10 ms·

They'll lend you, just at higher rates. This is banks doing what they do, taking the umbrella now that it's raining.

em500 7y ago
> taking the umbrella now that it's raining Always found this a very strange metaphore. Banks seem to always face criticism for 1) when they don't lend to people who need it most and 2) when they do lend to people who are likely to default. It seems fairly obvious that there is a very large overlap between those groups.
- gindely 7y ago
  Has anyone ever criticised a bank for lending to someone who needs it most at a rate they are likely to afford to minimise chance of default? I mean banks aren't charities and maybe they're not/shouldn't be obliged to do this, but it's not like everyone is being hypocritical - we're allowed to expect institutions to do things that are in the public interest rather than their own private interest (freedom of opinion and all that).
  - aguyfromnb 7y ago
    >Has anyone ever criticised a bank for lending to someone who needs it most at a rate they are likely to afford to minimise chance of default? Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). >we're allowed to expect institutions to do things that are in the public interest This article is about wealthy mortgage borrowers. The first guy is 60 years old with a $700k mortgage who wants a lower rate. How is it in the public's interest to grant him that? Perhaps it's in the public's interest for this man to continue to pay his modestly higher rate in order to cover expected losses from those who truly need it?
    - TeMPOraL 7y ago
      > Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). No. But then again, being a businessman isn't seen as unqualified virtue in many places in the world. You'll also note that "selling things to the people who need it most for the lowest price" is literally the justification given for why free and competitive markets are good. It's the goal societies want to achieve. In this, competitive pressure is a hack to force the businesses to reduce prices.
      - aguyfromnb 7y ago
        >is literally the justification given for why free and competitive markets are good. If you think "price that minimizes default" and "lowest economic price" are equivalent, you need to brush up on your Econ 101.
    - bryanrasmussen 7y ago
      >Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). I think a business that sells something for a small markup but makes it up in volume does something like this. So I guess the answer would be - yes - probably most businesses actually do this.
      - aguyfromnb 7y ago
        >I think a business that sells something for a small markup but makes it up in volume does something like this. Define a "small markup".
    - gindely 7y ago
      > Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). Yes > This article is about wealthy mortgage borrowers. The first guy is 60 years old with a $700k mortgage who wants a lower rate. How is it in the public's interest to grant him that? Perhaps it's in the public's interest for this man to continue to pay his modestly higher rate in order to cover expected losses from those who truly need it? I wasn't responding to the article.
  - imtringued 7y ago
    There are risk pools for lending because every business has a different cut off point below which a borrower is considered too risky and therefore gets rejected. Imagine you are a bank employee at Bank A with very low default rates and consequently low interest rates (say 2.5%) and a homeless man has an appointment with you because he wants a small loan of $5000 to find an apartment and a job. He has no assets or income and is only able to pay after getting his job so he will miss his first few payments. Therefore you decide to simply not give him a loan because it is incredibly obvious that he is going to default. What are his options now? He can go to a Bank B that accepts more risky borrowers with a still acceptable but slightly higher interest rate of 5%. What happens is that all the reliable lenders go to Bank A because they get a great deal there and have no trouble getting a loan. They don't even bother with Bank B. Since Bank B fails to attract reliable lenders the only borrowers at Bank B are those who couldn't get a loan at Bank A. Bank B now has two choices. Either keep the risk profile or tighten it and only allow reliable lenders. If they keep it then they will notice a much higher than usual default rate. Bank B is losing money from all the defaulting loans and that money has to come from the borrowers of Bank B that didn't default. Now imagine that there is a Bank C. What if it's risk profile is so lenient that it accepts anyone with no questions asked. Literally everyone who comes to you is defaulting. You're throwing money into a black hole with no chance of getting it back. You have to crank up the interest rate to absurd levels to cover the defaults. You know what the problem is? It's not that Bank C is evil and exploiting the poor. Those people should have never gotten a loan at all. The act of giving them a loan is exploitation itself, not the interest rate or whatever conditions that Bank C needs to stay in business. It's as simple as that. Those individuals do not need a loan, they need support from the government in a way that doesn't require the money to be paid back. e.g. free housing, unemployment benefits or even straight up UBI. Don't criticize Banks for not lending to those who need it most. For some reason people don't understand that Banks are businesses that have to at least cover their costs. They think a Bank is a charity that should take on responsibilities that really only belong to the government.
