A new year, and a new morality is needed in the financial sector

IN THIS short season of bracing resolutions, consider the lessons of the current crisis in our debt-laden households. From the perspective of 2008, last year's attempts by central bankers to provide liquidity to the money markets are akin to giving paracetamol to a binge drinker of ten years' standing – it may cure the headache, but will not avert cirrhosis of the liver.

The problem has less to do with the liquidity of the banks themselves and more to do with the reluctance of banks to lend to each other. Nobody wants to be holding the subprime parcel bomb when the music stops.

We were told that the knock-on effects of subprime lending in the US would have little effect here in the UK, because the UK had a much smaller proportion of subprime lenders than that in the US. But the truth is that the lending criteria of UK high street banks have been so lax in recent years that much of their lending has been, as near as dammit, subprime.

Six times income multiples and 125 per cent loan-to-value ratios have been commonplace. Self-certified proof of income has been an incitement to widespread fraud.

What last year taught us is that the "greed is good" mantra attributed to the Eighties icon Gordon Gekko is no less applicable to the era of the supposedly austere Gordon Brown.

The stark truth, now exposed for all to see, is that the ten-year boom we have experienced was fuelled by excessive borrowing.

This in turn was the result of the availability of easy credit, the drying up of which has ominous implications for the economy.

Expect to see an increase in pay demands in 2008 for a start. Think about it. Where does the call centre worker in Glasgow find the funds to buy that designer handbag? She asks her employer for a pay rise.

Wage inflation has remained low mainly because easy credit dampened pay demands. It was easier to phone a flexible friend than confront the boss. And it was so much easier to take the kids to Florida and slap it on the plastic than earn the cash.

Now that inflation threatens once again, the monetary policy committee of the Bank of England needs to be reminded that its sole remit is to check price rises through the use of interest rate policy. Nothing less, nothing more. This was overlooked in the final months of 2007, when the MPC was serenaded by the self-interested squawking of estate agents, mortgage lenders and retailers.

Their "argument"? Because house prices nationally dipped by 0.8 per cent in November, interest rates should be cut immediately.

But over the past seven years house prices nationally have increased by well over 100 per cent, and I don't recall the same parties calling for interest rate rises, as logic should have dictated.

It is not just the call centre worker in Glasgow who is nervous now. There is middle-class Malcolm from Kilmacolm, who jacked in his accountancy job to become a "property developer" and is now quaking in his designer boots.

Property Ladder presenter Sarah Beeny has much to answer for. She made it all look so simple. That second buy-to-let home in Bulgaria is no longer looking like such a good idea.

Those of us old enough to remember 15 per cent interest rates in 1989 will also remember the pain that ensued into the early Nineties.

It was this bout of unpleasantness, whose side-effects included negative equity, that enabled the UK economy to return to stability.

At the risk of pushing the salutory new year mood too far, I'm afraid we are again in need of some tough medicine. The Old Lady of Threadneedle Street must administer it without pandering to those special pleaders.

AS FOR the Northern Rock debacle, how does that look in the cold light of 2008? Here we have a bank that got into trouble through dubious lending practices and a flawed business model.

Now it is on the brink of rescue by the taxpayer.

What message does this give to banks that adopted a more conservative approach to lending, whose business models relied less on the wholesale money markets?

They enter 2008 finding themselves paying the price for the misdemeanours of others. Why shouldn't they act recklessly in pursuit of rapid short-term growth? After all, if everything goes belly-up, they can expect to be rescued by the taxpayer.

Were it not for the government guarantees applied to Northern Rock, it is doubtful that pensioners of other collapsed companies would have won their campaign to get their pensions paid.

For 2008 a new attitude – dare I say a new morality – is needed.

I predict that 2008 will be a year of acceptance that individuals can only live the lifestyle that they can afford without excessive borrowing.

Financial institutions will need to tighten up their lending criteria and be more scrupulous about uncovering fraudulent applications. If this results in a collapse of asset prices, such as property, so be it.

My tip for 2008 is to get yourself a moral compass, like the one the Prime Minister professes to carry.

Try to make it one that works.

Iris Benn-Carr is a freelance banking journalist