Caroline Metz, PhD Student at the University of Manchester discusses PERCs Financial Melancholia: Mental Health and Indebtedness report.

Linking debt and mental health requires giving careful attention to the demarcation between the individual and the social, the moral and the political. Although debt is often treated as a purely statistical question by policymakers, it is made tangible through the human suffering it causes.

It is perhaps most straightforward (yet still under-acknowledged) that debt has widespread and recurrent detrimental effects on the body and the mind –feelings of being trapped by past decisions, stress, anxiety and self-blame, to cite just a few.  Highlighting this aspect of debt, as has been done regarding the way austerity, literally, kills, makes it evident that debt is not just a cold economic fact or a problem that some isolated individuals face. Rather, it a systemic and pressing social issue that should be of concern to all policymakers.

Although such analysis is fundamental in making the issue of debt ‘real’ and in highlighting its social nature, the risk lies in the policy implications that one may draw from it. Indeed, seeing debt as problematic only insofar as it creates depressions and other mental illnesses could lead some to try and cure the symptoms rather than the disease. As the report emphasises (p.12), the rise of positive psychology since the 1980s has led to techniques such as cognitive behavioural therapy that “seek ways of re-activating depressed individuals, with advice on how to change their thoughts and behaviours in future, but without reflecting on the underlying sources of unhappiness”.

In terms of debt, then, we should be careful to avoid a similar slippage: efforts should be oriented towards eliminating situations of problematic debt, and not towards changing people’s ways of perceiving and feeling about their situations. Indeed, it is precisely when individuals deny the dire situation they are in and try by all means to overcome their debts that the spiral gets out of control. ‘Staying positive’ and working more and more hours, or taking on more and more loans to cover payments on previous loans (that are, in effect, unsustainable) can seem like a solution, but it often only makes matters worse as new debts, stress, fatigue and family issues pile up.

Thus, if the impact of debt on individuals’ physical and mental health should be given the attention it deserves –especially insofar as it renders tangible and social what is sometimes thought of as a mere economic fact– it should not be mistaken for a cause of the disease, or for the disease itself. Or, as William Davies put it, “some forms of unhappiness – such as a sense of injustice or anger – need hearing, not treating”. The unhappiness of debtors made audible by the Financial Melancholia report, then, should also be understood as voicing the sense of powerlessness and injustice incurred by debt. But what are the factors that have given rise to an economy and society where debt has become a social justice issue, and what are the complex interlinks between debt as personal suffering and debt as a political problem?

The structural causes of debt

A further distinction between ‘the individual/moral’ and ‘the political’ in debt is illuminating in terms of identifying the causes of the debt problem. “Policy narratives”, the report deplores (p.5), “seek to individualise debt as a personal problem”. However,  in contradiction to popular belief, debt issues do not stem from personal lack of financial capabilities or personal tendencies to profligate spending. Rather, a debt problem is generally caused by an “external shock –from a minor mishap or single loan agreement to a job loss or illness in the family –which snowballs over time”.

This finding, in itself, is crucial to deconstruct current policy narratives around ‘financial literacy’ that have been popular since the late 1990s, and which, among other things, aim to solve over-indebtedness by making individuals and households more ‘responsible’ financial actors. In the face of strong evidence that indebtedness cannot be attributed to financial illiteracy, it is more than doubtful that schemes of financial education will resolve anything. To the contrary, Toni Williams points out that such policies can be seen as a “form of regulation by which the state holds individuals accountable for aspects of (…) social security that it used to provide”. This shift of responsibility from the state to the individual level contributes to explicitly or implicitly putting the blame on individuals’ (mis)behaviours or deficiencies in cases of failures, thereby aggravating feelings of shame, self-loathing and depression.

Besides relieving debtors of the moral stigma often attached to their situation by emphasising the social nature of debt, the report also shows “a clear link between a lack of social safety net and borrowing in times of personal/family crisis”. This element is key, as debt does not result from external shocks such as job losses or family issues alone, but from the untenable situation in which such shocks put households in the current context. If external shocks may very well be triggers of debt issues, or identifiable points that mark their escalation, what is lacking is an explanation as to why, in the event of such shocks, the overwhelming response is to contract more debts. In other words, external shocks are the tipping point of the iceberg, and although it is worth identifying them, they should not obscure the more underlying or structural causes of debt.

Debt, as the report explains, has become endemic: in 1993, total household debt was £400 billion; in 2014 it had reached £1.5 trillion. It has also become increasingly problematic for households, as it went from representing about 90% of their income in 1987, to representing more than 160% of their income in 2008. Although Krugman advises to “imagine that for whatever reason people have grown careless about both borrowing and lending”, imagination is not enough if one seeks to uncover the factors that explain why, indeed, borrowing and lending have reached such impressive levels –for it is only by understanding how we got here that we can hope to find a way out. Two elements should be distinguished when considering the massive rise in household debt: the demand for loans, and their supply. If it seems pretty evident that we need to understand what has been driving such a huge demand for loans (cf supra), it may be less obvious why we should also look at the supply of loans –that is, the availability of credit, e.g. the capacity and willingness of banks and other financial firms to give out loans or other forms of debt. More concretely, if banks had not been allowed and willing to lend more, even a high demand for credit would not have resulted in such an increase in debt.

