Not according to the people who want them - so does that make the regulators who want to take away their free choice evil? (Freakonomics)
If we take an objective look at the folks who use payday lending, what we find is that most users of the product are very satisfied with the product. Survey results show that almost 90 percent of users of the product say that they’re either somewhat satisfied or very satisfied with the product afterwards.
Surprise, surprise, incentives matter. Fascinating look at housing policy - particularly in Germany and how it has shaped whether people buy or rent. Also a look at well meaning interventions elsewhere that have ultimately failed most the people they were designed to "help" (qz):
There’s another pretty simple reason Germans are less likely to own houses. The government doesn’t encourage it. Unlike high-homeownership countries like Spain, Ireland and the US, Germany doesn’t let homeowners deduct mortgage-interest payments from their taxes. (There’s more on the structure of European tax systems here.) Without that deduction, the benefits of owning and renting are more evenly balanced. “Both homeowners and landlords in Germany are barely subsidized,” wrote Voightländer in a paper on low homeownership rates in Germany. Those regulations, a solid supply of rental housing, and the fact that German property prices historically rise very slowly —that’s a whole other story—mean German rents don’t rise very fast. And because one of the main reasons to buy a home is to hedge against rising rents, the tendency of German rents to rise slowly results in fewer homebuyers and a lower homeownership rate.
High up on the list seems to be that outcomes are influenced by personal choices (CBC - yes, the our state sponsored broadcaster):
Not wanting to face a lifetime of debt, Cooper sacrificed three years of his life to pay down a $255,000 mortgage on a $425,000 Toronto home he bought in 2012.General rule of thumb: when you're offended by what someone else has done that isn't hurting anyone else, that probably says more about you than anyone else...
He worked up to 100 hours a week at three jobs: pension analyst; financial writer; and supermarket clerk. Naturally, the bachelor's social life suffered. Cooper also lived like a pauper, maintaining a strict budget and residing in the basement so he could collect rent on the rest of his house.
His story generated more than 2,000 comments on CBC News sites.
[...] Media across the globe have now jumped on the story and also taken sides. "Well done, big fella, congratulations, an inspirational guy," gushed host David Koch on the Australian breakfast television program, Sunrise.
But America's Slate magazine had a different take, stating Cooper's story implied our money troubles were entirely our own fault. The Slate article suggested cash-strapped people wanted real economic change rather than just "inspirational stories of sacrifice and pluck."
Yep. Remarkably candid/good reporting from NYMag:
The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire. [...] Whether it’s the one percent or hedge funds or Wall Street, I do not think society is well served by failing to encourage every last American to look within. This crisis truly took a village, and most of the villagers themselves are not without some personal responsibility for the circumstances in which they found themselves. We should be teaching our kids to be better citizens through personal responsibility, not by the example of blame.But also, in response to the question "What, if anything, makes you hopeful about the future?":
Innovation, especially in America, is continuing at a breakneck pace, even in areas facing substantial political or regulatory headwinds. The advances in health care in particular are breathtaking — so many selfless souls are working to advance science, and this is heartening. Long-term, this is good for humans in general. Americans have so much natural entrepreneurial drive. The caveat is that it is technology that should be a tool making lives better in the real world, and in line with the American spirit of getting better and better at something, whether it’s curing cancer or creating a better taxi service. I am less impressed with the market values assigned to technology that enhances distraction. We don’t want Orwell’s world, but we don’t want Huxley’s world either.
According to the Consumer Financial Protection Bureau (CFPB), yes (theDailySignal). One predictable consequence that will be written off as "unintended": the people who they're aiming to help will be worse off as they will have fewer financial options.
Incredibly sad - because their lives weren't already miserable (Reason):
There's strong evidence to suggest that "conflict mineral" regulations in Section 1502 of Dodd-Frank directly led to an increase in looting in affected regions of the Congo.Read the whole thing (Reason).
The result was a drop in demand that caused the DRC's tin, tantalum, and tungsten mines to become much less profitable. Section 1502 succeeded, in other words, at "cut[ting] off funding" to the region's militias. But the militias responded to the change by hurting more innocent people instead of less.
[...] According to Parker, violence increased on two fronts: First, some of the militias in the 3T regions left for greener pastures—in this case, the regions containing gold rather than tin or tungsten mines. They then went to war against the established militias in those places, vying through violence for control of the now-more-lucrative flow of gold.
But other militias saw a different path to replacing their lost income: looting local villages. Indeed, Parker and Vadheim found the incidence of looting increased by nearly threefold in the two years after Dodd-Frank was enacted. As a side-effect, violence against civilians shot up as well.
Writing in Fortune, liberal economist Dean Baker claims that the financial regulations enacted in reaction to the financial crisis of 2009, is a success:
First and foremost the complaint was that the bill would make it more difficult for businesses to raise capital. This argument has not held up well in the last five years. Certainly the businesses that can raise money in the stock market have little basis for complaint. With price to earnings ratios in the stock market at their highest level since the tech bubble, these companies can raise money at extraordinarily low prices.Let's not forget that the crisis resulted from subprime lending on overpriced real estate. "Of the 19.2 million subprime/low quality loans on the books of government agencies in 2008, 12 million were held or guaranteed by Fannie and Freddie" (The Atlantic). Now that the US government owns all of Fannie and Freddie, you might think they would be quite conservative. You'd be wrong: "Fannie Mae and Freddie Mac unveil mortgages with 3% down payment" (LA Times).
