Borrowing Hurdles:Unintended Consequences Arising From Wilful Blindness

Wednesday, 23 March 2022, 12:56 pm
Article: Keith Rankin

On 1 December 2021 the CCCFA (Credit Contracts and Consumer Finance Act) entered Aotearoa New Zealand with more stealth than the Omicron BA2 variant. It resulted in unintended consequences that were (and are) entirely predictable.

There are two sets of 'unintended but predictable consequences': those consequences that make anxious and desperate people more anxious, more desperate, and more detached from mainstream law-abiding living; and those consequences which aggravate the systemic problems of our system of primitive capitalism.

Anxious People

A starting point for this topic might be the Swedish novel Anxious People (now condensed into a Netflix series, that should appeal to the same people who enjoyed The Detectorists). Set in a small city not-too-far from Stockholm, the story starts with a man committing suicide. The trigger for his suicide turned out to be the rejection of an application for a bank loan. Then, the main antihero of the story also found herself in an incredibly difficult situation, in part because of the Family Court and social assistance bureaucracies, and in part because of petty 'rules-based' rejection by the bank, following her attempt to gain a small personal loan. The story was bittersweet, neither tragedy nor comedy; uplifting because of the way that the community of 'ordinary people' (people each with their own issues) resolved their personal issue through what might be called 'genuine community kindness'.

In New Zealand we have many anxious people, brought to critical states of anxiety for a number of different reasons. (In this RNZ story, The Science behind a Broken Heart 21 Mar 2022, the interviewee states that "scientists are figuring out that when we feel lonely, when we feel abandoned, our immune systems change". This is an important undisproved hypothesis – that escalating anxiety itself may be the equivalent of a pandemic, in terms of physical health – that needs much more discussion and scientific investigation. We remind ourselves that 'scientific' truths are not 'facts'; rather they are undisproved hypotheses, with some of these truths having been subject to more scrutiny than others.)

One of the most important reasons relates to housing: both getting home loans, and negotiating the rental market. Too many twenty-somethings are too anxious, and/or too poor, to leave the parental home. Many people in Aotearoa need to borrow money in order to forestall immediate problems in their lives. The last thing that they need is to have to confront an intrusive lender bureaucracy; a form of officialdom that can be as stressful to face as the government 'we are here to help' bureaucracy.

Banks lend to people who can jump certain hurdles. The government's 'here to help' agencies target people who cannot jump similar hurdles. One day an anxious person may visit a government agency, dressing downbeat, and spinning their answers to emphasise their incapacity. On another day, such an anxious person may go to the bank, dress upbeat; and must re-spin their answers to essentially the same questions, to emphasise their capacity. Always there are lengthy forms to complete, so that the assessors can tick – or not tick – their formulaic boxes. The banks tended to be the lesser evil; that is, until 1 December 2021.

Capitalism works well when the income distribution system is working well. Government-targeted welfare is a part of the income distribution system; albeit a charity band-aid to a market system that fails. Primitive capitalism fails because it emphasises private property rights – including labour rights – while rejecting public property rights. And we note that the word 'targeted' is a euphemism for 'allocation by means of intrusive bureaucracy'.

Lending and borrowing – credit and debt – is capitalism's number one backstop for when the income distribution system fails to maintain its necessary equity and circulation objectives. Borrowing, while indeed a backstop, is actually much more than a backstop. It's an integral component of any form of capitalism, primitive or developed.

People with less income than they need to meet their reasonable aspirations have just a few options; options which may help them get by in the present (eg as renters instead of home purchasers), or may give them sufficient means to escape from an income trap. These options are: borrowing, gambling, private charity, disreputable self-employment, and overt crime. If we take away the better of these options, that pushes people towards the worse of these.

Despite (or because of) the failings of the income distribution system, the lending/borrowing system in New Zealand was working surprisingly well. It was getting much money into the bank accounts of those who needed it to meet their aspirations, and the aspirations of the many resilient but stressed businesses who sold goods and services to people spending borrowed as well as earned funds.

The CCCFA was an attempt to fix a problem, which, except at the margins, did not exist. Once again from the government, a solution in search of a problem. And where, at the margins, a problem of exploitation did exist, there were better solutions available than deterrence through bureaucracy.