In the UK the so-called ‘democratisation’ of consumer credit began in the mid- to late 1970s and was consolidated in the 1980s. The UK consumer credit market was progressively opened to foreign banks, whilst the way financial services could be provided to consumers underwent important changes. For example, the Consumer Credit Act of 1974 regulated payday loans and commercial debt management companies. In terms of mortgages, prior to 1986 it was only building societies that were allowed to offer mortgages to consumers. This was modified with the Financial Services Act (1986) that permitted new financial institutions such as banks and centralised lenders to offer the same products, while the Building Societies Act of the same year allowed building societies to effectively become banks. This, coupled with the development of new technologies, gave rise to a “dramatic increase in number and complexity of credit products”. Today, credit is provided on increasingly flexible terms by banks, credit card companies, but also by retail companies such as Marks & Spencer’s and by the numerous entities specialised in ‘high cost credit’ like payday loans companies. As will be shown later, the deregulation and deepening of the consumer credit system means that a whole ‘debt business’ has come to have vested interest in the preservation of the consumer credit economy.

On the demand side, it could be argued that globalisation and neoliberal tendencies of UK and EU economic policies have been driving the increased need for credit. Waves of cuts in welfare and benefits, coupled with years of wage reduction or stagnation and widespread job insecurity mean that households and individuals are, increasingly, vulnerable in the face of even minor jolts. Because of the ever reduced safety nets, people often find themselves having no choice but to borrow to keep afloat. This is of course made worse when many households already take on debt in normal times, be it to buy a house, to fund the extremely costly higher education of children or simply when using credit cards to cover basic living expenditures, not to mention the trend towards expensive private pensions and insurance schemes.

As a result, not only is debt “the main safety-net (…) to get through difficult times”, but it is also “essential to household social participation and protection” even in normal times. As the report also stresses, this type of ‘privatised welfare state’ is very different from a public one: debt, unlike taxation, “functions psychologically and morally to produce feelings of responsibility and guilt”. This comes from the fact that debt is an individualised contract (one individual or household facing a creditor in a position of authority) and that, whereas taxation is correlated to some extent on one’s income, a debt contract locks a person in a certain level of income. Thus, a loss of job or a reduction of income due to unexpected expenses (illness, accident, etc.) will not result in the renegotiation of the debt contract, but is likely to a) force the debtor to re-organise his/her life primarily around the needs of debt repayments -hence the common feeling that debt takes control over one’s life- and b) precipitate the debtor into an unsustainable situation of ever increasing debt.

Finding alternatives?

So if some of the root causes of debt are the deregulated credit system, the lack of social security and the increasing dependence on loans to palliate low revenues, what can be done?

This is where deeper and perhaps disturbing contradictions begin to emerge. In the current economic system, economic growth –often equated with the economic health of a nation, although this, in itself, is contested– depends on consumption and investment. However, neoliberal prescriptions, recently reinforced and institutionalised through the ‘austerity regime’ in Europe, make it difficult for economic growth to be fostered through wage increases or higher state spending, as these are deemed detrimental to goals of price stability, competitiveness, productivity and fiscal responsibility.

The only option left, then, is to maintain debt levels that allow households to consume and act as the engine to production and growth. Thus, “instead of governments taking on debt to stimulate the economy, individuals [do] so”, thereby constituting an economic model of “privatized Keynesianism” that creates extraordinary “opportunities for bank loans and credit cards”. In that situation, it is easier to see why both policymakers and financial/industrial actors are unlikely to pay enough attention to the issue of debt: “consumer credit has become the lifeblood of most household consumption and macroeconomic expansion as a result of the neo-liberal strategy of non-inflationary growth”. To state it plainly, the current economic system does not suffer from debt; it needs debt.

Finding solutions to debt and the human suffering it involves thus requires a much broader rethinking of the debt-economy, which includes rethinking austerity, the role of the state, but also the rationales of growth and competitiveness that are currently nearly hegemonic in political discourses. Suggesting alternatives that run counter to powerful interests may prove a challenging task, but unless politicians, academics and activists recognise that debt has everything to do with structural economic and political forces, the debt problem will not be tackled seriously. Thus, identifying the obstacles ahead may be a first step in finding alternatives to the debt-economy.

One of the major causes of debt originates in the deregulation of the consumer credit system, which led to the growth of a credit supply industry. This means that debt has become a business –and a highly profitable one– in itself. Banks can easily and electronically create credit, on which they make a return, not only via interest rates but also via fees, and have thus an evident interest in giving out loans. An impressive number of (often large) companies have also become financialised which means that an important share of their profits comes from their own consumer credit schemes. Additionally, with the securitisation of mortgages, loans and credit card receivables, consumer debt has fueled yet another market, in which investment banks, broker-dealers, clearing houses, hedge funds, pension funds, law and auditing firms (etc…) all benefit from the debts-cum-financial products that are traded on worldwide financial markets.

It is thus clear that an important number of powerful companies (especially in terms of their strategic position in the economy, e.g. universal banks) have a strong interest in maintaining the current levels of debt. From their point of view, debt is not so much a problem as it is a business strategy. Given the influence of the financial industry (with more than 1700 lobbyists in over 700 organisations and €120 million per year on lobbying in Brussels alone), questioning debt and finding alternatives to the debt-economy may not be an easy task.It is clear that an important number of powerful companies (especially in terms of their strategic position in the economy, e.g. universal banks) have a strong interest in maintaining the current levels of debt. From their point of view, debt is not so much a problem as it is a business strategy. Given the influence of the financial industry (with more than 1700 lobbyists in over 700 organisations and €120 million per year on lobbying in Brussels alone, questioning debt and finding alternatives to the debt-economy may not be an easy task.