Last updated 23:22, Monday, 20 October 2008

Last week, the absurdity of the credit crunch was summed up in one hour of television. A breaking story about the first Icelandic bank to go into receivership was closely followed by a commercial for an electrical retailer offering the latest plasma screen TVs in return for monthly payments and no credit checks.

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Boom... and bust: Iceland, with a population of just 320,000, had banks’ liabilities nine times greater than the country’s annual economy

These are two extremes of the same problem. Customers who might struggle to meet their monthly payments are encouraged to pay 29 per cent interest for the privilege of having the latest technology now. At the other end of the spectrum, an entire economy has essentially collapsed on the back of unsustainable borrowing.

Iceland has a population of just 320,000 and the liabilities of its banks had become nine times greater than the country’s annual economy. That is equivalent to a family with an annual income of £30,000 being £270,000 in debt.

So what can we learn from the events of the last year?

Firstly, never base financial decisions on the assumption that the future will look exactly the same as the past. Some banks, and even some entire countries, have been pursuing an economic model that could only succeed if the level of growth seen over the last 15 years was sustained. Unfortunately, it wasn’t.

All economies are cyclical and just as there are periods of rapid growth, there will also be periods of decline.

The model of ‘maximum growth based on maximum borrowing’ only works if the economy continues to thrive, or you are in it for the short-term and don’t care too much about what you leave behind.

Many lenders, including the Cumberland, were criticised for not following the market and offering mortgages which were worth more than the property someone was looking to buy, or stretching income multiples so that people could buy that house which might be just out of reach.

I have never been happier to be called ‘old-fashioned’.

Lending is central to any successful economy. Irresponsible lending – or the pursuit of rapid growth based on unsustainable levels of borrowing – will see it fail.

Maybe we all played a part in creating the current financial crisis by constantly seeking out the highest savings rate without asking ‘who?’ or ‘why?’

Shareholders might also question the pressure they put on organisations to overstretch themselves and deliver rapid increases in short-term profit or the share price, rather than looking for genuine, sustainable growth.

I suspect the future will see more savers looking for rates which are competitive and from an organisation they trust, rather than automatically chasing the current best buy.

The financial pages of the Sunday papers are full of articles encouraging customers to select the highest rate on the market. In some cases, this may be the right thing to do, but it is worth remembering that Icelandic banks consistently topped the best buy charts for a reason. They needed your money more than anyone else.

• Chris McDonald is head of marketing at the Cumberland Building Society.
• This article should not be relied upon when making investment decisions. Always obtain financial advice.