What happens if we make our financial markets under-accessible to ordinary households and small businesses? It means a circulation problem; see below. And it means that ordinary New Zealanders must increasingly look to these: the bank of mum and dad, gambling, private charity, disreputable self-employment, and overt crime.

Gambling gives people a chance of meeting an aspiration; it makes rational sense when they would otherwise have no chance of meeting that aspiration. Private charity includes various forms of individual and community 'giving': foodbanks is an obvious one, as is giving money to street beggars. Less obviously, it includes the many and varied forms of charity that parents may provide to their adult children. Related to this last form of charity is the bank of mum and dad, where loans – usually soft-loans – are made between parents and adult children. The bank of mum and dad tends to reinforce existing privileges in the income distribution landscape.

Overt crime here is theft, which includes running businesses that sell illegal goods or services. Disreputable self-employment is either selling marginally legal services – such as prostitution – or working as a 'contract employee' for an illegal or a marginally legal business. These activities represent the 'black' and 'grey' economies.

The key point here is that, as people's lives become more precarious, and as relatively good options (such as borrowing money) diminish or close, then people get pushed into the much worse options to either maintain a basic living standard, or to meet aspirations of success.

We note that even bankruptcy represents an important part of the better options. Life for the economically insecure does involve hopeful borrowing that in some cases leads to bankruptcy. In practice, undertaking debt with a risk of bankruptcy is a far better option – for individuals, businesses, and society in general – than is resort to the criminal underworld. One doesn't have to read or watch too many Dickensian stories to appreciate the need for an alternative to crime and criminalised debt. Indeed, the modern concept of bankruptcy – the decriminalisation of debt default – was one of the most important and socially progressive developments of the Victorian era.

Policies which make personal debt harder to access represent a reversal of post-Dickensian social progress.

Circulation of Money and Wage Goods

The other, and in some ways even more important problem with the bureaucratisation of household and small business finance, is that of impaired circulation of income and spending. Income and spending together make up 'the circulatory economy'; or, for short, 'the economy'.

An important concept here is that of 'wage goods'; a term used a lot by economists in the period from circa 1850 to 1950, but not a lot these days. Wage goods are the goods and services that ordinary people buy; they include 'necessities' but go well beyond being necessary goods. They include basic aspirational goods and services. Thus, they represent mass markets. The key to the success of industrial capitalism – an extension of primitive capitalism which arose from the industrial revolution – is the ability of ordinary people to buy goods manufactured at scale, through the 'factory system'.

During the twentieth century, cars and houses became wage goods. In the more-populated early twenty-first century, we might say an apartment rather than a detached or semi-detached house. The larger wage goods – which include household devices – always have and always will require recourse to borrowed money. This recourse is called 'personal finance'; and involves a lifecycle mix of borrowing and saving. Further, large wage goods can be either rented or purchased; ideally with the lessors being people and businesses embedded in the circulatory economy.

To these wage goods we can add 'social wage goods'. Think of education, healthcare, defence, and environmental and public health subsidies. In normal times, these will be funded from public revenue; taxation for the most part. But, and especially when public revenue systems are under strain, it is essential that they be funded by other means, rather than being unprovided or underprovided.

An efficient monetary circulation system has two requirements. The first of those is an income distribution system that maintains a stable (and not excessive) degree of inequality. By 'stable', we mean that the distribution of income inequality should be essentially the same in 2022 as it was in 1972; and (assuming that 1972 was a good year) in all years in-between, and all years in the future.

The second requirement is that there is a stabilising financial system (including an international system, which is beyond the scope of this essay). Such a system has three components: personal finance, business finance, and government finance.

Personal finance has already been alluded too. Business finance represents the core of capitalism; in particular, the financing of businesses which supply (create and sell) goods and services. Businesses invest in capital goods, and in inventories. Government finance – the third leg of the financial stool – is a critically important for investment in capital infrastructure, to maintain the income distribution system through what would otherwise be 'hard times', and to maintain the supply of social wage goods. As the third leg of the stool, government finance stabilises the stool – the system – compensating for the collective vagaries associated with personal spending and business investment. Of particular importance is the privileged (and necessary) ability of central governments to maintain a 'balance sheet' that enables them to be 'borrowers of last resort' while undertaking their core roles even in – no, especially in – hard times.

