The rise of high cost debt in Aotearoa is purely a response of the successive political movement to keep the bottom third of families living below the poverty line. No-one actually worried about the families at the time that Ruth Richardson’s mother of all budgets came in. The only goal of decreasing benefits then was to provide a gap between benefits and wages, so that wages could be pulled down.
It is history now that this was a highly successful strategy. New Zealand became a low-income, high profit country, ripe for exploitation. There were so many consequences that I couldn’t list them all here, even if I tried.
But making people poor spawned quite a number of industries that allowed others to feast on the misery of poverty. The pawn-broking industry barely existed before Cash Converters, for example. But the industry I want to focus on here can be called high cost debt. You may call them payday loans or whatever, but what these debts are in principle is the loan of last resort. When you need money and there is no other legal way to get it, you borrow money from the high cost loan industry.
It has a pretty face. Many of the lenders advertise on TV with happy faces, assuring those in need that they will not be turned down. They charge usurious fees and massive interest rates. One percent a day, compounding, is the standard, with some charging up to 800% per annum.
Over the summer a group of us have been doing some research on these loans in New Zealand. The truth is that the industry has been virtually unregulated in the free market era, allowing people to lend much as they wish, charge any interest rates they like, demand huge penalties for late payment and use a range of downright shady practices to get repayment.
In January, one lender admitted in the media that high interest rates were to compensate because so many people never repaid their debts. So, the poor are paying for the default of other poor people, and allowing lenders to loan indiscriminately knowing if they don’t get their money back from one lender, the others will pay.
A loan of $100 for two weeks may require an on-time repayment of around $250, when you add in all the fees. In addition, around half of borrowers (who may borrow, anyway, because they are poor) are not able to repay on time, leading to massive penalties and the threat of being put in the hands of debt collectors.
These agencies often use dreadful tactics. Multiple phone calls each day, even when repayment plan has been put in place. Collection fees that are higher than the original loans. Taking money out of pay packets before even rent and food have been paid, leaving families too short.
Of all the examples of usury and greed that have emerged from our neo-liberal past, the high cost loan industry is one of the worst. The problem is, until wages and benefit are increased to living levels for all, people will need to borrow money.
In my view, the high cost loan industry needs to be pushed out of business, and replaced with a state-run system of low-interest loans for families. State-run because the banks have shown little or no interest in entering this sector. Default rates will fall dramatically when low or even no interest loans are available. Everyone borrowing should also be given a mentor to support their whanau and assist with debt repayment.
A Bill will shortly come to Parliament to add some regulation to the industry. There are fears that it will not go nearly far enough. Options include a cap on interest rates, more prescribed loan models, regulation of debt collection and much more. New Zealand is one of the last to regulate its loan industry, and should learn from the experience of other countries.
Government policy created whanau poverty in Aotearoa, whether it be beneficiaries or the working poor. The market for these high cost loans was thus created in Wellington. Wellington must now unpick these problems by strict regulation of the industry and significant work on ending whanau poverty.
Dr Liz Gordon began her working life as a university lecturer at Massey and the Canterbury universities. She spent six years as an Alliance MP, before starting her own research company, Pukeko Research. Her work is in the fields of justice, law, education and sociology (poverty and inequality). She is the president of Pillars, a charity that works for the children of prisoners, a prison volunteer, and is on the board of several other organisations. Her mission is to see New Zealand freed from the shackles of neo-liberalism before she dies (hopefully well before!).
Well said, Liz, but the debt problem goes way beyond individuals and families: entire nations are up to their necks in debt, and central banks continue to ‘print’ money keep property markets inflated, to keep equity markets looking good and to support the infinite growth on a finite planet narrative that has become the basis of economics.
The continuous expansion of the money system results in continuous devaluation of money in people’s pockets or bank accounts. And since the entire system is predicated on converting fossil fuels into waste, the day of reckoning is coming.
Needless to say, when the day of reckoning does come, it will be those at the bottom of the heap who will suffer the most.
