Gearing in the NEST
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I’ve spent time in the past lambasting the chattering classes of the industry of which I am a reluctant member (but only in the way that Karl Marx was middle class). We are those who love to muse from on high about how “ordinary” people think when it comes to finances and have lofty opinions about what they should and should not be doing with their lives.
This class controls every part of the industry from practitioners, regulators and the media and can (in my view) often be responsible for making the industry totally inaccessible for the very “ordinary” people that they so profess to care about. It’s all very Mary Antoinette to me, but hopefully with a happier ending.
The trouble with the chattering classes is they often end up creating polices designed to make themselves feel better about the world on paper, in practice wreak havoc in the long run. I guess mathematically you could refer to it as a Type II error, but it’s generally better known as the law of unintended consequences.
Recently I’ve been hearing from many of my chattering friends and associates about how terrible payday loans are. In particular wonga.com. I’ll declare a partial interest, I’m a Hearts supporter, wonga.com are our shirt sponsor and we need all the money we can get!
The conversation usually goes that these payday loan companies are nothing but modern day loan sharks. This is your first indication that anyone saying this doesn’t have a clue about the real world. It’s a perfectly fair and rational reaction to be angry and upset about the rates of interest payday loan companies charge but they don’t inhabit the violent underworld of real loan sharks! Indeed one could argue that they have at least legitimised and brought into the cold light of day a practice that has been going on for as long as currency has existed.
The chattering class abhorrence towards this product finds expression in their criticism of the presentation. To them it’s all a question of further regulation or making the interest rate even MORE clear. If only “ordinary people” could understand (in the way “we” do) how bad these products were then they would never buy them. This is again displays ignorance of the issue. In my view some of the payday loan sites could teach us all a thing or two about clearly expressing the price of their financial products. I have no doubt that many payday loan customers (reluctantly) know exactly how much their loan will cost, how many 25 year interest only mortgage customers could say the same?
I’m not defending the rates of interest that payday loan companies charge or their marketing policies. Far from it. I too worry about the debt that many people are getting into with these organisations however I do recognise that this has always happened and that it’s important that we in the chattering classes ask the right question: why are these organisations doing such brisk business? So brisk in fact that they can buy up huge amounts of TV time and sponsor major footballing teams (I’m talking about Newcastle obviously).
Rather than focus on educating people as to how bad these loans are, it would be better to ask why are people so desperate that they take out these eyewateringly expensive loans.
The fact is that people use these products because, in their mind, they have no other alternative. This is a population facing exceptionally difficult economic hardship, who have not effectively seen their real income grow over 12 years (other than through the use of tax credits).
Indeed during the boom years they were the main targets for the financial services industry’s outpouring of cheap consumer credit, the stuff that our “genius” financial wizardry helped create. With the bust in credit and the pairing back of financial support from the state no wonder many people are finding it hard to get to the end of the month and reluctantly turning to financial products that the chattering classes do not approve of.
So it’s sad to see the chatterers lament from their ivory towers about the situation of the general population rather than understanding that they are mistaking desperation for ignorance. But it’s a tragedy when this ignorance (on the part of the chattering classes) ends up creating policies that make the situation so much worse.
The launch of auto-enrolment and NEST was a triumph for the chattering classes. Finally the “ignorant” population who did not know that long term saving was good for them would have it de facto enforced upon them. The whole premise of auto-enrolment and NEST is that people are too stupid and lazy to invest themselves so we’ll make them do it. Of course no one could imagine that people weren’t investing in a pension because, for example, they couldn’t afford it or they didn’t think pensions represent good value for money.
Unfortunately in the medium term I worry that the effect of auto enrollment and NEST will be to cut people’s disposable income at a time when they really cannot afford such cuts. The worst possible outcome would be that due to the additional expense of a forced pension contribution people end up taking out a payday loan to get to the end of the month. The tragic effect of this that they are funding pension contributions through a payday loan; it’s the absolute worst kind of gearing possible.
Clearly I’ve no scientific evidence that this is systematically happening (other than some anecdotal evidence from friends and colleagues) but I do worry that we in the chattering classes are on the verge of a catastrophic failure by smugly introducing a policy without understudying its real effects.
It’s not often I’ll say this but I really hope I’m wrong.