    - gindely 7y ago
      But now you have just portrayed situations in which banks provide affordable loans to people who don't need them, and unaffordable loans to people who need them. But this is what was criticised in the first place so we know it happens. So I'm not sure what the point of your first four paragraphs were. Your final paragraph is exactly what my earlier comment rejects. The general public has every right to criticise banks for acting in the banks' private interest. Banks are not charities, it is true. But they are groups of moral agents acting in a community, and the community has every right to hold the moral agents to whatever standards the community wishes to. The bank has the legal right to pursue its own private interests, so long as it acts legally, and has the legal right to not act as a charity. But that is not an argument against the view that the bank should act in conformance with community expectations, and if necessary the law should be changed to ensure that they do. The fact that banks make ridiculous profits - they're not just covering costs - is also relevant. If your business is making billion dollar profits, you're vulnerable to the claim that you should give greater weight to public opinion, and the notion that you're only acting to cover costs is a red herring.
- godzillabrennus 7y ago
  Payday lenders fill this gap. Everyone hates them as well. Everyone hates student loans and they fill a different gap. Basically, people hate people who lend money.
  - ForHackernews 7y ago
    There's a reason usury was historically a serious sin.
    - throw_m239339 7y ago
      It was in fact punishable by death in Christian countries. In theory it's also still a sin in Islam. That's why most of the first bankers… were not Christians or Muslims if I can put it that way.
    - spicymaki 7y ago
      Yes and usury is why we have an economic crisis every ten years. The magnitude of the crisis seems to be increasing each time.
      - lotsofpulp 7y ago
        Is this specific Mar 2020 onward economic crisis being caused by usury?
  - TeMPOraL 7y ago
    > Payday lenders fill this gap. Everyone hates them as well. That's because they offer a very dangerous financial tool, and at the same time they work hard to put this tool in hands of people who can't handle it safely. In this way, they make money off destroying people. > Everyone hates student loans and they fill a different gap. The problem with student loans is on the higher level in the system; their existence causes runaway cost increase of higher education.
    - smcl 7y ago
      > The problem with student loans is on the higher level in the system; their existence causes runaway cost increase of higher education. If the loan is meant to pay for tuition then perhaps that's true. My loan was something like £1600/yr which covered about 5 months of rent, but the government paid for my tuition.
- cowsandmilk 7y ago
  My experience has been this idea has largely been a myth pushed in conjunction with the community reinvestment act and the financial crisis, When. Looking at numbers, most of the subprime mortgages were originated by institutions not subject to the CRA and we had decades of banks complying with the CRA without giving out subprime loans. The financial crisis was largely a system repackaging loans they knew were bad and then claiming falsely they were good using voodoo math. And the CRA didn’t force them to do that.
- TheOtherHobbes 7y ago
  That's not why banks face criticism. They face criticism because they don't lend as a service, they lend as a scam operation. In the UK there are credit card companies that specialise in borrowers with poor credit. They offer cards with a rate of up to 100% and a contract which gives them first call on any assets, including the borrower's house. Is it hard to understand that this is entirely conscious and predatory? They could lend at lower rates and minimise the risk of default, but they make more money by pushing high-risk borrowers into default and selling off their property. It's a similar story with bank loans for small businesses. Banks will often call in a loan and bankrupt a small company at the first sign of any trouble, including a wider recession that the company may be perfectly able to handle. There's a huge gap between prudent and sensible lending and aggressively destructive profiteering, and banks are often on the wrong side of that line.
