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Household Debt and Economic Crises
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Household Debt and
Economic Crises
Causes, Consequences and Remedies
Heikki Hiilamo
Professor of Social Policy, University of Helsinki, Finland
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©HeikkiHiilamo2018
Allrightsreserved.Nopartofthispublicationmaybereproduced,storedina
retrievalsystemortransmittedinanyformorbyanymeans,electronic,mechanical
orphotocopying,recording,orotherwisewithoutthepriorpermissionofthe
publisher.
Publishedby
EdwardElgarPublishingLimited
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Cheltenham
GlosGL502JA
UK
EdwardElgarPublishing,Inc.
WilliamPrattHouse
9DeweyCourt
Northampton
Massachusetts01060
USA
Acataloguerecordforthisbook
isavailablefromtheBritishLibrary
LibraryofCongressControlNumber:2018939991
Thisbookisavailableelectronicallyinthe
SocialandPoliticalSciencesubjectcollection
DOI10.4337/9781785369872
ISBN9781785369865(cased)
ISBN9781785369872(eBook)
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Contents
List of figures and tables vi
Preface vii
1 Context of debt problems 1
2 Falling into over-indebtedness 26
3 Causes of over-indebtedness 58
4 Consequences of over-indebtedness 100
5 How to prevent and alleviate debt problems 135
6 Conclusions: towards social policy solutions to debt problems 153
References 156
Index 171
v
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Figures and tables
FIGURES
1.1 Household debt as share of national domestic income in six
countries between 1995 and 2015/2016 11
3.1 Rowntree’s poverty cycle inYork (1899) and the 2010s’
cycle in Nordic andAnglo-Saxon welfare states 87
3.2 Causes of over-indebtedness among debt counselling clients
in Germany in 2016 (%) 96
TABLES
1.1 Share of indebted households by three different measures in
six OECD countries 12
1.2 Common indicators of over-indebtedness 15
2.1 Five-stage model for falling into over-indebtedness 27
2.2 Combined debt load and payment difficulties 32
2.3 Four types of personal insolvency regimes 40
2.4 Debt counselling clients and outstanding debt by monthly
household net income in 2016 50
2.5 Number of creditors and balance of outstanding debt in
Germany among debt counselling clients in 2016 51
2.6 Central features of debt discharge systems in six countries 56
3.1 Structural and individual factors for over-indebtedness by
debt/income ratio 69
3.2 Country-specific structural and individual causes of
over-indebtedness in six countries 99
4.1 Individual and societal consequences of over-indebtedness
by lack of material resources and stigma of debt 107
4.2 Reported impacts of over-indebtedness by EU households
(N=120) 116
4.3 Country-specific individual and societal consequences of
over-indebtedness 134
5.1 Credit-based social policy framework to prevent and alleviate
over-indebtedness 136
vi
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Preface
Feeling indebted is more obvious in the context of this book than in my
previous works. While writing this book I have stepped on the shoulders
of a large number of senior scholars and professionals during a period
which extends to three decades. My personal interest in over-
indebtedness goes back to my early working life. I worked as a journalist
withadegreeineconomicsandsomeuniversitystudiesinlawatthetime
when the Finnish economy was going through a period of overheating
before a complete collapse in 1991. While reporting for a national
newspaper, Uusi Suomi, my bosses, Olli Ainola, Eero Karisto and Jyrki
Vesikansa, gave me unexpected responsibility for following the banking
crisis, which included bank takeovers, direct monetary assistance and
temporary blanket guarantees to the banks – the crisis cost roughly
8percentofgrossnationalproduct(GNP),makingitthemostsevereofthe
contemporaryNordicbankingcrises.Thefinancialinstitutionswerebailed
out while thousands of individuals were left with insurmountable debt
burdens.Thepublicatmospherewasfilledwithangerandresentment.After
acareerinjournalism,ProfessorOlliKangasintroducedmetosocialpolicy
andpovertyresearch,whichbecamemymainareaofacademicinterest.
