Why do we Need Forbrukslån or Consumer Loans More than Ever?

There have been a lot of talks about the possibility of an inflation surge, as most countries lift COVID-19 pandemic restrictions and look to resume their normal economic activities. In the past couple of months, the United States prices have risen more than a five percent year-on-year. In the United Kingdom, the price increase has been pretty slow and was even below expectations for the month of July, but there is a good chance that it will accelerate again. The situation resembles what happened after World War Two.

Then, as now, most governments were confronted with people eager to spend, as well as industries not yet ready to meet the public’s demand. But in 2021, companies and their supply chains will have a hard time meeting unpredictable demands because of COVID-19 restrictions.

After World War Two, the producers needed a lot of time to return to normal business after years of focusing on the global crisis. With financial inflation looming, government officials had the courage to foist bold restrictions on consumer loans and credits to curb demand. It looks unthinkable in today’s environment, but there are good enough reasons for doing this in today’s financial climate.

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What happened after World War Two?

The United Kingdom and the United States actually introduced consumer loan restrictions during the war to minimize the effects of inflation and credit-fueled demands and to redirect resources towards the country’s national defense. Franklin Roosevelt summarized the policy in 1942:

The government needs to discourage installment and credit buying or hire purchase and encourage paying off mortgages, debts, and other financial obligations; promote savings, add to the available resources of financial institutions for the purchase of war bonds, and retards excessive purchasing. The government, especially the Federal Reserve, introduced restrictions on financial institutions like traditional banks and lending firms.

For hire purchases (which usually financed household appliances and automobiles), consumers were required to pay more or less 33% of the price in advance and repay the rest over twelve months. The Federal Reserves also restricted retail credits, requiring them to repay loans in ninety days. The United Kingdom introduced the same controls, limiting credit purchases of services and products that needed expensive foreign metal imports.

It shrank hire-bought credits to at least ten percent of its total before the war. The UK and U.S maintained these controls post-war to restrain demand for products and services at a time when they had a very limited supply. These controls were also about moderating the thorough and peaks of the business cycle. Government officials believed that this type of credit had driven inflation and growth during forgoing upswings but deepened the fall when the public stopped spending their money and could not or did not borrow. It had prolonged the great depression.

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The following decades

The United States lifted its controls first. The Federal Reserves had struggled to enforce rules during this time and subsequently faced business backlashes against the government, including objections to these controls. As financial institutions explained to congress: Regulations of these credits by the Federal Reserve are not needed, un-American, ineffective, inconsistent, impractical, and unsocial.

The control expired in 1949. It was briefly revived during the Korean War but extinguished in 1954. Nevertheless, these controls remained a huge part of any political debate. In 1980, then-president Jimmy Carter briefly re-imposed these controls to minimize the effect of inflation.

It remained more consistently in the United Kingdom, where the fight against the effects of inflation blended with attempts to defend their currencies. Besides maintaining hire-bought restrictions, the UK government later surpassed the amount people could spend on their credit cards outside the country.

There was also a credit corset, which needed traditional banks to make special deposits against new loans in the 70s. Both Labor and Conservative governments continued experimenting with these controls until 1982. In Europe, postwar governments favored more direct financial and business economic management, but it could lead to the same policy.

For instance, in France, the NCC or the National Credit Council imposed this type of control after the war. They maintained it until 1979, occasionally needing down payments of at least fifty percent of the purchased product or service. In all these countries, these controls retrained people’s borrowing, as well as help control inflation during the 40s and beyond. They also made sure that salary growth, instead of consumer borrowing, would drive prosperity after the war.

The modern times

In the 80s, deregulations swept away controls as economic liberalism adopted by the US president Ronald Reagan and UK Prime Minister Margaret Thatcher took center stage. These things were viewed by many as undesirable government interventions. It remains a taboo in today’s world.

Aside from ideology, most governments will be reluctant to consider these things when they have problems with consumer spending booms. Like most postwar times, most consumers are sitting on a lot of cash reserves from saving tons of money compared to their usual savings during the COVID-19 pandemic.

Although this lessens credit spending earlier in the COVID-19 pandemic, credit spending has increased by paying off credit balances instead of getting new ones. In previous years, consumer loans were the core of economic growth and will be seen as an important part of recovery from one of the worst downturns in recent history.