The Irish sovereign debt crisis was not originated by government over-spending, but from the state guaranteeing the six main Irish-based banks who had financed a property bubble. Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to property developers and homeowners made in the midst of the property bubble, which burst around 2007.

Similarly, the UK government debt ballooned as a result of bailing out banks brought down through property financing. Halifax Bank of Scotland financed its extensive property involvement not from its depositors, but from the open market, by means of loans which were rolled over on a short term basis. In 2008 this market dried up and HBOS was operationally bankrupt. Northern Rock suffered its demise in precisely the same way and was also bailed out by the government.

Individuals as well as governments are increasingly at risk

Britons have racked up so much debt on loans and credit cards that the total borrowed now exceeds the entire value of the economy, according to December 2011 data. Gross domestic product (GDP) for 2011 is forecast to hit £1.33 trillion, less than the £1.35trn in mortgages, credit cards and personal loans outstanding in June 2011.

This is the first time that Britain’s 60 million people owe more to the banks than the total value of everything made by every office and factory in the country. Personal borrowing has become so out of control that many more people may be pushed over the "financial edge". The runaway housing market is the biggest reason why consumer debt has spiralled, totalling £1.131trn. Debt on personal loans and credit cards totals £214bn. Overall, individuals owe the staggering sum of £1,344,721,000,000.

Mark Allen, a personal insolvency advisor, said it was not uncommon to encounter individuals with debts of £50,000 spread across five credit cards on top of a mortgage. "In our experience these are the sort of people walking a perilous financial tightrope," he said. "All it takes is an increase in costs or, as is the present case, a rise in mortgage premiums due to higher interest rates, to force people to default on their repayments - hence the increase in bankruptcies and individual voluntary arrangements."

Malcolm Hurlston, the chairman of the Consumer Credit Counselling Service, said "The problem on the mortgage front is getting worse because of the rising gap between house prices and incomes, and a lot of people will find that they can’t pay the money back."

Credit Card Debt

We need to bring down personal credit card debt and introduce a total credit card limit. Presently, each credit card company sets an individual debt limit. This must become an overall limit for all a holder’s credit cards taken together. Yes it can be done, credit card companies already share creditworthiness information.

But wait. Isn’t this a gross infringement of individual liberty? Surely, my debt is my problem. Well no, actually it’s not. When an economy gets a bit overheated and government or central bank raises interest rates thereby creating a twinge of recession, a mild downturn can rectify the problem. But when people are overloaded with debt, the moment they catch a whiff of recession, fear of job loss or income reduction leads them to reduce their spending sharply to draw down their debt, so accelerating the downturn - and delaying any upturn.

Mortgage Debt

It seems to be the generally accepted wisdom among economists that an increase in house prices is a Good Thing. But what’s good about it? OK you feel good if your house value goes up, and if you move, you sell at a higher price - but you buy at a higher price, so where’s the gain? Or house prices can balloon and crash, then many are left with mortgages greater than the current value of their property. And the more house prices increase, the more difficult for first time buyers.

So who really gains?

The banks. They make the loans, they get the interest. If your house is worth a measly 5,000 (in whatever currency), the bank only loans you - and gets interest on - 5,000. How much more attractive for the bank if your house, and the loan, and the interest, are based, not on 5,000 but on 50,000.

The interesting result is that gradually the banks are coming to own more and more property. You may think you own your 50,000 home, but how much do you owe the bank? 40,000? Then the bank really owns it. And if you default you may end up with nothing, the bank with everything.

We can’t put a cap on house prices. But mortgages need to be more tightly controlled, existing rules regarding income-to-mortgage ratios more strictly enforced, with strict rules regarding "investment property" financed with cheap loans in times of low interest rates.

And Regional Development Banks, through Regional Housing Corporations, can also provide lowcost financing for new housing, for rental or lease “at-cost”. The Housing Corporations would acquire “grey” ex-industrial, or unused agricultural land at its current price, rather than the inflated “with planning permission” price for the construction of quality, environmentally attractive cluster housing, yet built using techniques of fast-track mass-production. Availability of at-cost housing would make it possible once again for young families to afford that most basic of all needs: a decent home in pleasant surroundings.

And so back to personal debt and its part in creating periodic financial crises. A major element in the economic and financial disaster of 2008-9 was the phenomenal rise and catastrophic fall in house prices which also made a substantial contribution to the Great Banking Crisis. And 2011 brought a second round from Europe. A pool of lowcost rental housing would provide an “anchor” to slow down the next housing bubble.

And a stricter control over credit card debt will protect borrowers from themselves (and the phenomenal interest charged on credit cards) while removing the dead-weight of debt which accelerates downturns and puts a break on recovery.

It’s not just government.