Monday, September 17, 2007

Blancmange Wobbling Our Way

As we've blogged many times, much of Britain's prosperity over the last decade has been built on a huge blancmange of debt.

Personal debt now stands at over £1.3 trillion (see here) - some £50 grand per household. Properly counted, public sector debt stands at around £1.7 trillion - another £70 grand per household (eg see this blog). So your typical taxpaying household now owes £120,000. That's a wince-making 4 times average household income.

Of course, there's nothing wrong with debt per se. Indeed, it's a key component of any successful capitalist economy. What's wrong is that much of this debt has been run up on some highly Micawberish assumptions about ability to repay.

Today, we're seeing that in the case of Northern Rock. Obviously we have the absolute assurance of everyone from Darling down that NR's problem is one of short term liquidity rather than solvency. But how do they know? NR has been a highly aggressive maxxed out mortgage lender (see this blog), and the housing market is currently teetering on the cliff edge: crikey, even bigtime punter Alan Greenspan is offloading his buy-to-lets in Scunthorpe Waterside.

And whatever Darling says about "stability" and how we're so much better placed than most other countries to "weather the storm", the fact is that the potential bad debt problem is much wider than NR. We all now know about Sivs and Spivs, but even safe-as-houses mortgage loans are a lot less safe on loan-to-value ratios of 95% than 80%.

The question remains- who's going to take the haircut? Who's going to pick-up the bill for all the bad debt we know is wobbling around out there?

The choices are shareholders, depositors, or taxpayers. On BBC Today this morning, Will Hutton argued it should be taxpayers. He says the government should provide a 100% deposit guarantee, and stand ready to nationalise banks in trouble.

Darling wasn't prepared to sign that particular blank cheque, but he seemed pretty short of other ideas.

Looks like that £1.7 trillion of public debt is heading up.

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