This is exactly correct. Indeed, debt is used as a tool to keep the populous subservient. Most NZ voters are debt serfs, which is why political change is almost impossible (imo this is by design in all Western Democracies). The idea is that as long as you don’t technically own anything outright (e.g. a house, car, TV, education or whatever), then you’ll keep your head down, work hard and don’t rock the boat politically or socially for fear of losing everything.
My advice: DDD – Don’t Do Debt. If you don’t owe anyone anything, then that’s one less thing that can be used to control/steer you. For sure this is easier said than done, but nonetheless it is very possible in NZ with hard-line financial discipline.
Afewknowthe truth, your comment:-
“central banks continue to ‘print’ money keep property markets inflated, to keep equity markets looking good and to support the infinite growth on a finite planet narrative that has become the basis of economics.” is wrong.
You are referring to commercial banks. It is true that central banks (in this case the NZ Reserve Bank) print money but not much and that money is bought up by the commercial banks at face value, so the Reserve makes a good profit on it. Once the commercial banks have bought that money, the Reserve Bank has no further say in what the commercial Banks do with it. I guess it mostly goes into ATM’s.
As I understand it, commercial banks take money created by central banks and use Fractional Reserve Banking to multiply it, so the source if the problem is central banks.
I believe little money is in the form of notes and coins (maybe 5%); the vast majority is in the form of digits in computer systems.
Denis the Reserve Bank creates under 3% of new money mainly in replacing paper money and minting coins.
Private banks create 97% of new money through digital manipulation of account balances. The paper money and coins in NZ are a small fraction of the total money held.
Check with the reserve bank website and do your homework.
The myth that loans from private banks are made from deposits is misleading and most are misled.
The fractional reserve regulations in NZ allow banks to loan 9 times what they have in deposits or have borrowed for other financial institutions. And that limit is hard to police with some academic authorities throwing doubt on those limits being observed in NZ.
So a dollar in bank deposit can have a loan of $10 dollar made against it. $9 new dollars are created by that loan and paid back to the bank who then may use it as they wish. Free money at 900%. The biggest racket in the world but well protected. Interest is on top of that and most interest is paid on money that did not exist before the bank loan created it.
Your guess is very much reflective of most peoples misunderstanding about money creation.
This is longwinded and technical but he essentials are in the introduction.https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.
Pleas note that contrary to Positive Money’s interpretation it does not say the money multiplier would not have worked under the old fractional reserve system, but rathe that at least in the UK jurisdiction, a fractional reserve is no longer being imposed. This does not mean that it is not being imposed here, and wikipedia thinks it is, but I wouldn’t be confidant of that.
The arrangement the BOE describes is that banks in that jurisdiction are constrained in their money (debt) creation only by what they are required to pay in interest to the BOE if they lend (create ) more money than they have received in deposit that day.The BOE being UK’s central bank equivalent to our reserve bank. Banks that receive more money on deposit than they lend out on the day are able to deposit it overnight for a slightly lessor interest rate.
Bare in mind that almost no money ( only cash) ever leaves the banking system, as it goes instantaneously from your credit card to another person’s bank deposit account, and your check if you still use them is not paid out until it is cleared; and a direct electronic payment is self explanatory.
So every loan as it is taken up -spent- creates a deposit in another bank, or another account in the same bank, in the instant that it is drawn. So as all the banks in the UK jurisdiction at least, when pooled in this system so as to be operating as if they were one institution, cannot possibly lend more than is deposited as very loan automatically becomes a deposit somewhere else in the system as it is drawn.
I strongly suspect that our banks and all western world banks do in effect operate the same way, and are all effectively integrated the same way. The central banks actually are creating unlimited new money all the time, to accommodate the bank that has “lent” a bit more out today than they got in.
The only constraint exercised by the central bank is the price of that newly created money.
D J S
Agreed David.
Govts have problems in probing the books of banks as the international nature of the complex network of transactions are not open to individual jurisdictions.
