4 ms·
The obvious possible failure is that these people may find it hard to get credit in the future, as described in the last paragraph: > Some economists, among th
by bjt 12y ago
The obvious possible failure is that these people may find it hard to get credit in the future, as described in the last paragraph:
> Some economists, among them Baker, are skeptical whether the scheme will succeed: "I am not sure that this is the best way to help low-income people. If lenders think this can happen again they will charge very high interest rates to low-income borrowers," Baker said.
If you were a bank that had just been pressured into forgiving a bunch of loans, how likely would you be to make new loans to the same class of people?
- deciplex 12y ago> If you were a bank that had just been pressured into forgiving a bunch of loans, how likely would you be to make new loans to the same class of people? Considering that many of those loans are predatory in nature, that may not be a bad thing.
- vegedor 12y agoHow much do you think a bank would have lent to someone with anyway a fair chance of not paying it back?
- radisb 12y ago3 years ago, in Cyprus, the reverse happened (savings were cut off) but people still deposit money into their bank accounts without getting increased interest, despite this precedent. Why should a loan writing off cause loan interests to go up?
- calinet6 12y agoExactly because the situation is reversed: the banks are much more likely to be strategic and self preserving than the general public, due to concentration of power and many other factors.
- rlucas 12y agoThis. Good comment highlighting a super important insight: freshman Ec 10 thinking does not universally apply across all kinds of economic actors. In trying to apprehend reality as closely as feasible, it will not do to make assumptions like "all actors have constant (or even he same lognormal function describing) marginal utility" or "ignoring transaction costs and taxes." This is most crucial in understanding behavior in vastly asymmetric situations (e.g. A Croatian making $100 a month vs a bank). Of course, much of our consumer tech industry is founded on this sort of asymmetry, so the concept is not out of reach; yet, we of the technical mindset often are too quick to use the lens of a convenient simplifying abstraction when it comes to political questions of economic incentives...
- radisb 12y agoI hear you, but isnt deposit interest an incentive for the depositor? Doesn't the interest partly reflect the risk the depositor takes? Theory aside, deciding between a bank with such precedent and one without and with equal interests, I don't think anyone would choose the 1st. This alone says something.
- crpatino 12y agoWhile I read tones of rayndianism in Baker's statement (we'd like to help poor people, but without giving them money or incurring in any actual cost ourselves) the statement is factually correct. Even if we have not had any such bailouts for the underclasses in Mexico, delinquency rates for all sort of credit are so high that the banks have accepted this as the cost of doing business, and passed those costs to the subset of customers that actually care about paying off debt. This is how I still pay ~30% on my credit card after 20 years of solid credit history with the same bank - entry level ones charge ~50%!!! Or how a few years ago there was this brilliant advertising campaign for "the first single-digit mortgage in market" (9.97% or so).