- wegs 7y ago
  The central friction is there are two conflicting views of banking: 1) Lending, insurance, and investment as a social service. People need homes. Businesses sometimes need to weather crises without bankruptcy. Startups need funding. People need educations. 2) Lending as a private investment. You want interest rate to reflect risk. Evolving monetary theory means federal interest rates are set to reflect #1. The underlying view is that financial system is a bunch of bits used for accounting designed to keep businesses productive, people working, and the economy running, much as you might have in a video game. You make and destroy money as needed to support what needs to happen to make that work, much as a game developer might engineering money sources and sinks into an MMORPG. It's just bits on a computer. Historical practice and the structure of banks is set around #2. This is a really sound theory if your currency is either backed by gold, or even is fiat currency, but running on the same principles. Defaults aren't a problem with #1, unless they encourage bad behavior. If a bunch of poor people buy homes, and later default on mortgages, it's really not a big deal; bits on a computer appear and disappear. If 50% of those people come out owning homes, you're still ahead if 100% were still renting. But in #2, it's a financial crisis. Conversely, if a bunch of poor people can't buy homes and have to rent, it's a crisis in #1. It's not a problem in #2. I'm not sure the mixture model works well -- indeed, I think that's the source of our problems. I think if we killed the banking sector, and folded all of this into the fed, it'd work great (that's what China does). I think if we had the gold standard again, that'd work pretty well too. But when you mix the two, things get a bit ugly.
  - pishpash 7y ago
    There isn't some fundamental distinction between 1 and 2. For 1, there is obviously some positive social utility in the end or else it wouldn't be good policy. But such lending may require too much capital, too large a risk pool, or too long a time horizon for an individual private bank to take on. Instead a public or policy bank steps in. It's good to have banks of different sizes serving different niches, as long as they assess risk prudently and price rationally. What you don't want is politicians micromanaging in domains in which they have no expertise, especially when they are driven by short-term, personal political objectives.
    - 7y ago
- PopeDotNinja 7y ago
  When banks lend to people who will default, it's usually because they issued a secured loan. You can repossess a car quite easily. I couldn't keep up with my car payments in 2009, and my car got repossessed. They got (most of) their money back. Since I had been paying a high interest rate, maybe they even made money. When I ran a service business & wanted to borrow money for growth, even though I was profitable, there was no risk formula I fit into that would allow the bank to determine the likelihood my business would pay them back, so they wouldn't lend to me (unless I used personal assets as collateral).
- rapind 7y ago
  I don't care if banks make foolish or intelligent lending decisions... I just don't want my tax dollars bailing them out when they screw it up. If I am bailing them out, then I should be entitled to an opinion on how they run their business... heck I should be a shareholder!

> taking the umbrella now that it's raining Always found this a very strange metaphore. Banks seem to always face criticism for 1) when they don't lend to people who need it most and 2) when they do lend to people who are likely to default. It seems fairly obvious that there is a very large overlap between those groups.

gindely 7y ago
Has anyone ever criticised a bank for lending to someone who needs it most at a rate they are likely to afford to minimise chance of default? I mean banks aren't charities and maybe they're not/shouldn't be obliged to do this, but it's not like everyone is being hypocritical - we're allowed to expect institutions to do things that are in the public interest rather than their own private interest (freedom of opinion and all that).
- aguyfromnb 7y ago
  >Has anyone ever criticised a bank for lending to someone who needs it most at a rate they are likely to afford to minimise chance of default? Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). >we're allowed to expect institutions to do things that are in the public interest This article is about wealthy mortgage borrowers. The first guy is 60 years old with a $700k mortgage who wants a lower rate. How is it in the public's interest to grant him that? Perhaps it's in the public's interest for this man to continue to pay his modestly higher rate in order to cover expected losses from those who truly need it?
  - TeMPOraL 7y ago
    > Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). No. But then again, being a businessman isn't seen as unqualified virtue in many places in the world. You'll also note that "selling things to the people who need it most for the lowest price" is literally the justification given for why free and competitive markets are good. It's the goal societies want to achieve. In this, competitive pressure is a hack to force the businesses to reduce prices.
    - aguyfromnb 7y ago
      >is literally the justification given for why free and competitive markets are good. If you think "price that minimizes default" and "lowest economic price" are equivalent, you need to brush up on your Econ 101.
  - bryanrasmussen 7y ago
    >Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). I think a business that sells something for a small markup but makes it up in volume does something like this. So I guess the answer would be - yes - probably most businesses actually do this.
    - aguyfromnb 7y ago
      >I think a business that sells something for a small markup but makes it up in volume does something like this. Define a "small markup".
