8 ms·

Economic Worries and Payday Loans

58 points by Amorymeltzer 11y ago

pc86 11y ago
To clarify for anyone coming to the comments first, "Economic Worries" and "Payday Loans" are two unrelated sections in this article.
- morgante 11y ago
  From the headline, I was really hoping to see an analysis linking the volume of payday loans to market sentiment.
chollida1 11y 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 11y 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.
  - ktRolster 11y 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-stimulus/ 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)
  - chollida1 11y 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.
Shivetya 11y 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 11y 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_slash 11y 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.

58 points by Amorymeltzer 11y ago

pc86 11y ago

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

morgante 11y ago
From the headline, I was really hoping to see an analysis linking the volume of payday loans to market sentiment.

chollida1 11y 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 11y 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.
- ktRolster 11y 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-stimulus/ 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)
- chollida1 11y 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.

Shivetya 11y 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 11y 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_slash 11y 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.