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You are incorrect and your magic analogy is flawed.
by tanderson92 9y ago
You are incorrect and your magic analogy is flawed.
- taeric 9y agoDo you have recommended reading or links to an overview of how it actually works?
- eru 9y agoA student subscription to the Economist perhaps?
- taeric 9y agoThat my analogy is flawed is not exactly surprising or helpful. It is an analogy and only intended directionally. At best. You two seem to indicate it isn't good at even that. Which is a claim I'm interested in knowing more about.
- tanderson92 9y agoI explained it above. The dual risks in a loan are credit risk and term risk (look those up and learn about them). Since the term is 5 years, the investment with no credit risk is the 5 year treasury (this is the credit risk-free rate). All loans have credit risk. Bundling loans does not eliminate credit risk (this is what 2008 taught us), though it does reduce credit risk. Selling loans with rates below the risk-free rate has negative expected return. The proper analogy is this: treasuries vs. corporate bonds. Here is the current yield spread (difference in interest rate: corporate minus treasury): https://fred.stlouisfed.org/series/BAMLC0A0CM https://fred.stlouisfed.org/series/BAMLC0A0CM The spread is always positive, because investors demand extra yield for taking on credit risk.
- taeric 9y agoI asked you the wrong question, then. What, then, is your explanation for why they make these loans?
- tanderson92 9y agoMy explanation is that they've done the math on how more generous financing encourages more people to buy cars, and that the losses they take on the loans is less than the extra profit they make from the additional car sales.
- taeric 9y agoI guess my cynicism has just grown to the point that I feel some industries have settled on never taking a known loss. That is, this seems like it is the easy answer, and is certainly what folks would do in the small. At large, though, I feel like they are able to have other options. (I fully ack that just because I feel it, does not mean it is the case.)
- tanderson92 9y agoI explained how they're not really taking a loss, since it increases their profits overall. Companies make these decisions frequently; a closely related concept is a loss leader.
- metaphor 9y agoThanks to both you and taeric for keeping the exchange civil.
- taeric 9y agoIf you ever see me being uncivil, please call me on it! I consider it a safe assumption that I was mistaken on anything I'm not an expert on. And on those things, I think the odds might actually increase. :)
- TrickyRick 9y agoSame as with Nespresso machines, the machine is cheap (Probably sold at a loss but I have no numbers on that) because over a lifetime the customer will buy grossly overpriced capsules which will make the money back and more. Game consoles work the same way early in the cycle.
- eru 9y agoSorry, I didn't meant to indicate any of that. I just meant to say that you should be reading the Economist for this kind of stuff. And if you can finagle to get the subscription on a student discount, it's definitely worth it. Full-prince subscription is debatable.