the remit of the DTI not the Treasury so i wonder how much this was Gordon's brainchild. Also the issue was and is unsustainable consumer debt rather than what insolvency law is. That clearly is a Treasury issue.

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