Tuesday, March 04, 2014

Soft bigotry of low expectations: finance edition

Paul Bucheit, known best for creating Gmail wants to lend to entrepreneurs in Africa at a "more affordable" interest rates of 5%. Currently the top comment on HN nails it :

I think 5% is below market rate for what you are doing. By establishing 5% as the rate, you crowd out any local investment options which would need to charge above 5% (but not 60%). By making the subsidy non explicit, you make it even harder for local lenders to compete.
Not only do you make it harder for local lenders to compete, but as the case when you attempt to sell something below market prices, you drive up demand.

In the case of finance, this means that entrepreneurs who are able to do more with the money (as evidenced by higher returns) are also crowded out of getting it, while less worthy 'living dead' competitors make it more difficult to successful firms to thrive.

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