UK households need a bailout, just like the banks

Indebted households in the UK and more widely need a bailout just like the financial sector got one, in order for the economic recovery to take root, according to Dr. Johnna Montgomerie, lecturer in economics at the Political Economy Research Centre (PERC), Goldsmiths University of London.

The fact that the banks have been bailed out while households have been left to pay the bill raises questions about the morality of debt overall and its repayment requirement – if banks don’t need to pay back their loans, why should households? – Montgomerie argues in the report “The Politics of Indebtedness in the UK,” whose lead author she is.

“I am proposing a bailout for households like the one the financial sector got. I think it’s needed because debt is effectively what it’s causing the economic malaise that we see today,” she told in an interview.

The fact that so many households are living from one payment to the next is creating “a huge drain” on growth, consumer confidence and economic vitality.

“The emotional toll that debt takes also has an economic effect. It depresses people, it causes anxiety. That is not the vibrant household sector that we need to generate a dynamic workforce,” Montgomerie said.

In the UK, household debt is expected to take off after a brief dip, according to data from the Office for Budget Responsibility.

The OBR expects household debt to increase from around 145% of income this year to 151% by the end of next year and to more than 180% by the end of 2020.

Central banks around the world have kept interest rates at record lows in order to help indebted households to pay down their debt, but it looks like this has not been enough.

Deleveraging is still going on in some countries, but the financial crisis has also meant that many households have seen their income reduced; therefore it is more difficult for them to pay down debt.

UK household debt and incomes

UK household debt was made worse by falling incomes. Source: ONS

The Goldsmiths University report has found that while the issue of household debt is still being ignored by politicians, civil society has stepped into the gap, with advocacy and support groups gathering in places like churches or street stalls to reach out and help the indebted households.

Housing debt a big problem

Numerous online groups have also been created, with many of the participants lacking formal training in debt management but having gone through difficulties with debt themselves.

In many instances the informal advice given is not the same as one that a debt advisor would give.

For instance, where a standard debt advisor would advise people to always remain in contact with their creditors, some of the participants to the online discussions on the issue of debt advise them not to respond to phone calls or letters in certain situations.

Another big problem is that successive UK governments have promoted house ownership as a way to ensure a pension, the report said.

“In just under 25 years, the national average house price has increased 336% while the stock of outstanding mortgage debt increased 781%,” it said.

The issue of debt forgiveness is politically sensitive, as it has been seen as encouraging profligate behaviour and moral hazard.

Montgomerie said it would be no different from the moral hazard that the bank bailout has encouraged in the financial industry.

“We accept moral hazard because… it’s more about an even distribution of moral hazard. The households sector deserves it at least as much as the financial sector,” she said.

If household debt were to be forgiven, consumption would get a big boost because consumers would go out and spend this fresh disposable income – unlike the banks, Montgomerie argued.

The banks “are not lending the money that was given to them. They’re hoarding cash, they’re denying mortgages and small and medium size enterprises have less money than they ever had in their loan book.”

“Clearly, the financial sector has failed to bounce back from the financial crisis,” she said.


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