Northern Crock

David Cameron is engaging in a bit of political opportunism this morning, by laying the blame for the Northern Rock credit crisis at the door of the government (well, it beats having any actual policies, doesn't it?).

Without wishing to mention that the liberalisation of the consumer credit market took place under a Conservative government, one has to question the validity of his argument.

There are two points worth making: the first is on the point of access to credit; and the second relates to the relationship between debt and Britain's economy over the last 10 years.

It's important that people have access to credit in order to be able to engage in consumption smoothing. A credit constrained world benefits only those with enough liquid resources at the outset (i.e. the very rich); at one level, access to credit (almost paradoxically) helps those on lower incomes more than those in higher income brackets, as it allows them to maintain spending in periods where their income falls short of their outgoings, and pay off debt when their income exceeds outgoings (at least, theoretically). Credit is therefore a redistributive device in the sense that it allows individuals to smooth consumption over their lifetime.

Of course, there need to be reasonable safeguards on lending - but it is, and should rightly be the responsibility of lenders and borrowers to lend/borrow on an affordable basis. The Government should introduce regulation only to the extent that it provides adequate safeguards to the wider economy and to individuals. It shouldn't involve itself in more wholesale policing of credit agreements between individuals and their lenders, as this would drive up the costs of borrowing and would in turn restrict access to credit.

David Cameron suggests that "under Labour our economic growth has been built on a mountain of debt. And as any family with debts knows, higher debt makes us more vulnerable to the unexpected. In short, the increases in debt in the UK have added a new risk to economic stability." Whilst this as a factual observation has some truth in it (debt has risen over the last 10 years, and borrowing exposes individuals to the risks of unexpected events), it misses the point.

A stable economy - where people feel assured that inflation and interest rates will remain stable and low (in historic terms) - actually increases the likelihood that people will borrow against the expectation of stable income streams over the long term. Increased debt is a symptom of a stable economy, not necessarily a cause of an unstable one.

The year after the Black Wednesday debacle, total gross lending in the UK increased five-fold. Why? Because people felt more confident that lending would not expose them to the risks that they had endured during the 1980s and early 1990s. It is no surprise that gross lending has increased in every year since 1993 - a period that has seen low and stable inflation rates, and decreasing interest rates (a trend that was accelerated under Labour).

Whilst low interest rates might encourage borrowing, higher interest rates discourages it. The recent rises in interest rates will encourage more and more marginal borrowers to pay off debt more quickly and revert to saving instead. The consumer credit market, in this way, is self-regulating.

In David Cameron's rush to acquire a few floating voters, he has failed to grasp the facts of the matter. His comments today about consumer credit are simply a load of Northern Crock.