Monday, May 5, 2008

Personal insolvencies - 100,000 a year

The government has just published data on last year's personal insolvencies. Overall, the numbers filing for bankruptcy appear to have stabilized at just over 100,000 a year; roughly the same level as 2006. It is still a huge number, and reflects the deeply distressed financial situation of many UK households.

Filing for bankruptcy is a miserable experience. Nevertheless, it is hard to feel sorry for insolvent individuals. The vast majority of bankrupt individuals brought this misery upon themselves, taking out credits that they could not repay. No one is forced to go into a bank and sign up for loan or a mortgage. It only takes a sharp pair of scissors to cut up a credit card. However, many bankrupt individuals have families, who are often the innocent victims of irresponsible debt accumulation.

Why do the banks, who own the majority of defaulted debts, put up with such losses? For them, it is a simple numbers game. The losses from a 100,000 deliquents can be written off against taxes and covered by large profits generated by other household debtors.

Here is a simple idea to limit personal insolvencies. In future, banks should not be able write off debts from individuals against tax payments. Since the costs of reckless lending would increase, Banks would have to be much more careful in the future about extending credit to vulnerable and financially naive individuals. Personal bankruptcies would fall, and the misery inflicted on the dependents of bankrupts would be reduced.

The government would never consider such a radical and effective proposal. For the government, a 100,000 bankruptcies a year is the acceptable cost of an explosion of household debt. The banks, too, seem content with that level of personal insolvencies.

So, the debt cycle will roll on. Irresponsible banks will continue to lend to naive financially illiterate individuals, and a sizable minority will default. The banks will foreclose and the UK will continue to produce a 100,000 personal bankruptcies a year.


  1. No sympathy for debtors. Make 'em pay.

  2. Allowing the inept to kite debt allows them to exchange relative affluence now for future risk. Among those who are easily deceived, and easiest to influence with propaganda, unchecked debt can be viewed as a reward in the short term against a long-term penalty which is unlikely to be properly assessed by the target audience.

    This draws parallels with the idea of gambling, lotteries and super-casinos... and appeals to those of a similar persuasion.

  3. P.S. Does that graph look even slightly credible to you, Alice?

    It seems remarkable that insolvencies should accellerate so rapidly to such a round number - then remain so remarkably stead for so long. Do you think that either these figures or the insolvency process itself may have been 'manipulated'? For example, is it plausible that a capacity for rate of insolvencies has somehow been set at 100,000 per year - and once that rate has been met... insolvencies are delayed rather than prevented?

  4. Would your graph be connected with the sudden leap in M4 from an average c. 8.25% pa 1997-2002 to nearly 14% pa 2003-2007?

    See my graph here:

    BoE stats here:

  5. The number of insolvencies won't be flat this year. It is going to grow and grow and BTL investors go under.

  6. Sackerson, I've replied to your blog... I'd be interested to know what you think...

  7. Hi Asteve, I've put in a short reply on my own where you left your comment, but I have to say that I don't pretend to have your or Alice's information sources or expertise.

    It's clear that M4 is back to its long-term trend and was rather lower for a few years recently (the "Prudence Period?") - I do a simple analysis of BoE figures here:

    You say mortgage lending is now down, but the BoE figures may reflect an earlier snapshot. Having said that, the last two quarters for M4 were c. 10%, down from 16% in the quarter ending 30 September. And we've only got as far as 31 March for M4 reporting.

    Also, maybe people are now running up further credit in other ways to cope with increased costs of living.

    Will anyone ever stop the banks blowing up the system like an unattended tractor tyre?

  8. I don't want anyone to take my ramblings about M4 as fact - even I don't trust my own views. I'm sure, however, that M4 is harder to interpret than it, at first, appears.

    My evidence for mortgage lending going down is from the BoE - but it is not the M4 figures. The public statistical database gives a lot of far more specific data. I think this shows a sharp slowdown in mortgage lending... both in terms of number of loans and total value.

    When I referred to M4 trends, I was considering the month-on-month data... in an attempt to grasp the most recent effects... mainly because I'd like to be able to forecast... though I'm a very long way from being able to do that!

    It is interesting that M4 expanded quicker during the previous housing boom... which, I think, might be explained by securitisation of debt - where M4 expansion hasn't reflected all of the debt that has been created. Securitisation of debt - I understand - was invented in the 80s, but took off in around 1997 in connection with "Structured Finance". Securitisation definitely upsets the nature of what is measured by M4.

    I think that the cost of living (buying a house aside) is remarkably low at the moment... relative to wages. I think people have been running up wages either because they can, or because credit has driven up the prices of assets (like houses) which people consider essential from a lifestyle perspective.

    We should expect monetary expansion - (at an appropriate rate) that's a part of a correctly functioning system... and, I think, it is important to focus beyond M4 - i.e. beyond mere bank deposits and physical notes... that's a very small proportion of wealth in the UK... I think it is important to grasp what is happening, for example, with pensions... and other long term investments.

  9. Damn, I'm making loads of typos!

    "running up wages" => "running up debts"

    Anyhow... I've been trying to nudge discussion here away from solely focussing on M4 and how it relates to the UK bubble... because while it intuitively appeals to research it (and research is never entirely wasted) I don't think it is where the real action lies.

    Securitization is far harder to gain information about... since it isn't (as far as I can tell) included transparently in any of the Bank of England statistical releases. I think that, if you were interested in M4, you might be interested in this too:

    If you are new to the idea of securitization, I recommend you take a peak at the table on page 5 to establish the relevance of this table to the UK.

    I think this report raises several extremely interesting questions. The one I find most intriguing this minute is this: Why is securitization for the UK denominated in Euros... and does the fact that Sterling has fallen in value significantly against the Euro affect securitized debt significantly?

  10. Typo alert! "relevance of this data to the UK" :-)

  11. "Why is securitization for the UK denominated in Euros?"

    I think it'll be because if it is governed by Euro legislation it'll be expressed in Euro terms. It's much the same with the capital amount that personal financial advisers have to hold in the bank.

  12. Can you point me at specific legislation?

  13. Alas no, Steve; but when we in the retail financial services industry saw money-laundering regulations brought in and there were certain exemptions (premiums below x), these were expressed in Euros and then translated into rough sterling equivalents.

  14. Hmmm... pity.

    It feels as if I'm playing a detective game and, every-so-often, someone whispers "Europe!" in my ear. There is masses and masses of circumstantial evidence that suggests to me that debt expansion is a clever scam that transcends the USA, Europe-proper and the UK... and that the Euro is centre stage every time. I simply can't put together anything coherent from the jumble I've discovered. It seems that every interesting avenue I pursue has some Euro/European angle... but then the trail runs cold.

    I'm neither pro-nor-anti Europe... I just find it odd that we understand so little about how European legislation affects us. It also seems odd that securitization is Euro denominated - when about 50% is issued in Sterling.

  15. "I'm neither pro-nor-anti Europe."

    Nor am I. I simply think we should assert our complete sovereignty - Crown in Parliament and all that - or sack all our MPs and replace them with genuine bureaucrats, who would cost far less in pay and exes, and wouldn't have to pretend to represent us.