Abstract: Many British banks are in crisis. Some have already collapsed. Four of Britain's largest banks are asking the Bank of England to bail them out. The problems these banks face stem from speculative investments. As a result of the losses on these investments, British banks have tightened their lending programs. This has led to a credit crunch, and as a result companies and individuals are finding it difficult to borrow money. This lack of credit availability is hurting the economy. The question is how best to work through this problem. British legislators are also considering the role the government can and should play in addressing this financial crisis.
Context: According to an essay by Andrew Stead published online on the ABCMoney website, in December of 2006 the United Kingdom was already in the throes of a massive debt crisis which had forced creditors to write off more than 1.4 billion pounds of bad debts. In 2006, individual debtors were only able to pay about 39 percent of the outstanding debt they incurred prior to their bankruptcy filing. According to Stead, part of the problem involved the fact that there was very little government regulation over consumer debt. Several steps have been proposed to ensure that Britain's form of personal bankruptcy does not become a panacea for individuals seeking to avoid their financial obligations.
Until the scope of the current credit crunch was fully understood, British banks were issuing billions of pounds in unsecured loans, sometimes without even asking consumers for proof of income. British banks and other financial institutions were also encouraging consumers to take out debt consolidation loans without a requirement that consumers actually use the additional money to pay off existing debts. As a result, funds from these debt consolidation loans were often used to purchase luxuries or to pay living expenses rather than to pay down debt (Stead...