Families should not accept share of blame for Britain's woes

In a Telegraph article, a senior UK cabinet member said that families had to accept responsibility for taking on bigger loans than they could afford to repay.

This is fundamentally wrong.

Banks are not in the business of granting a loan to anyone for any amount of money that they would like to borrow.

Rather, banks are in the business of providing loans based on an assessment of the borrower's capacity to repay.  This assessment of the borrower's capacity to repay caps the amount of the loan the bank is willing to provide.

Assessing a borrower's capacity to repay a loan is a core competence of banks.

As a result, it is 100% the bank's responsibility to not provide a bigger loan than the borrower can repay.

British households that borrowed too much money must “accept responsibility” for their role in the current economic troubles... 

Philip Hammond, the Defence Secretary, said that banks were not solely responsible for the financial crisis as “they had to lend to someone”. 

The minister, who played a key role in drawing up David Cameron’s economic strategy in opposition, also claimed that people who took out loans were “consenting adults” who, in some cases, were now be seeking to blame others for their actions. 

Mr Hammond made the comments after Sir Mervyn King, the Governor of the Bank of England, ... criticised the delay by Gordon Brown’s government in bailing out the banks; remarks that prompted calls for an official inquiry into the role of regulators, the Bank and ministers in the financial collapse. 

Mr Hammond, speaking to The Daily Telegraph on an official visit to Germany, said that households must also accept that they played a role in the decisions that led to the crisis.

“People say to me, 'it was the banks’. I say, 'hang on, the banks had to lend to someone’,” he said. “People feel in a sense that someone else is responsible for the decisions they made. Of course, if banks don’t offer credit, people can’t take it. [But] there were two consenting adults in all these transactions, a borrower and a lender, and they may both have made wrong calls. 

“Some people are unwilling to accept responsibility for the consequences of their own choices.” 

He added that individuals, companies and governments were all guilty of excessive borrowing. We allowed our expectations to run away with us,” Mr Hammond said. “We started living a lifestyle both in private consumption and in public consumption that we could not afford. We borrowed to top it up … now the day of reckoning has come and we are adjusting. 

“Households were spending more than they earned. That’s why household debt rose.” 

The attempt to persuade indebted households that they should share responsibility for the crisis is a risky strategy at a time when Conservative ministers are facing accusations that they are out of touch with ordinary Britons. 

Mr Hammond was a successful businessman before entering politics, amassing a multi-million-pound fortune from interests including property development. But he insisted it was right to highlight the role played by household borrowing, including mortgages. 

“It is a tough message but we are still, by some margin, the most indebted nation on earth in terms of household debt,” he said.... 

Last night, Mr Hammond made it clear that he was not telling people how to arrange their finances, although he did point out that consumers were clearing debts rather than spending — a factor in the lacklustre economic recovery. 

“People are dealing with that [their indebtedness],” the Defence Secretary said. “That is what households are doing. Running down debt. Households are very rational. 

“Governments can pontificate all they like but its individual decisions that matter. Millions of households are deciding they are uncomfortable with their levels of debt and they are going to tighten their belts and squeeze down their levels of debt. I prefer to trust millions of households to make their own decisions rather than try to impose them from the centre.”