Economist warns of debt crisis

By Paul Lewis
BBC Radio 4's Money Box

Ann Pettifor believes we are heading for a crash

Personal debt in the UK is now so high the country is heading for an economic crisis, a top international economist has told the BBC. And she called for new controls on lending and borrowing.

Ann Pettifor, a director of the New Economics Foundation, told BBC Radio 4's Money Box that:

An awful lot of people will be hurt, and the economy overall will be hurt Ann Pettifor, New Economics Foundation

"There is going to be a crash when confidence evaporates. The housing bubble is based on this very ephemeral thing called confidence.

"When interest rates rise in the United States, when they continue to rise here - because the trend is now upwards - the crash will come.

"An awful lot of people will be hurt, and the economy overall will be hurt."

She was responding to a warning this week by the Governor of the Bank of England, Mervyn King.

He said: "There is a risk that some heavily indebted households will be badly affected by changes in economic circumstances or interest rates. Everyone needs to think carefully about the amount of debt which they can afford."

His remarks came just days after the Bank revealed we now owe £905 billion, up by nearly £11 billion in September alone. On present trends it will reach a trillion pounds within a year.

Too easy to borrow?

Ann Pettifor blames the banks for these record levels of debt. She told the programme:

"At the New Economics Foundation we are extremely alarmed by the level of debt. What we worry about is that the Bank of England is punishing the victims, the borrowers, not the lenders, by putting up interest rates.

Banks do lend carefully, it is not in a bank's interest to lend unwisely Jerry Fearnley, BBA

"What the Bank of England and the government have done is to create an environment where credit is easy and banks are encouraged to push it. We are in a deregulated time and lenders are pushing loans, and doing it in ways that are often quite deceptive."

But Jerry Fearnley, a director of the British Bankers' Association disagreed:

"What the governor said is right. People do need to be careful and think about the impact of the extra repayments. But we think the majority of people do use credit wisely.

"We have very good systems that weed out people who are using credit unwisely. It is very heavily regulated but also a very free market. Banks do lend carefully. It is not in a bank's interest to lend unwisely."

But Ann Pettifor wants new controls, both on interest rates and the amount that can be borrowed to buy a home.

"We would like to see a cap on interest rates, and also the loan to valuation ratio decreased. On the continent you cannot borrow more than 80% of the value of the home. And we think the loan to value ratio should be capped at 80% here as well.

"The banks have pushed it up to 90 or 95% and that has pushed up the price of homes by increasing lending."

BBC Radio 4's Money Box was broadcast on Saturday, 15 November, 2003 at 1204 GMT.

The programme was repeated on Sunday, 16 November, 2003 at 2102 GMT.