Greedy debt pushers cause economic damage

In my last post I highlighted the decision of the Advertising Standards Authority to uphold a complaint about an advertisement from Bond and Bond that stated "NZ has the 3rd highest level of personal debt, help us get to No. 1". The ASA found the advertisement to be socially irresponsible.

While its completely out of the purview of the ASA [tongue in cheek], I believe the actions of the large retailers in encouraging their customers into high levels of debt is also economically irresponsible. And that goes for the Australian owned banks pushing residential mortgages, and the finance companies who deal in high interest loans.

New Zealand has a long standing current account deficit, a problem only made worse by the liberalisation of consumer and other forms of credit by Roger Douglas in the first term of the Forth Labour Government. That money for the TV has to come from somewhere, and it can usually be traced to overseas sources, thereby placing greater pressure on NZ to source foreign investment (eg asset sales) to balance the books. While souring large mortgages for property investment deals in more significant amounts, the growth of consumer credit over the past 22 or so years has also got to be a factor. Since Douglas, levels of private debt have ballooned.

In some ways debt is a little like alcohol. It can function as a social lubricant as consumption is kept in moderation. In the same way bars are forbidden to sell alcohol to intoxicated persons, I believe it would be socially responsible for the government to place greater restrictions on consumer finance.

• The loan sharks need to be targeted and run out of town like the illegal bootleggers.
• There needs to be tough rules around high interest car loans, particularly where the level of debt is going to grow to be significantly higher than the cost of the car (perhaps this could involve restrictions on the assets that can be repossessed).
• I also support the recommendations of the Parasites on Poverty campaign, such as setting a maximum finance rate for all borrowing (related the rate of inflation) and ensuring all loan forms have to be in "plain English" in order to be enforceable.

One of causes of the current sub-prime mortgage crisis in the United States is the high interest rates charged on these mortgages. So in some ways the greed of American financial institutions has made them the authors of their own difficulties. In New Zealand the trouble with Provincial Finance began with the high number of high risk vehicle loans held by the company. In this case, why is there so much sympathy and focus on the investors who have lost money, and so little sympathy for the people who were struggling to pay off these loans in the first place?

I find it surprising effect of consumer credit and the use of credit cards is hardly ever mentioned in debates over monetary policy and the old bug bear of 'restraining inflation'. While greater restrictions on the use of consumer credit may in itself only have a small economic impact, there is potential for this to contribute to a change in consumer behaviour, meaning that people would be more likely to save if they wanted a big screen TV. An increase in overall savings rates would have a positive impact on the current account deficit.

In the wider scale, New Zealand's economic problems are not due to bad consumers who will not stop spending. Retailers who run advertising campaigns encouraging their customers into high levels of debt at usurious interest rates are contributing to the problem. However, the most fundamental problem is continuation of poor public policy which continues to leave the debt markets so unregulated.