New report - Other looming debt crises

PS_RalphW · Post by **PS_RalphW** » 15 Jul 2015, 08:03

I rarely need a loan, but I suspect for 70% of the adult population that simply is not true. Major purchases are funded through loans as a matter of course, almost all students have long term debt, as do most home buyers.

We are a nation living in credit, at personal , commercial and government level.

emordnilap · Post by **emordnilap** » 15 Jul 2015, 11:33

3rdRock wrote:I seem to remember that someone brought to our attention the following series of articles from Golem XIV, in an earlier post last year.

http://www.golemxiv.co.uk/2014/09/next-crisis-part-one/

http://www.golemxiv.co.uk/2014/09/next- ... nifesto-1/

http://www.golemxiv.co.uk/2014/09/next- ... hip-earth/

Well worth revisiting, IMHO. Thanks again for the original post.

That was myself. I have kept those articles in mind. They really are eye-opening.

emordnilap · Post by **emordnilap** » 15 Jul 2015, 11:35

clv101 wrote:
vtsnowedin wrote:
biffvernon wrote: Why?
Because if you don't repay them they, nor anyone else , will ever invest in your projects ever again.
So how did we get into the situation where we need others to invest in our projects?

Spot on, Chris.

emordnilap · Post by **emordnilap** » 15 Jul 2015, 11:41

PS_RalphW wrote:I rarely need a loan, but I suspect for 70% of the adult population that simply is not true.

Major purchases - house etc - yes. That's what building (mutual) societies were for and a damned fine idea they were too.

We have allowed a society where life for many/most would be impossible without loans. It didn't start with Thatcher but she put multiple rocket boosters under that society. And students should not have loans (not for their studies, that is).

johnhemming2 · Post by **johnhemming2** » 15 Jul 2015, 14:20

emordnilap wrote:We have allowed a society where life for many/most would be impossible without loans.

What proportion are you talking about?

If is fair to say that buying a property is difficult without a mortgage, but life is not "impossible".

Student finance is a contingent liability not a debt anyway.

emordnilap · Post by **emordnilap** » 15 Jul 2015, 14:56

Student debt is not a debt? Try telling that to students with debts.

johnhemming2 · Post by **johnhemming2** » 15 Jul 2015, 15:08

It is a contingent liability. The Council for Mortgage lenders told me a few years ago that when looking at someone's ability to take out a mortgage they would not consider the student finance as a debt and would only look at the cash flow implications of the effective graduate tax.

It is important to distinguish between this and for example credit card debt or a mortgage.

PS_RalphW · Post by **PS_RalphW** » 15 Jul 2015, 15:17

If it wasn't for cheap mortgages house prices would be much lower.

People buy and sell houses when they need to, or inherit them. Property developers sell new houses but in very small numbers relative to the size of the market.

Mortgages add flexibility to the market, as long as the economy is growing. but with supply static and demand growing, people will buy at the highest price they can afford to finance. If finance becomes cheaper, the prices go up.

Finance is now so cheap that houses are a 'good investment' for the BTL market, for anyone who can raise a deposit. The difference between rental income and mortgage payments is large enough to make a decent return on investment for the deposit down payment.

And, of course, because prices only ever go up, they can cash in and make a huge profit on the capital as well ... until they don't, of course.

All of this leads to a huge asset bubble, which appears to be unbreakable, because of the huge pent up demand for housing. For every eviction there are 10 first time buyers in the queue.

I (and spouse) have ended up owning houses between us, and I am now in the ludicrous position that my nominal net worth is rising faster than my gross income. In the 1980s a studio flat in undesirable parts of London was rising in price faster than I was earning gross income.
I didn't buy then and I won't sell now. I have always bought houses to live in, not directly as an investment. Selling now would be tying in the buyers to 30+ years of debt which is going to explode in their face if interest rates rise, whilst I walk away with the cash. To me to take advantage of this market would be immoral.

When property bubble bursts, so will my nominal net worth. But it is all just electrons in the bank anyway.

PS_RalphW · Post by **PS_RalphW** » 15 Jul 2015, 15:24

johnhemming2 wrote:It is a contingent liability. The Council for Mortgage lenders told me a few years ago that when looking at someone's ability to take out a mortgage they would not consider the student finance as a debt and would only look at the cash flow implications of the effective graduate tax.

It is important to distinguish between this and for example credit card debt or a mortgage.

SO it is a debt with a lower priority among creditors when the student is declared bankrupt. Banks can ignore it when advancing mortgages because they know the student will always pay them back before they pay back the student loan.

But the student still needs to pay their debt, as long as they meet the income level deemed adequate to fund it, and who is to say what that income level will be set at in the future?

lies, damned lies, and small print.

emordnilap · Post by **emordnilap** » 15 Jul 2015, 16:15

Yup. A debt is a debt. You're not in parliament now. Don't fúck about with politic-speak.

johnhemming2 · Post by **johnhemming2** » 15 Jul 2015, 17:02

PS_RalphW wrote:SO it is a debt with a lower priority among creditors when the student is declared bankrupt. Banks can ignore it when advancing mortgages because they know the student will always pay them back before they pay back the student loan.

No. The bank reduces the amount of mortgage available based upon the effective tax paid by the graduate. That has to be paid before the mortgage effectively.

Student finance is not due to be paid.

But the student still needs to pay their debt, as long as they meet the income level deemed adequate to fund it, and who is to say what that income level will be set at in the future?

Whereas you are right to be concerned as to the effective graduate tax paid the student finance does not work like a debt. It is not written off by bankruptcy, but if a graduate dies it is written off and not due to be paid by the estate.

3rdRock · Post by **3rdRock** » 15 Jul 2015, 18:27

emordnilap wrote:
3rdRock wrote:I seem to remember that someone brought to our attention the following series of articles from Golem XIV, in an earlier post last year.

http://www.golemxiv.co.uk/2014/09/next-crisis-part-one/

http://www.golemxiv.co.uk/2014/09/next- ... nifesto-1/

http://www.golemxiv.co.uk/2014/09/next- ... hip-earth/

Well worth revisiting, IMHO. Thanks again for the original post.
That was myself. I have kept those articles in mind. They really are eye-opening.

Thanks again EM. I saved said articles as PDF files when you first drew our attention to them and have pondered on the contents ever since. Enlightening to say the least.

biffvernon · Post by **biffvernon** » 15 Jul 2015, 21:47

Without loans and debts and interest there would be no capitalism.

Ah, there's a plan.

Actually, capitalism is incompatible with a finite planet, for reasons that my friend Beth explained last night:
http://biffvernon.blogspot.co.uk/2015/0 ... rd-in.html

fuzzy · Post by **fuzzy** » 16 Jul 2015, 07:04

As long as there are couples who have more than 2 kids [or an open door to those who have], and a legal system, there will be capitalism and feudalism

vtsnowedin · Post by **vtsnowedin** » 16 Jul 2015, 11:18

The basic rules of Capitalism are like gravity, something that works all the time, like it or not. Those that work harder and wiser produce more thus have more to sell and gain more wealth.