As we approach Christmas, a good banker's thoughts should naturally turn to debtors' prison and the workhouse. Frost and a chill wind off the North Sea stimulate belt-tightening and financial draught-excluding, prophylactic measures to combat extravagance, profligate borrowing and lending, which lead only to a new year of regret, bankruptcy and ruin.

Where is Ebenezer Scrooge, now that we need him? He is no longer welcome at the Bank of England, off message at the Treasury, and he would be shot on sight at the headquarters of the European Central Bank in Frankfurt. The eurobankers are shovelling mountains of cash into the street at huge discounts to the cost of interbank lending, encouraging bad bankers to be bad all over again.

Somewhere, long ago, we lost the wisdom of Scrooge. Instead of his sneer, his stooped back and gnarled tightened fist, we got the broad shoulders and cheery smile of Adam Applegarth, the man who led Northern Rock to ruin.

The business of burdening the prodigal with expensive cash continues and it does so because banks no longer lend only to the solvent middle class. They take equity gambles on the poor. An independent financial adviser, active in the North West, and who deals in sub-prime loans, recently gave me an insight into how this business works. He showed me an extensive spreadsheet detailing the terms of business of various consumer lenders, including well known high street names. These will back regular defaulters, borrowers with multiple credit card arrears and county court judgments, offering to consolidate all personal debt into a single loan secured by mortgage. The rate is high but not prohibitive, 3.5 per cent above libor — about 10 per cent.

My IFA is a decent person, offering good advice to borrowers who are ignorant, reckless or just stupid. One of his clients came to him borrowing at an APR of 57 per cent. He had been missing payments regularly and the bank had simply rolled over the penalty charges and arrears into a new and ever more costly personal loan.

Anyone willing to take on such a borrower is not taking a credit risk because missed payments and arrears are almost certain. This is, therefore, not lending, but venture capital, albeit on a tiny scale. It's a gamble that the bank, despite the almost inevitable default, will ultimately recover a good profit, if necessary by plundering the borrower — selling his home, his car, etc. It's a shakedown and monetisation of the insolvent borrower by the bank.

It is a busy time of year for IFAs with Christmas, holidays and party clothes all making demands on their clients. At the very bottom of the pile are the customers of doorstep lenders, such as Provident Financial, who borrow small sums at outrageous cost. The repayment on a £100 loan for 56 weeks is £3 per week, or £168, an APR of 183 per cent. The company is doing well and this week reported customer numbers up 4 per cent.

Perhaps it is time to have a little chat about usury? It might be an embarrassing debate for the City of London in its new role as pretender to the title of world's greatest financial capital. However, the Treasury and the Bank of England have already been compromised. This Government's faith in market forces is as solid as an opinion poll and as safe as a Labour seat in a constituency in Newcastle upon Tyne, home of Northern Rock.

Besides, it is not just the fundamentally religious who fret over the ethics of lending. Adam Smith, that sterling defender of the virtue of market forces, was worried about “the extortion of usury”. Writing in the 18th century, he determined that the legal (maximum) rate, should be 5 per cent, a half point above what was then a market rate.

“If the legal rate of interest in Great Britain, for example, was fixed so high as 8 or 10 per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.”

There are obvious differences between Adam Smith's world and our own. Today, capital is not in short supply, but in surplus, and prodigals can always borrow, if not from banks, then from criminals. The economist lived in a world of powerful moral sanction: “The man who borrows in order to spend will soon be ruined, and he who lends to him will generally have occasion to repent of his folly.”

Much of what we know of retail banking today is, in Adam Smith's term “folly”. But there are no debtors' prisons, no workhouses for “projectors”, just a grey world of personal bankruptcy, followed by jobseeker's allowance and state benefits for the slightly disabled. It's a vast cushion supported by the overtaxed middle-income classes.

Ebenezer Scrooge might well say: “Bah. Humbug.”

carl.mortished@thetimes.co.uk

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