Economic Worries and Payday Loans

http://www.bloombergview.com/articles/2016-02-11/economic-worries-and-payday-loans

by Amorymeltzer • 10 years ago

58 51 10 years ago

pc86• 10 years ago

To clarify for anyone coming to the comments first, "Economic Worries" and "Payday Loans" are two unrelated sections in this article.

morgante• 10 years ago

From the headline, I was really hoping to see an analysis linking the volume of payday loans to market sentiment.

chollida12• 10 years ago

I think the biggest issue that Levine writes about today is the fate of the Chinese banks. If you thought that the American banks were in bed with the government then you haven't seen anything yet.

The worry is that the banks are currently propping up alot of companies that are for all intents and purposes already bankrupt. The linked article mentions that about 10% of their loans could go bad which may wipe up to 3.5 trillion of equity away.

Most of these companies are limited to China with a bit of exposure due to their ADR's trading in North America so there isn't much direct market worry.

The real worry is that to prop up their own economy China may have to:

- start selling US Dollar holdings to keep its own at a rate that the rest of the world can't absorb,

- have their economy grow at a zero rate, something that was almost unthinkable even 2 years ago.

Both of these have significant knock on effects for the rest of the world.

I have no insight to this myself, I'm not an economist but the guy really making noise about this is Kyle Bass who made alot of money off the 2008 crash but whose fund hasn't done so well since then.

So you can either believe he knows what he's talking about and get ready or assume he's a "one hit wonder" who is unlikely to be right about such a big event again.

I will say this. I talk to alot of people who would love to short China but are afraid of getting burned as there is really no way of predicting if the govnermnet will let some banks fail or if they will throw everything at the problem to prop up their financial sector.

My suspicion is that they will follow the US example and throw billions at the banks in an attempt to right them.

exelius• 10 years ago

My suspicion is that they will follow the US example and throw billions at the banks in an attempt to right them.

My suspicion is that China will actually let a few banks fail before the government steps in. And China culturally prefers to find scapegoats - it's easier to say the bad action taken by a company is not reflective of the company, but the result of a few criminals who betrayed the rest of the company for personal gain (this rationale is often used in government corruption cases).

In any case, if they let a bank or two fail, then anger about economic losses is redirected away from the government and towards the corrupt, greedy bankers, and the government is the knight in shining armor that comes and heroically saves the day. The US did the exact same thing with Lehmann - they found the bank that was more fucked than the rest, let them fail in a controlled manner, and it sent a signal to the market that "this is serious, equity will be wiped out, but it's not financial Armageddon". I expect China to send the same signals.

ktRolster2• 10 years ago

  >My suspicion is that China will actually let a few banks fail before the government steps in

Too late, the government has already stepped in. http://money.cnn.com/2015/02/04/news/economy/china-economy-s... (cutting the reserve ratio is basically like giving money to banks)

Don't expect to see something like TARP, the central banks have found less controversial ways to fund banks (by buying mortgages, etc)

chollida12• 10 years ago

The US did the exact same thing with Lehmann - they found the bank that was more fucked than the rest, let them fail in a controlled manner, and it sent a signal to the market that "this is serious, equity will be wiped out, but it's not financial Armageddon".

Umm, I guess this could be a matter of opinion but this seems completely wrong to me.

I'd argue the Lehman failure was anything but controlled, and so would pretty much anyone in the finance industry.

I'd also argue that the government didn't let them fail to be an example, that was done with Bear Sterns. The government try extremely hard to save Lehman and ultimately it was Lehman's ownership,who refused to have their equity wiped out, who sunk the company.

rhino369• 10 years ago

The US did the exact same thing with Lehmann - they found the bank that was more fucked than the rest, let them fail in a controlled manner, and it sent a signal to the market that "this is serious, equity will be wiped out, but it's not financial Armageddon". I expect China to send the same signals.

Which is a very good reason the Chinese probably shouldn't follow our lead. Letting Lehman fail was a huge disaster. It essentially seized the capital markets and sped up the collapse of a bunch of other banks. In my opinion, the solution is making the bailout so impalpable to the shareholders than it's really the last solution before bankruptcy. Or maybe even some special bank only bankruptcy that allow it to fully operate with government backing.

