"Who's to blame for the credit crunch?" is a question I am often asked. My answer – "pretty much all of us" – doesn't usually satisfy so I have started thinking of new analogies for how the culture of debt formed and why we were unable to cope with it.
On a Mediterranean holiday this summer, it was hard to avoid the fact that Europeans are just as flabby as our American counterparts. From all corners of the continent, great heaving lumps of flesh would waddle past. Stomachs on stilts. The reasons for excess weight are complex, as any women's magazine will tell you, but also simple.
The simple reason is that calories are extremely cheap, so cheap that almost everyone in western societies can feed themselves to excess, if they wish. The complex reason is that because price does not constrain, to avoid eating to excess requires self-control. This is because our societies, and brains, are likely constructed and programmed to operate in an environment of food scarcity, because that is all most people have ever known. But it means that to limit weight, people must apply self-control, which is a difficult, and often learned, skill.
This reminds me of people's attitudes towards credit. For almost all of human existence, credit has either not been available or incredibly difficult to receive. This fact permeates all cultures and has shaped economies for centuries. Very occasionally, access to credit has seeped down beyond the incredibly wealthy, as it has done so over the last decade.
And just as with food, many people have been unable to cope with this excess of debt. Our personal and institutional structures were not designed to withstand a culture of cheap debt just as our brains and bodies are not accustomed to living in a world of cheap calories
John Kay: "Banks would normally be wary of lending to someone whose liabilities were 50 times their net assets, but they happily lent to each other on that basis – until, one day, they stopped. If you want a one sentence explanation of the present crisis, that is it."
2 days ago