Although I soon realized that poverty research has mainly ignored the
topic of over-indebtedness, the original idea for this book did not come
before a project funded by the Academy of Finland (SA 259216,
2012–2016) which focused on the social consequences of economic
recessions.With Jenni Blomgren and Nico Maunula, my good colleagues
at the Social Insurance Institution of Finland research department, I was
able to purchase and utilize a unique register from Suomen Asiakastieto
Oy, a company maintaining the leading database of consumer and
business credit history in Finland. The records of previously over-
indebted persons were erased retrospectively following the amendment to
the Credit Information Act taking effect on 1 April 2010, which stipu-
lated that all outdated payment default entries had to be removed from
the credit information register after the payment liability had expired.We
got the personal identification numbers of 37 000 persons with default
payment records whose name had been on the register for at least
vii
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viii Householddebtandeconomiccrises
15 years. The project resulted in one of the first register-based studies on
consequences of over-indebtedness in the Nordic area.
As part of the same project I produced, together with Elina Turunen, a
systematic literature review on the health effects of over-indebtedness. In
2013, I moved to the University of Helsinki, where Chaitawat Boon-
jubun, Meng Han Chau, Annika Lehmus-Sun and Jonni Tanskanen
worked as my research assistants. Jonni Tanskanen also wrote his
Masters’ thesis utilizing the data described above. Chaitawat Boonjubun
and Meng Han Chau carried out literature reviews which I was able to
use in compiling this book. Annika Lehmus-Sun helped me with editing
the references.
I have been privileged to have comments and guidance on my
manuscriptfromAapoHiilamo,Elli-AlinaHiilamo,JuhaPanzarandAnu
Rajas. Johanna Niemi gave valuable comments on legal terms. I also am
grateful to VID Specialized University Oslo, which offered me an
opportunity to work as Kjell Nordstokke guest professor during the most
intensive writing period in this project in 2017. I want to thank my boss
Annette Peter-Leis and my colleagues Hans Morten Haugen, Kari
Jordheim and Kari Korslien for their encouragement and support.
There is also a more personal reason behind my engagement with
over-indebtedness. In 1991 my parents’ textile company filed for bank-
ruptcy, leaving some 100 people without work and my parents with
unbearable debts due to personal liability of business loans. I am deeply
indebtedtomyfatherSimoandmymotherPirkko,whoshowedhowitis
possible to recover from serious over-indebtedness with determination
and a resourceful mind. While they were able to rebound soon, the
bankruptcy continues to shadow their lives and the lives of my brothers
and sisters to the present day. Through this personal experience I have
come to realize how deep and long-standing the effects of a period of
insolvency can be on concerned individuals and their families.
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1. Context of debt problems
On 14 July 1656 Dutch painter and art collector Rembrandt Harmensz
van Rijn (1606–1669) made it known to the Court of Holland in
Amsterdam that he could not pay his creditors due to losses suffered in
business as well as damage and losses at sea. Since that day the
bankruptcy of a celebrated artist has struck people as an incidence of
fantastic irony. To avoid imprisonment Rembrandt applied for cessio
bonorum, a process stipulated by the Romans whereby debtors voluntar-
ily surrender goods to creditors. As a result of personal bankruptcy, the
50-year-old painter was forced to cede possession not only of his own
works but also of a large collection of paintings and drawings by other
Old Masters. In addition were ceded busts of Roman emperors, suits of
Japanese armour (among many other objects from Asia) and items of
natural history, including minerals. These items were offered for sale in
1657 and 1658 but the prices were disappointing.As a result, Rembrandt
had to also sell his house and printing-press in Sint Anthonisbreestraat1
and move to a small rented apartment on Rozengracht 184, where he
lived in poverty until his death. The famous painter was buried in an
unmarked grave, and after 20 years his remains were taken away and
destroyed, as was customary with poor people at that time.
The 20th and 21st centuries have witnessed tremendous developments
in terms of better health, higher incomes and stronger states to support
people in need. In the Western world, epidemic diseases have been more
or less conquered, and earlier causes of death have been replaced by
modern and degenerative diseases linked to lifestyles, stress and excess
consumption (Grand 2008). Instead of epidemics another type of disease
is causing havoc by destroying people’s health, taking away their
incomes and possessions and undermining the state’s capacity to help
people in need. That epidemic is over-indebtedness.
It might sound odd to call a problem related to the economic sphere of
life an epidemic.The justification is twofold. Firstly, as will be presented
in this book, over-indebtedness causes serious harm to health and
well-being. Secondly, over-indebtedness is also highly contagious. Of
1 Later Jodenbreestraat, and now the location of the Rembrandt museum.
1
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