Riod4• 10 years ago

I think China has learnt from the US example that letting big banks fail is a stupid thing to do..

Krugman on this: http://www.nytimes.com/2009/02/23/opinion/23krugman.html

Riod4• 10 years ago

Bass was kinda wrong on his Japan trade though. Doesn't work every time. Also the big issue with 2008 was that the government led Lehman fail; a huge mistake. They should have nationalized it or taken a majority equity stake in it at punitive terms.

Shivetya• 10 years ago

with regards to Payday loans the take away is that regulation is often uneven in application and not timely, worse activities which were not expressly illegal can one day become so with prosecution of said activities at a much later date.

Note, I am not excusing the behavior of the example cases. I am not a fan of reaching back so far to prosecute for actions that were not illegal unless it can be shown that an investigation was already in process and those performing them were notified their actions were irregular and subject to legal action

fennecfoxen• 10 years ago

There's a bit of a Moral Crusade against payday lenders, because the rates they charge are exorbitant and their customers are poor, and people find that shocking. Since they're so obviously Bad Guys, then it's okay to do things like this to Get Them, right?

Never mind that a payday loan may be a much better deal than a late payment on something important (or, for instance, if your car has been towed and is accruing storage fees by the hour). Never mind that the money lent stands a substantial risk of being lost forever and that economic studies find the actual profit margins on loans are often in the ~3.5% range, consistent with many other businesses. No, there's prima facie evidence that this is EVIL USURY; burn it with fire.

rm_-rf_slash2• 10 years ago

Perhaps the problem is that because rates are so high, and people who need them so desperate, it is a no-brainer why the profit margins are low.

Perhaps a better alternative would be a general credit line available to all Americans managed by the CFPB. The credit limit would be rather small, in the low hundreds, but would be higher for citizens with better credit scores.

Why subsidize loans to this degree? Because there are many, many people that are so poor, payday loans can be their only option, burrowing them into crippling debt, which makes them scarcer consumers (less tax from commerce), economically precarious (more likely to require welfare of some kind), and societally corrosive (what happens when the children of severely indebted parents grow up? Another generation of poverty, most likely).

By all means, let payday lenders do their thing, but they need competiton. Before homeownership policies of the mid 20th century, you would have to be rich to afford a house (when a 50% down payment was normal). Now it's an expectation of middle class life. Competiton is a good thing, and so is letting the government compete.

st3v3r4• 10 years ago

A payday loan being better than those alternatives does not change the fact that payday loans are absolutely terrible, and should not be allowed to operate the way they are.

thomaskcr• 10 years ago

People on that moral crusade never seem to take the time to actually think about what those words and numbers mean. If a friend let you borrow $100 for 2 weeks, I don't think a 6 pack of beer ($8) would be an unreasonable "thank you"/interest payment when you pay them back. That would be a 192% APR.

These are small, short term loans. Of course the rates become insane when you extrapolate to a year.

The other side is a lot of people seem to assume they're compounding rates, I have never seen one with compounding interest. Sure, the fees keep accumulating but they are not compounding.

crdoconnor• 10 years ago

There's a bit of a Moral Crusade against payday lenders, because the rates they charge are exorbitant and their customers are poor, and people find that shocking. Since they're so obviously Bad Guys, then it's okay to do things like this to Get Them, right?

It absolutely is. They're bottom feeding scum whose profits are driven by the irrational financial decisions that occur under conditions of desperation and panic.

Never mind that a payday loan may be a much better deal than a late payment on something important

Never mind that they capitalize on two very common cognitive biases:

* Shortened time horizons of the financially distressed (your limbic system kicks in when you panic, causing people to make irrational decisions).

* A bias towards optimism in emotionally healthy adults.

When payday lenders are prohibited (like in Ohio) the poor end up better off in the long run.

Only if you believe the neoclassical, neoliberal fairy tale that is the eternally rational consumer would it make sense to support these scum.

FireBeyond2• 10 years ago

Those example cases are not 'retroactive' illegalization. They're examples of uneven enforcement. Usury was entirely illegal throughout the life of the two businesses in question. Both businesses made multiple explicit attempts to evade the laws in question (using tribal sovereignty) which says they knew perfectly well their actions were illegal.

They just weren't enforced very well.

Economic Worries and Payday Loans

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