Monday, 28 August 2017

Too Good To Be True

Like Lemmings to the Cliff

Your Shiny New SUV is About to Crash the Economy

Peter Hitchens

Just after the last crash, in November 2008, the Queen asked a roomful of academics and economists why they hadn’t seen it coming. She won’t have to do that next time. This week the klaxons started to sound. Another crash is on the way.

And so if you wake up one morning and the cashpoint machines are empty, and there are long, angry queues outside famous high street banks, you, the Queen and the Government will have no excuse for being surprised.  The warning came very clearly from Alex Brazier, a director of the Bank of England, in a speech in Liverpool that ought to have been on every front page and at the top of every broadcast news bulletin.

Great fleets of such cars are pouring out of showrooms thanks to easy-money loans called Personal Contract Purchase (PCP)
Great fleets of such cars are pouring out of showrooms thanks to easy-money loans called Personal Contract Purchase (PCP)

For if he is right, all the controversies, from the EU to Donald Trump, that fill the bulletins will shrivel into nothing pretty soon. Of course he did not put it quite like that. He has to be cautious. He said: ‘Household debt – like most things that are good in moderation – can be dangerous in excess. Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.’

And then he noted that consumer credit has recently increased more than six times as fast as incomes. There is no real money to cover this. It’s a gamble on the future being just like the present.

It is very similar to the dangerous sub-prime mortgages that infected the Western financial system with impossible debt ten years ago. He warned of a ‘spiral of complacency’. As loans become easier to get, more money is lent on easier terms. ‘The spiral continues, and borrowers rack up more and more debt. Lending standards can go from responsible to reckless very quickly. The sorry fact is that, as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing.’

There’s a big new danger. If some of your neighbours have recently acquired shiny, big new cars, they may be part of the problem. Great fleets of such cars are pouring out of showrooms thanks to easy-money loans called Personal Contract Purchase (PCP). Almost four new cars in every five are now bought through these PCPs. Put simply, this postpones the main final ‘balloon’ payment for as long as four years.

If, at the end, the buyer can’t pay, he can just hand the car back and walk away. Can you see how risky this is for the lender? The money comes from the finance arms of the car companies, not usually from banks themselves, but if used car prices fall, as is quite possible, the whole thing goes down the drain. And that might spread to the banks and the rest of the economy.

Mr Brazier warned: ‘The banks that are involved, as well as the shareholders of car companies, will want to think very carefully about the risks.’  Or will they? Experience suggests that lenders don’t want to think about this at all.

So if they won’t, Chancellor Philip Hammond and the rest of the Cabinet should be thinking very hard indeed about what to do if it all comes crashing down one day, and farmers’ fields are full of used SUVs that nobody knows what to do with.  They’ll say it came out of the blue, but it won’t have done. It’s about as predictable as next autumn, and may not be much further away.

We have been warned, and if the Government isn’t ready with a plan, then I’m not sure what will save it from the wrath to come.

No comments: