The weekend press revealed that fifteen of Anglo Irish Bank’s customers owed more than €500 million each. In a country of just four million people, the sums are preposterous, but there has been much that has been preposterous in these past years; the loans were the top of an absurd speculative spiral to which the majority of Irish people assented when going to the polls in 2002 and 2007. Yet when the house of cards falls, it is not the billionaire debtors who are hurt, it is the people at the bottom; those who probably got no nearer a mortgage than talking to someone who was selling their council house.
Banks, who recklessly granted mortgages that were often four or five times a borrower’s earnings, are now assuming an attitude of financial rectitude, an air of responsibility. The tightening of credit is a closing of the stable door after the horse is clear over the hill into the next parish; rather than being a purely positive step, it threatens to further hurt those who are already hurting.
What happens when people cannot get credit at all? Perhaps they are inhibited from spending; sometimes, though, they are driven to other sources of finance. The unlicensed money lenders have not gone away, even during the boom years. The crash may bring them a lot of new business, those who had no prospect of a mortgage as we spiralled upwards have even less prospect of credit from retailers or financial institutions as we spiral down.
The reality of the ‘tick man’, the loan shark, the money lender, is described in Niall Ferguson’s The Ascent of Money:
Loan sharks, like the poor on whom they prey, are always with us. They thrive in East Africa, for example. But there is no need to travel to the developing world to understand the workings of primitive money-lending. According to a 2007 report by the Department of Trade and Industry, approximately 165,000 households in the UK use illegal moneylenders, borrowing in aggregate up to £40 million a year, but repaying three times that amount. To see just why one-man moneylenders are nearly always unpopular, regardless of their ethnicity, all you need do is pay a visit to my home town, Glasgow. The deprived housing estates of the city’s East End have long been fertile breeding grounds for loan sharks. In districts like Shettleston, where my grandparents lived, there are steel shutters over the windows of derelict tenements and sectarian graffiti on the bus shelters. Once, Shettleston’s economic life revolved around the pay packets of the workers employed at Boyd’s ironworks. Now it revolves around the benefit payments made into the Post Office accounts of the unemployed. Male life expectancy in Shettleston is around 64, thirteen years less than the UK average and the same as in Pakistan, which means that a newborn boy there typically will not live long enough to collect his state pension.
Such deprived areas of Glasgow are perfect hunting grounds for loan sharks. In the district of Hillington, Gerard Law was for twenty years the number one loan shark. He used the Argosy pub on Paisley Road West as his office, spending most working days there, despite himself being a teetotaller. Law’s system was simple. Borrowers would hand over their benefit books or Post Office cashcards to him in return for a loan, the terms of which he recorded in his loan book. When a benefit cheque was due, Law would give the borrower back his card and wait to collect his interest. The loan book itself was strikingly crude: a haphazard compilation of transactions in which the same twenty or thirty names and nicknames feature again and again alongside sums of varying sizes: ‘Beardy Al 15’, ‘Jibber 100’, ‘Bernadett 150’, ‘Wee Caffy 1210’. The standard rate of interest Law charged his clients was a staggering 25 per cent a week. Typically, the likes of Beardy Al borrowed ten pounds and paid back £12.50 (principal plus interest) a week later. Often, however, Law’s clients could not afford to make their scheduled repayments; hardly surprising when some people in the area have to live on as little as £ 5.90 a day. So they borrowed some more. Soon some clients owed him hundreds, even thousands, of pounds. The speed with which they became entirely trapped by their debts is scarcely surprising. Twenty-five per cent a week works out at over 11 million per cent compound interest a year.
An economy in decline, and credit that is rapidly shrinking, create many new opportunities for the lenders. The government’s cash injections into the banking system should be matched by resources to support the work of the credit union movement and to support the Money Advice and Budgeting Service, whose staff must be under serious pressure, otherwise we are feeding people to the sharks.