What I have outlined above is what we call 'the economy'. When functioning well, with due recognition of public as well as private rights, the economy has transitioned from primitive to democratic capitalism.

What happens if we have legislation that hobbles the efficient cycling of money into the production of wage goods (including social wage goods), and capital goods (private and public)? Where does the money go when it doesn't go where it should go? The short answer is that it flows to a relatively small number of asset-rich people. Part is this is cycled back into the economy through their purchases of luxury goods (those private goods and services which are not wage goods). Part of it just sits in banks and other repositories; it does not circulate at all. And the third part circulates in another place; a place that may be called 'the casino'.

The casino is a whole suite of secondary markets – real estate, company shares, bonds, financial derivatives, foreign bank deposits, crypto-currencies, gold, artefacts, artworks, football teams, non-fungible-tokens; once upon a time there was even a speculative secondary market in tulip bulbs. Capitalism always has its casino, inhabited in the main by oligarchs and plutocrats. The circulation system is inefficient – and unstable – when 'the casino' is too big relative to 'the economy'; and particularly when the casino grows faster than the economy.

In this last 'uneven growth' case, the flow of unspent money into the casino from the economy exceeds the flow of spent money from the casino back to the economy. It is in these times – a net flow of money from the economy to the casino – when most asset prices rise; this may be facilitated by monetary policies which inject new money into the casino rather than into the economy.

The easiest way by far for injecting new money into the national economy is via the government's balance sheet. The big problem here is when debt-averse governments resist this process, thereby forcing money that should be going into the economy, into the casino instead. When this happens, the casino grows faster than the economy; asset prices increase, creating an illusion of wealth creation, but really only pumping up the prices of tradable assets. Rather than a bottomless money pit, the casino is a gravityless monetary sky.

New Zealand's present regime of 'Authoritarian Social Neoliberalism'

Finally, I will present this label that I think fits. Neoliberalism, by the way, means – more than anything else – the centrality of both private property rights (as a basis for the distribution of income) and restrictive public finance (aka government debt-aversion).

The government takes an authoritarian 'top down' approach to execute both a social policy agenda and its responses to exogenous events. The alternative is a democratic approach where informed – through discussion, not narrative – populations find their own solutions, and are supported by governments to do so. And the government pursues its debt-averse interpretation of neoliberalism, both with respect to its own balance sheet, and in its supposition that households and businesses also should behave as debt-minimisers.

The result is that both personal savings and new money flow, substantially and excessively, into 'the casino'; the financial stratosphere inhabited by those with large portfolios of 'financial wealth', meaning the tradable assets mentioned above. When subject to this kind of casino-enriching policymaking – albeit policy making that is not understood by the policymakers in this way, due to regime wilful blindness – there are necessarily large net flows of money entering the world of asset trading. That is the consequence of public policy developed in the spirit that underpinned the CCCFA.

If we don’t allow money to flow towards where it can be usefully spent within the economy, then we push people towards more desperate options, such as crime. And we prioritise the casinoisation of the economy, which includes the designation (and resigned acceptance) of land as an appreciating asset, rather than as places to live and grow food. Authoritarian social neoliberal governments don't understand that this is what they are doing; nevertheless, that's what they do, though they would rather not know it.

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References to CCCFA:

Increase in loan rejections sharpest for people with high 700-plus credit scores, Centrix says, Rob Stock, stuff.co.nz, 3 Mar 2022

Credit Madness Inquiry Must Be Open and Transparent, Act NZ, scoop.co.nz, 14 Jan 2022

David Clark: Govt will move fast on Credit Contracts and Consumer Finance law changes, NZ Herald, 17 Feb 2022

Govt Updates Responsible Lending Rules, NZ Government, scoop.co.nz, 11 Mar 2022

Government's controversial home lending rules: Minister David Clark announces tweaks less than four months after law change, NZ Herald, 11 Mar 2022

Debtfix supports Common Sense returning to CCCFA but Stands by Protecting New Zealand’s Safe Lending Laws, 11 Mar 2022

Open letter – Backing our safe lending laws will bring financial wellbeing to our communities, Debtfix, 8 Mar 2022

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

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Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

Contact Keith Rankin

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