As so neatly encompassed by Geoff Bertram “its a black hole”
Good work to focus attention on this dirty business Liz.
I suggest that it be made illegal to recover any loan not made by a registered , regulated organisation working on controlled rates of interest.
D J S
Noam Chomskiy pointed out that the best way to control university graduates is to burden them with big debt so that they are less likely to protest. Same goes for striking workers and all other sectors of society
Spot on, Liz. In my last job- govt dept – I lent a moderate sum to a young guy in a desperate personal situation. He had a PSA delegate ask management for an advance on his pay, to be deducted from future pays. I told him that if management wouldn’t lend him the money I would. They wouldn’t, so I did. He repaid me. This was later canvassed at mediation in a separate issue which I took to the ERA – and won.
Log ago I had a return-to-workforce job with a high profile finance company. I was fairly naive about what they did – then. I quit after 6 weeks without another job to go to.
The company lied to me about their practices, including the interest rate charged on renegotiated loans for defaulters. Their loan agreement, while doubtless legal, was impossible for anyone with English as a second language to understand.
The official information to be provided to personal loan guarantors was inadequate, and probably not legal.
The company told me specifically that they did not carry out repossessions. This was another lie. They did, and they flogged stuff off in garage sales at two garages rented specifically for that purpose. When I queried my ‘supervisor’ about this, she said that she didn’t know they did this.
Needless to say, I met up with some very poor people, and certainly not necessarily feckless either, but often quietly desperate.
Keep up your good work in this area; I am cynical about any govt measures to help those defeated by swimming with sharks. Successive govts have had many many years to address this, and they have not.
The poor have little voice.
Global Debt is now 10 times worse than when the last GFC came in 2008.
We are now on the edge of the financial cliff that is about to crumble.
https://www.businessinsider.com.au/global-debt-levels-hit-an-eye-watering-215-trillion-last-year-2017-4
World total debt now stands at $250 trillion dollars and we can never pay this amount back.
“Global debt levels soared over the past decade, with the vast majority accumulated by emerging market nations.
According to figures from the Institute of International Finance (IIF), global levels of debt held by households, governments, financials and non-financial corporates jumped by over $US70 trillion in the past decade to a record high of $US215 trillion, equating to 325% of global GDP.
Here’s what that increase looks like, looking back not only over the past decade but also to the decade before.”
Read more at;
https://www.businessinsider.com.au/global-debt-levels-hit-an-eye-watering-215-trillion-last-year-2017-4
Global Debt is now 10 times worse than when the last GFC came in 2008.
We are now on the edge of the financial cliff that is about to crumble.
https://www.businessinsider.com.au/global-debt-levels-hit-an-eye-watering-215-trillion-last-year-2017-4
World total debt now stands at $250 trillion dollars and we can never pay this amount back.
“Global debt levels soared over the past decade, with the vast majority accumulated by emerging market nations.
According to figures from the Institute of International Finance (IIF), global levels of debt held by households, governments, financials and non-financial corporates jumped by over $US70 trillion in the past decade to a record high of $US215 trillion, equating to 325% of global GDP.
Here’s what that increase looks like, looking back not only over the past decade but also to the decade before.”
Read more at;
https://www.businessinsider.com.au/global-debt-levels-hit-an-eye-watering-215-trillion-last-year-2017-4
Yeah but America doesn’t really have to pay it back because they’ve got F35s that can carry nukes which is pretty dangerous for any one wanting to send em to Baycorp.
It seems that any legislation put up to remedy the neo liberal virus ” never goes far enough ”
At a time when we need this government to step up they are unable to do what is needed.
This system we have put in place directly affects what a government can or must do to alleviate its harshest cruelties.
That is a massive failure of democracy and the power of government to effectively deal with this neo liberal virus and there seems no cure.
Those loans should not be legally allowed to be charged out.
