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1. There was once a widely held belief that people who were in debt, but who could not afford to pay back that debt, should be punished severely. At the end of the 19th century, those unable to repay what they owed were arrested, taken to court, and ultimately sent to 'debtors' prisons', locked away until they had worked off what they owed. To be in debt, in the eyes of society, was unacceptable. And yet, by the time we reached the first years of the 21st century, the idea that owning debt was something positive, even productive, had become commonplace in many parts of the world. So much so, that the global financial crash of 2008, in the eyes of many observers, was entirely inevitable.
2. At the end of the 20th century, the general financial climate was stable and healthy. Commercial banks and investment banks for a number of years had mostly functioned separately from one another. When people put their income or savings into an investment, it was often done without a great deal of risk, and they tended not to make an astonishing amount of money. But this was soon to change in a disastrous way, writes Alicia Pillory in The Great Deception. In the early 2000s, 'investment bankers devised an opportunity to make huge profits by buying mortgage loans from commercial banks and mortgage lenders'. She explain show the investment banks then created 'packages' of these loans and sold them to individual investors. 'The grand, misguided theory was that any repayments would have to be made to the companies or people who now owned the mortgages, and everyone would get rich.'
3. Huge numbers of investors brought their money to the table. They were given confidence by the fact that the packages being offered to them had apparently been assessed and passed by the credit rating agencies. The main purpose of these organisations is to evaluate in a neutral way the amount of risk an individual or company might face in a potential investment. The fundamental problem, as Charles Vane sets out in The End of Innocence, was that these credit rating agencies were actually paid by the investment banks themselves, and the agencies were happy to provide the first class 'AAA' ratings which did so much to convince potential investors to part with their money: 'which is actually very far from being neutral'. It seems unthinkable now that this was the case, but it was not uncommon at the time. 'We have to take that into consideration before isolating and criticising the investment banks too harshly.'
4. The investment banks, now free to offer home loans to anyone, regardless of how much that person earned or was even likely to earn, began offering mortgages to new borrowers: people who were in low-paid employment, and who had no savings at all. Huge levels of debt were provided to those who, within two or three years, would have no way of meeting the monthly repayments. 'So many people were taken advantage of,' writes Pillory, and 'this irresponsible lending behaviour was never made to stop, with no ultimate consequences for the bankers, who simply became very, very rich'. She maintains that the authorities could, and should, have put a stop to it earlier. Instead, 'at this point, another industry saw the potential for profit and greedily stepped in'.
5. Insurance companies commonly offer protection against personal debt (for example, when somebody takes out a mortgage but wants to make sure that, if they suffer an unexpected accident and cannot work, the debt will be paid not by themselves, but by that company). However, in the early part of the 21st century, people suddenly became able to buy insurance for properties they did not even own. In other words, when a family could no longer afford the repayments on their home and had to leave, another person - who they had never met, maybe even living on the other side of the country could claim a huge amount of money from the insurance company, simply because they had bought a policy for that particular property. In The Crash: Reasons and Repercussions, Dr Alfred Moran writes, 'The AAA ratings gave everyone a dishonest guarantee that the system could not collapse. Unfortunately for the world's economy, the insurance companies followed those ratings blindly.' Eventually, in 2008, the system did indeed collapse, on a devastating scale.
6. Despite this, he emphasises, it should not be overlooked that it was actually the investment banks who paid the ratings agencies in the first place, and so the AAA rating was essentially funded by those who would exploit it- it is they who are most to blame. Pillory contends, however, that we should vent our strongest anger towards the dangerously 'hands-off' approach of western governments at the time, while Vane avoids placing the entire blame at the feet of either the banks, or their governments and regulators. He maintains that, in the western world, the attitude towards debt is careless. 'Chinese people, for example, often put 30% of their income into saving; this sensible attitude to money is commonly seen in Asian countries. In comparison, in Europe and the US, you rarely see anyone putting aside more than 5% of their earnings. This is extremely unwise.' By extension, those people who borrowed money to buy a house, knowing that they could never afford to pay that money back in their entire lifetimes, must take the major share of the blame.
7. As Alicia Pillory laments, 'We are living through the worst recession for 80 years, all because a comparatively small number of people working in the financial sector could not control their greed.' Whatever the root causes of this highly devastating period in our history, the one thing that experts seem to agree on is that our shared financial wellbeing is unlikely to return to full health at any point soon. Perhaps it is even time to reconsider some 19th-century notions of how we are supposed to feel about debt.
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