Toxic Assets - Part 2

 Toxic Assets, by Douglas Welbanks

This guest article by Douglas Welbanks follows "Toxic Assets - Part One"

Between 1999 and 2005:

Total debt in Canada increased by 47.5%. This was largely due to two factors: the increase in the cost of purchasing a home and the increase in the proportion of families who owned a home with a mortgage.

The second largest contributor to the increase in debt load was lines of credit, at $68 billion. About 3.3 million families, one-quarter (24.9%) of the total, reported having a line of credit debt in 2005, up from only 15.4% in 1999.

Families reported holding about $46 billion in loans on owned vehicles, a 41.3% increase.

$25.8 billion in outstanding credit card and installment debt, up 58.4%.

Student loans approached $20 billion, a 15.8% increase.

Almost 11 million families reported owning at least one credit card in 2005.

Lenders have been lending more and more credit and borrowers have been going further and further into debt each and every year, in Canada, since the 1970s. There has been something deeper than a mercurial stock market – especially for middle and lower income consumers - individuals and families. It may be more accurate to see the recession as a culmination of events and that the undue reliance on credit, in its many forms, has been tenuous at best.

The recent announcement by the government of Canada to give consumers a 21-day grace period before charging interest, when the balance is paid in full, falls into the category of ‘slightly better than nothing.’ However, it completely overlooks the financial realities of real individuals and families struggling to make ends meet today – not to mention the millions hanging on the cliff of predictable job loss, corporate reorganizations and bankruptcy.

Not capping or regulating the actual interest rates reaffirms this unspoken, unforgiving attitude to debtors. It ignores the sacrosanct status of charge card interest rates - in some cases the rate of 28% per year has remained untouched for the last 35 years – even now when the Bank of Canada’s rate is almost zero at 0.25% for its overnight rate. There doesn’t seem to be any relief for preexisting debt and debtors – all $416 Billion of it.

For those facing financial adversity, what is most needed is compassion and a much better understanding of the realities of personal finance – especially from of the federal and provincial governments. Debt is a huge part of the family economic pie. We cannot shrug our shoulders or pretend that all of the bankruptcies are caused by toxic assets or some temporary, international, economic blip creating job losses. Similarly, it is equally sinister to ignore the pain and suffering of hard working and honest individuals and families and the inescapable losses of the accumulated family wealth of millions of people over, in many cases, a lifetime - such as the family home or the RRSPs that have been cashed to meet family expenses and pay creditors prior to reaching a state of absolute destitution.

John Kenneth Galbraith drew attention in The New Industrial State to the abandonment of profit maximization for modern corporations in favour of stability and predictability. Perhaps it’s time to revisit such principles, especially with respect to interest rates and a recession that has the potential to devastate the middle and lower income groups. This is a time for compassion for the less fortunate and vulnerable and an opportunity to take preventative steps to mitigate the losses, for both lenders and consumers.

This would be an excellent period to redefine the enemy. Is it the debtor? Governments need to look beyond a debtor-creditor contract and see real people with families and children. People should not be swept away from public attention under the ominous veil of a bankruptcy. Instead, there needs to be more creativity and flexibility with interest rate reductions for honest individuals and families caught in the recessionary malaise; moratoriums on monthly payments and interest for both mortgages and consumer loans, where appropriate; and the overall willingness to help their customers, co-operate with proposals and be reminded that bankruptcy is a tragedy, the final step in the debt collection process.

The author of this Guest Article, Douglas Welbanks, is the former Director of Debtor Assistance and Debt Collection for British Columbia. He is an author and director on the board of the Debtor Assistance Society, a newly formed non-profit service scheduled to open in August 2009 that has been designed to help individuals and families with long and short term debt problems through education and workshops. He can be reached at 604-951-4357 or dpwelbanks@shaw.ca