  - gindely 7y ago
    > Does any business operate this way, including the one you work at? That is, selling things to the people who need it most for the amount that "minimizes default" (ie lowest price). Yes > This article is about wealthy mortgage borrowers. The first guy is 60 years old with a $700k mortgage who wants a lower rate. How is it in the public's interest to grant him that? Perhaps it's in the public's interest for this man to continue to pay his modestly higher rate in order to cover expected losses from those who truly need it? I wasn't responding to the article.
- imtringued 7y ago
  There are risk pools for lending because every business has a different cut off point below which a borrower is considered too risky and therefore gets rejected. Imagine you are a bank employee at Bank A with very low default rates and consequently low interest rates (say 2.5%) and a homeless man has an appointment with you because he wants a small loan of $5000 to find an apartment and a job. He has no assets or income and is only able to pay after getting his job so he will miss his first few payments. Therefore you decide to simply not give him a loan because it is incredibly obvious that he is going to default. What are his options now? He can go to a Bank B that accepts more risky borrowers with a still acceptable but slightly higher interest rate of 5%. What happens is that all the reliable lenders go to Bank A because they get a great deal there and have no trouble getting a loan. They don't even bother with Bank B. Since Bank B fails to attract reliable lenders the only borrowers at Bank B are those who couldn't get a loan at Bank A. Bank B now has two choices. Either keep the risk profile or tighten it and only allow reliable lenders. If they keep it then they will notice a much higher than usual default rate. Bank B is losing money from all the defaulting loans and that money has to come from the borrowers of Bank B that didn't default. Now imagine that there is a Bank C. What if it's risk profile is so lenient that it accepts anyone with no questions asked. Literally everyone who comes to you is defaulting. You're throwing money into a black hole with no chance of getting it back. You have to crank up the interest rate to absurd levels to cover the defaults. You know what the problem is? It's not that Bank C is evil and exploiting the poor. Those people should have never gotten a loan at all. The act of giving them a loan is exploitation itself, not the interest rate or whatever conditions that Bank C needs to stay in business. It's as simple as that. Those individuals do not need a loan, they need support from the government in a way that doesn't require the money to be paid back. e.g. free housing, unemployment benefits or even straight up UBI. Don't criticize Banks for not lending to those who need it most. For some reason people don't understand that Banks are businesses that have to at least cover their costs. They think a Bank is a charity that should take on responsibilities that really only belong to the government.
  - gindely 7y ago
    But now you have just portrayed situations in which banks provide affordable loans to people who don't need them, and unaffordable loans to people who need them. But this is what was criticised in the first place so we know it happens. So I'm not sure what the point of your first four paragraphs were. Your final paragraph is exactly what my earlier comment rejects. The general public has every right to criticise banks for acting in the banks' private interest. Banks are not charities, it is true. But they are groups of moral agents acting in a community, and the community has every right to hold the moral agents to whatever standards the community wishes to. The bank has the legal right to pursue its own private interests, so long as it acts legally, and has the legal right to not act as a charity. But that is not an argument against the view that the bank should act in conformance with community expectations, and if necessary the law should be changed to ensure that they do. The fact that banks make ridiculous profits - they're not just covering costs - is also relevant. If your business is making billion dollar profits, you're vulnerable to the claim that you should give greater weight to public opinion, and the notion that you're only acting to cover costs is a red herring.
godzillabrennus 7y ago
Payday lenders fill this gap. Everyone hates them as well. Everyone hates student loans and they fill a different gap. Basically, people hate people who lend money.
- ForHackernews 7y ago
  There's a reason usury was historically a serious sin.
  - throw_m239339 7y ago
    It was in fact punishable by death in Christian countries. In theory it's also still a sin in Islam. That's why most of the first bankers… were not Christians or Muslims if I can put it that way.
  - spicymaki 7y ago
    Yes and usury is why we have an economic crisis every ten years. The magnitude of the crisis seems to be increasing each time.
    - lotsofpulp 7y ago
      Is this specific Mar 2020 onward economic crisis being caused by usury?
- TeMPOraL 7y ago
  > Payday lenders fill this gap. Everyone hates them as well. That's because they offer a very dangerous financial tool, and at the same time they work hard to put this tool in hands of people who can't handle it safely. In this way, they make money off destroying people. > Everyone hates student loans and they fill a different gap. The problem with student loans is on the higher level in the system; their existence causes runaway cost increase of higher education.
