Financial pain may stop us living beyond our means
The Bank of England's announcement that it plans to help other banks by swapping secure government bonds for risky mortgage debt holds little surprise, considering the financial machinations dominating the news.
This move is eerily reminiscent of what happened to Northern Rock, which was forced to ask for loans to continue its business. Its misfortune seems not one of reckless investment, but of bad timing. If it had been last month that it had run into trouble, it would have been able to barter its way out of the mess.
With new figures showing the cost of house rentals climbing - up 15% in the last year as landlords seek to cover the costs of buy-to-let properties - it seems that if the financial crisis is not bedfellows with the UK yet, then it is knocking loudly on the door to get in.
But is a recession a bad thing? Should the Bank of England be providing a cushion for those who overstretched themselves through irresponsible lending?
The past decade has seen ridiculous growth in the cost of housing and a scarcity of property. Much of it has been snapped up as 'buy-to-let' investments, which has largely priced first-time buyers and lower-income workers out of the market or forced them to buy through higher risk and debt. As one member of the protection industry commented, "that is not the sign of economic stability".
Mortgage repayments are set to increase later this year as thousands of fixed-rate mortgages come to an end. And a squeeze on businesses will almost certainly lead to job losses. Citigroup, a bank directly affected by investments that have turned sour, has announced nearly 13,500 job losses. This is likely to cause home repossession on a grand scale.
It is interesting that credit card debt is included in the assets that the Bank of England is willing to temporarily swap. Consumer debt has long been the elephant in the room: there is no longer much of a social stigma in carrying significant amounts. Along with mortgages, how will this be serviced in the event of redundancy?
Right now, the protection industry is reaping the benefits of the credit squeeze, with sales up as mortgage brokers turn to protection products to replace lost revenue. Hopefully, the economy will stabilise before these increased sales slow down. The best-case scenario for the industry would be an increase in consumer trust.
If it is cold-hearted to assess a recession as a good thing, it is worth noting that it could aid the British consumer in the long term. Stricter controls on granting credit will lead to a reduction in the use of credit cards, the public will become more wary about carrying debt they cannot service, and the long-awaited adjustment in housing prices will help first-time buyers get onto the property ladder.
