This Government promised to prioritise child poverty. Child poverty comes from many sources, with one of the biggest being debt from loans with high interest rates. The 2019 efforts by the Government to legislate to constrain the predatory lending practices of loan sharks leading to unmanageable debt have hardly had much effect, if the number of debt consolidation agencies is anything to go by. A search on “debt consolidation” will show pages and pages of companies offering help to the desperate.
And Covid-19 has made it all worse.
On 4 May 2020 Tim Barnett, CEO of Fincap the umbrella group for 200 financial mentoring agencies, said the $11 million they received for running Fincap last year would not do the job this time around.
“If unemployment goes to 12 percent, that’s triple [the current rate], and we’d expect the demand to triple as well. That’s going to be impossible for us to meet at the standard we want. So [we are] absolutely needing more support.
He said in 2018, “The people we see have an average debt of $10,000 – so that’s about $600 million debt a year.”
FinCap surveyed agencies on their experiences of dealing with clients whose financial lives were in turmoil as a result of unsustainable debts. People came to the agencies as a “last resort”, facing extreme hardship such as eviction, going hungry, or having the power cut off, the report said.
Many borrowers were struggling with debts after losing employment, or falling ill. Multiple debts were the norm, including credit card, high-interest payday loans, overdrafts, truck shop and Work and Income debts, with agencies estimating the average number of debts per client at between three and five.
A recent report (June 8, 2020 Stuff) by BERL on high-cost lending noted that small high-cost lenders had become increasingly common in New Zealand and were now a $8.5 billion industry.
It might be said, and often is said, that people should live within their means. Some blame them and other sympathise.
Yet there is a third option – it is inevitable. The very system itself make sure of it. How can this be?
Well most of us know that commercial banks are the main issuers of the money we use. Whenever they issue a loan, they just write a credit on one side of the ledger and a debit on the other. The home buyer gets a deposit put in their account and they have to pay the bank back over a number of years. But they have to pay it back WITH INTEREST. The bank, you see, has created the deposit but not the interest. So borrowers must go out and compete with others to find that interest. Some will succeed but a small portion will necessarily fail, because there isn’t enough for them.
It is best illustrated with a story. Bernard Lietaer, author of the Future of Money said,
“I have a story that I call the “11th Round Parable.” I learned the story in Australia, so I’m setting it in the Australian Outback, in a little village where people don’t know about money. Every week they gather, and people bring hams, chickens, and eggs and barter and bargain with each other.
Then one day, a gentleman comes with a very fancy hat and very shiny shoes, and he observes the market. At one point, he sees a farmer trying to carry 12 chickens around the market to exchange them for a ham—and the farmer is obviously having trouble doing that. So the man starts laughing.
The wife of the farmer says, “Hey, stranger, do you know a better way of getting around with the chickens?”
And the man says, “I don’t know about chickens, but I know a better way of doing all this.”
“Oh, really,” she says. “What would that be?”
“See that tree in the corner?” he asks. “I’m going to sit under that tree. One of you bring me a big cow skin, and I will prepare something. Bring every family together, and I will explain it to you.”
He goes to the tree, and they bring him the skin. He cuts little rounds in that skin and puts a fancy little seal in each of those rounds. He gives ten rounds for every family. One round is equal in value to a chicken. So now the villagers can carry those rounds instead of the chickens.
Then he says, “I’ll come back next year and sit under the same tree. I want everyone to bring 11 rounds. The 11th round is the token of appreciation for the improvement that I’ve made possible in your community.”
The farmer’s lady asks, “Where will the 11th round come from?”
He says, “You’ll see, you’ll see, you’ll see. Don’t worry.”
Do you know what’s going to happen?
TRACY: Some people will have enough, and others will be left with fewer than 11.
BERNARD: What has to happen is on average, one of ten families has to go bankrupt to provide the 11th round to someone else. We’ve created a negative-sum game. And the next time the harvest is ready, not everyone will participate to help a neighbour in trouble to get his harvest in before a storm.
That’s how scarcity is created and how competition is generated. Lietaer said, “Our money system is structurally brittle. It doesn’t matter if you put a very clever guy or a stupid guy at the wheel. The clever guy will take a half hour to have an accident, and the stupid guy will take ten minutes.”
Of course how to solve it is another matter for another time. Meanwhile let’s first understand that unless you look at the structure of the money system and ask the right questions you are not going get the right answers.
I don’t believe the Labour Party understands the cause of accumulating debt in the section of our society at the bottom of the heap. Yes, sure they understand the pain. Yes they try. But the way they try is to put more and more bandaids on and keep up the rhetoric about solving child poverty.
The only trouble with knowing that the very structure of our money system requires a certain number of vulnerable people to keep getting into unmanageable debt is that once you understand it, once the genie is out of the bottle, you can’t push it back in. You can’t unknow it. But the more of us that are informed, the more likely we will collectively discover various solutions.