Also another weapon on war on the poor, Meth…. which at least there seems to be a tiny bit more of a clamp down at the border these days than under the Natz… clearly not enough though…
this arrest estimated as saving 136m of social harm…
Two arrests over meth, loaded guns found in shipping container
https://www.radionz.co.nz/news/national/383309/two-arrests-over-meth-loaded-guns-found-in-shipping-container
Arrests after 11kg of meth worth $5.5m found in imported appliances
https://www.radionz.co.nz/news/national/383133/arrests-after-11kg-of-meth-worth-5-point-5m-found-in-imported-appliances
the avalanche continues… this one stopped before it got to it’s final destination NZ…
http://www.khaosodenglish.com/news/asean/2019/02/07/romanians-nigerians-arrested-in-cambodian-drug-bust/
(just a couple of examples of people making money trying to bring in Meth in just a few days in February… )
(To give an indication this arrest of just ONE shipment of Meth listed above in the golf carts is causing nearly the amount of social harm than the entire poor housing in an entire year, https://www.radionz.co.nz/news/national/383318/poor-housing-conditions-costing-taxpayers-more-than-145m
the focus of government seems very weak on stopping the drugs flow compared to every spare moment on housing with the lobbyists getting rich off Kiwibuild and construction roots.. very little government interest or firm policy in preventing the amount of social harm coming in every day from Meth into NZ which is far greater!)
Correct, Mosa. With homelessness under National, and denied by National, it was marae which lead the way in addressing the issue, and showed the lying govt how it could be done.
I think the Sallies have now initiated a money lending scheme.
So this is NGO’s leading the way on crucial issues – all they have to lose are their reputations eg Hurimoana Dennis, or their funding. Govt are too gutless to act because what they have to lose is their power, and the fact that they are elected to represent all of the people is secondary to that.
“A Bill will shortly come to Parliament to add some regulation to the industry.”
I thought it already had….obviously im mistaken, but it should have been years ago.
Well, if my fellow New Zealanders want to hold NZ dollars which are increasingly becoming worthless, so be it.
Granted not everybody can save, but hell, even if you only have a few dollars, for the love of Jesus (no blasphemy intended) swap those dollars for Gold and Bitcoin.
Are houses becoming more expensive, or is the NZ dollar becoming worthless – something to think about.
Evidently the next GFC is on the horizon, the storm clouds are gathering and it will be nothing like 2008, there will be carnage around the world.
This new “Transitional Government” can now decide on this course wisely instead? – Better to begin now doing the right thing?
I would be in favour of a ‘Capital Gains tax’ if it funds this option I propose for saving our planet from Climate change;
It would be more productive and environmentally sustainable for Government to offer better options for property owners to get these subsidies to make all properties more healthy.
*For better insulation like using wool underlay and wool carpeting.
*Double glazing of windows.
*This would also stimulate more jobs.
*Also sheep farmer incomes would rise and assist them to cope with lowering ‘climate change emissions’.
*These improvements would effectively be helping to slow Climate change and will slow the rate of increasing dampness, rain and extreme weather event that cause more dampness and mould in homes.
“Good laid plans make for far better outcomes”
Could start with wiping all work and income debt accumulated only due to poverty (not fraud). Its shocking how many basic costs need to be relayed, with the payment taken from what is meant to be just below basic living costs.
Our ‘compassionate’ Government really needs to start digging a whole lot deeper when it comes to protecting its citizens…
Judge asks why Budget Loans’ directors not prosecuted…”For reasons not entirely clear, neither Mr Hawkins nor his son faced charges themselves,” the judge said….even our Judges are taken aback.
Just a small taste of some harrowing reading…
“One woman who took out a $3500 loan was still repaying it 10 years later, and was eventually bankrupted. Budget Loans had told her she owed almost $57,000, when a 2005 court order had frozen the loan at $15,000.
In another, a woman ordered by a court to pay Budget Loans $8574.55 was told by Budget Loans she owed $55,774.84.”
https://www.stuff.co.nz/business/110840090/judge-asks-why-budget-loans-directors-not-prosecuted-and-dismisses-720000-sentence-appeal
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