Improvident Financial

100 years ago, more than half the settled households in England had at least one 'product' sold by Prudential Assurance under the provisions of the Industrial Assurance Acts. These laws had specifically been designed for the 'working poor' so that they could have the resources that would be needed in the event of the incapacity of the principal wage-earner, or the death of a family member. To avoid a loved one being subjected to a pauper's funeral and deposited in an unmarked grave, it was considered essential to have a 'death policy'; and it was a high priority for the household to maintain the payments towards that highly-desired end. In most cases, the premium was collected every week by an agent of the company, who entered the payment in 'the book' that he [or, rarely, she] carried along with a satchel for the money. Thousands of agents were supervised by hundreds of Inspectors, and the log of payments into the book was checked against the cash paid in and then entered into company accounts by an army of clerks. Some more sophisticated products were sold to better-off customers, notably Endowment Policies, but the death policy was an almost-universal product; because alongside the Pru there were several other major life companies [the Refuge, Royal London, Royal Liver, Liverpool Victoria etc] most of which have been transmogrified into modern insurers and wealth managers with trendy names [often just initials] as well as many smaller companies and Friendly Societies. While some of the smaller 'burial clubs' survive, most of the companies that have survived have been through a path of change that was first mapped out by the Pru.

A generation ago, with the coming of computers, the management looked carefully at the whole structure of their market. By 1993 better-off consumers were installing computers to their homes and were happy to join the digital economy: they were the people whom the Pru decided to target. The company also wanted to convert more people into digital trading, before they would have been self-motivated to do so, so their sales force was encouraged to persuade customers in that direction. Massive advertising and information schemes were embarked upon, and sufficient business came the way of the company for it to be able to transmute itself into a wealth-management conglomerate; not repudiating its assurance roots, but developing for a different market in a different era. The whole door-to-door operation was abandoned: some customers maintained their payments by standing order if they had bank accounts, and a few went to the company's diminishing number of local offices to maintain their cash payments. Eventually, a vast number of policies lapsed and the huge cost of the door-to-door operation became a memory.

Other companies followed the lead of the Pru.

But as the digital economy developed and higher earners and permanently employed people entered the world of bank accounts and direct debits and more advanced savings and insurance products, that only provided for a minority of the less well-off in society. The ongoing fear of not having enough money to fund a family funeral has been enhanced by scare stories about the cost of a funeral; to the extent that I am now extremely irritated by the frequent repetition of an advert for a very reputable company that is trying to cream off as much of that market as can be got.

Beneath the people who can buy an 'over-fifties plan' for funeral expenses - paid for by direct debit, of course - there are a few million people [including many elderly] who do not have both computers and bank accounts. When these people need money urgently, perhaps for a funeral, they need to borrow it: and until last year there was a very solid company, Provident Financial, that met their needs in most cases. The company was represented by door-to-door agents, who knew their areas and knew how to maintain and expand their incomes by meeting the requirements both of the company and their clients. It was always expected that that there would be a proportion of defaults, the 'moonlight flit' was not just a Victorian phenomenon; and the agents knew the admonitory signs and might be able to save the contract. Then in came a 'modern management' with a 'modern model' for the business. Some of the agents were offered new contracts as salaried door-to-door collectors rather than as helpful providers of contingent finance. Such an animal was akin to a bailiff, rather than a welcome contact: a greeting was replaced by abuse at the door. Unsurprisingly, the model is a disaster and the inept individual who drove the model past the company board and into effect has been dismissed. The business has effectively been destroyed. Whether some hugely charismatic individual can be found to turn it round is questionable.

An important underpinning of the weakest layers of society has wantonly been destroyed. The consequences of this will be deeply significant.

Economics - Again

A few days ago, I had a brief discussion with a student of History about my views on Economics and the Econocracy, referring him to the website of the Post Crash Economics Society where I first saw the very apposite term, Econocracy. On our next encounter [in the pub where he earns a crust as a part-time barman] he told me that he had mentioned my stance to a friend who is studying Economics; and the friend had vehemently disagreed with me. Perhaps we will be able to have a face-to-face discussion some time. In the mean time, I will post here today the briefest summary of my views.

I had the great good luck to go up to university when classes were small - my year in Politics and Economics comprised just 12 students - but teachers were good and libraries well resourced. The era of electronic access to data had not yet arisen, so we had to read: and we read voraciously.

At that time what we now call neo-Keyesianism was in the ascendancy, and models of the entire economy had been constructed in the National Institute for Economic and Social Research [NIESR], in the Treasury and in various universities. Given the state of development of computers at that time the models were crude and simplistic, and they could only be manipulated laboriously. Nevertheless, estimates could be made of the impact on the modeled economy of the policy options that were available to governments. These options came in two categories, monetary policy and fiscal policy. Monetary policy involved the creation of money; implicitly by the Bank of England on behalf of and with the authority of the government that owned the Bank. Banning the creation of money was a means of limiting the rate of growth of the economy; and encouraging the Bank to create money to lend to the trading institutions in the economy was a way of stimulating the growth of the money supply more generally. It was taken as a sign to the commercial banks that they could risk making more loans of their own money [deposited by their customers] whenever the Bank of England was stimulating the money supply; thus the amount by which spending could increase was very much greater than the amount by which the Bank increased the supply. Any commercial bank could borrow money from the Bank of England at a 'bank rate' [later called the 'base rate'] which was publicly announced; and lending by commercial banks was made at rates higher than the bank rate. The banks charged their customers rates of interest that varied according to the perceived riskiness of the loan. When the Bank of England had the nod from the government, it lowered bank rate; which was a clear indication to all the banks that they could drop the rates they charged to their customers, and perhaps risk extending the range. Thus a drop in bank rate, accompanied by an increase in the Bank of England's willingness to lend, signaled that banks and their customers should invest to expand the economy; thus expanding trade generally and stimulating economic growth and job opportunities in many sectors of the system could be increased.

However, at that time there were major constraints on the expansion of credit extended by banks. Their customers were required to pay cash deposits on durable consumer goods, and were only allowed to borrow a set percentage of the purchase price. Thus the spread of TV sets, washing machines and other desirable consumer goods was slowed down by the legal requirement for would-be buyers to save up for the deposit before they could enter into a hire-purchase agreement under which [having paid the deposit] they could pay off their borrowing while they had the use of the device. The firms that made the television sets were protected from foreign competition by import tariffs and controls on the amount of foreign currency that businesses could buy: so the system of monetary policy operated within a physically controlled system of protection. The present situation, where consumers can borrow huge amounts of credit and thus create the 'consumer demand' that 'drives' the economy was unthinkable. The world in which neo-Keynesiansim appeared to thrive was utterly different from the world in which we live now; and over the next few days I will outline how that change happened.

I try to keep my blogs at a modest length, and hope that anyone who becomes interested in my ideas will word-search through the archive.