  - smcl 7y ago
    > The problem with student loans is on the higher level in the system; their existence causes runaway cost increase of higher education. If the loan is meant to pay for tuition then perhaps that's true. My loan was something like £1600/yr which covered about 5 months of rent, but the government paid for my tuition.
cowsandmilk 7y ago
My experience has been this idea has largely been a myth pushed in conjunction with the community reinvestment act and the financial crisis, When. Looking at numbers, most of the subprime mortgages were originated by institutions not subject to the CRA and we had decades of banks complying with the CRA without giving out subprime loans. The financial crisis was largely a system repackaging loans they knew were bad and then claiming falsely they were good using voodoo math. And the CRA didn’t force them to do that.
TheOtherHobbes 7y ago
That's not why banks face criticism. They face criticism because they don't lend as a service, they lend as a scam operation. In the UK there are credit card companies that specialise in borrowers with poor credit. They offer cards with a rate of up to 100% and a contract which gives them first call on any assets, including the borrower's house. Is it hard to understand that this is entirely conscious and predatory? They could lend at lower rates and minimise the risk of default, but they make more money by pushing high-risk borrowers into default and selling off their property. It's a similar story with bank loans for small businesses. Banks will often call in a loan and bankrupt a small company at the first sign of any trouble, including a wider recession that the company may be perfectly able to handle. There's a huge gap between prudent and sensible lending and aggressively destructive profiteering, and banks are often on the wrong side of that line.
wegs 7y ago
The central friction is there are two conflicting views of banking: 1) Lending, insurance, and investment as a social service. People need homes. Businesses sometimes need to weather crises without bankruptcy. Startups need funding. People need educations. 2) Lending as a private investment. You want interest rate to reflect risk. Evolving monetary theory means federal interest rates are set to reflect #1. The underlying view is that financial system is a bunch of bits used for accounting designed to keep businesses productive, people working, and the economy running, much as you might have in a video game. You make and destroy money as needed to support what needs to happen to make that work, much as a game developer might engineering money sources and sinks into an MMORPG. It's just bits on a computer. Historical practice and the structure of banks is set around #2. This is a really sound theory if your currency is either backed by gold, or even is fiat currency, but running on the same principles. Defaults aren't a problem with #1, unless they encourage bad behavior. If a bunch of poor people buy homes, and later default on mortgages, it's really not a big deal; bits on a computer appear and disappear. If 50% of those people come out owning homes, you're still ahead if 100% were still renting. But in #2, it's a financial crisis. Conversely, if a bunch of poor people can't buy homes and have to rent, it's a crisis in #1. It's not a problem in #2. I'm not sure the mixture model works well -- indeed, I think that's the source of our problems. I think if we killed the banking sector, and folded all of this into the fed, it'd work great (that's what China does). I think if we had the gold standard again, that'd work pretty well too. But when you mix the two, things get a bit ugly.
- pishpash 7y ago
  There isn't some fundamental distinction between 1 and 2. For 1, there is obviously some positive social utility in the end or else it wouldn't be good policy. But such lending may require too much capital, too large a risk pool, or too long a time horizon for an individual private bank to take on. Instead a public or policy bank steps in. It's good to have banks of different sizes serving different niches, as long as they assess risk prudently and price rationally. What you don't want is politicians micromanaging in domains in which they have no expertise, especially when they are driven by short-term, personal political objectives.
  - 7y ago
PopeDotNinja 7y ago
When banks lend to people who will default, it's usually because they issued a secured loan. You can repossess a car quite easily. I couldn't keep up with my car payments in 2009, and my car got repossessed. They got (most of) their money back. Since I had been paying a high interest rate, maybe they even made money. When I ran a service business & wanted to borrow money for growth, even though I was profitable, there was no risk formula I fit into that would allow the bank to determine the likelihood my business would pay them back, so they wouldn't lend to me (unless I used personal assets as collateral).
rapind 7y ago
I don't care if banks make foolish or intelligent lending decisions... I just don't want my tax dollars bailing them out when they screw it up. If I am bailing them out, then I should be entitled to an opinion on how they run their business... heck I should be a shareholder!