This is true for bonds as well, as we see both very low interest rates and unusually low spreads between the interest rate paid by even relatively high risk companies and Treasury bonds. In fact, these spreads are so low that Federal Reserve Chair Janet Yellen saw fit to warn markets about a bubble in the high yield market last summer. And for smaller businesses, according to the Federal Reserve Board’s data, banks made an average of more than $230 billion in new loans in the last three years, up from an average of just over $200 billion in the 3 years before the crash.
We also had warnings that the Consumer Financial Protection Bureau (CFPB) — the creation of which was authorized by Dodd-Frank — was going to impose such high costs through rules and regulations that it would sharply limit access to consumer credit. This also does not appear to be happening. Consumer credit overall is up by almost a third since the passage of Dodd-Frank. In fact, the news in the consumer credit market is in the abuses in the subprime auto loan market, a market not covered by the CFPB thanks to lobbying by the auto dealers.
The number and value of small loans has shrunk substantially over the past five years. Federal Deposit Insurance Corporation Call Report data show that both the number of and the inflation-adjusted value of non-farm, non-residential loans of up to $1 million—a common proxy for small business loans—declined by 27 percent fromk June 2008 to June 2013.The WSJ goes further:
Twenty-five percent of respondents to the third quarter 2013 Wells Fargo/Gallup Small Business Index, a survey (PDF) of approximately 600 small business owners conducted every three months by Gallup on behalf of Wells Fargo, said that obtaining credit was difficult over the past 12 months, while 22 percent said it was easy. In the third quarter of 2008, those percentages were 14 percent and 41 percent, respectively.
Dodd-Frank was supposedly aimed at Wall Street, but it hit Main Street hard. Community financial institutions, which make the bulk of small business loans, are overwhelmed by the law’s complexity. Government figures indicate that the country is losing on average one community bank or credit union a day. Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so—a trend various scholars have attributed to Dodd-Frank’s “Durbin amendment,” which imposed price controls on the fee paid by retailers when consumers use a debit card. Bank fees have also increased due to Dodd-Frank, leading to a rise of the unbanked and underbanked among low- and moderate-income Americans. [...]Sounds like a fail to me.
[...] Adhering to the new rules takes time and money, reducing the resources that bankers have to make loans. As Greg Ohlendorf, president and chief executive officer of First Community Bank and Trust, told Congress, “This compliance burden is a distraction from our small business lending. Every hour I spend on compliance is an hour that could be spent with a small business customer.”
Because many small business owners borrow personally to finance their businesses, they have also been caught up policy makers’ efforts to increase consumer financial protections. [... New regulations have led] credit issuers to increase the interest rate spread on their loans, according to an additional Federal Reserve report.
Higher interest rates necessarily mean that small companies need to pay more to borrow funds. Second, fewer small businesses can get loans. The inability to re-price loans has made the high risk segment of the credit-card market less profitable to lenders, causing many of them to reduce their participation in that part of the market. As a result, a sizable minority of high-risk small business borrowers that once obtained credit-card loans can no longer get them.
From TechCrunch - aggregated data on some of the startups that made it to billion dollar valuations. And from VentureBeat: a compilation of post mortems of failed startups.
Related (TechCrunch): Good advice to consider when you're working to raise capital.
Evidence based interventions in poverty - randomized control trials (WSJ):
World-wide, in 1981, 2.6 billion people subsisted on less than $2 a day; in 2011, 2.2 billion did. Most of that progress came in China, while poverty has barely budged in large swaths of sub-Saharan Africa, South Asia and Latin America.Not surprisingly, those who have been on the edge of the status quo of the interventions and the billions of dollars spent that have done little to nothing, are skeptical:
Is it time for a new approach? Many experts who study poverty think so. They see great promise in a new generation of experimental programs focusing not on large-scale social support and development but on helping the poor and indebted to save more, live better and scramble up in their own way.
Prof. Sachs says that “many, almost surely most, of the cutting-edge breakthroughs in actual development in recent years did not result from [randomized controlled trials].” He believes that tackling problems at the level of communities or entire societies, rather than just households, is likely to be more effective—though, he adds, randomized controlled trials should be “a part of a diverse arsenal of analytical and policy tools.”
The fact that it's taken this long is the only real surprising aspect of this story - that Wall Street is under threat by the rise of info tech (wired):
These so-called “fintech” upstarts are calling attention to the many shortcomings of the gatekeepers who have traditionally controlled lending, paying, and investing. When these incumbents were the only option, they could rest easy assuming annoyed consumers had no other options. Now they do, and a nervous Wall Street, Dimon included, is realizing it has to play along in order to fight back. Amid fears of a growing threat to their market share, Wall Street is now playing catch-up. Banks are launching competitive products (or slapdash imitations, depending on where you sit) to startups’ innovations. They’re financing partnerships. And in some cases, they’re just trying to acquire away threats to their businesses.More: Inc. profiles a few companies that are making it easier for startups to find money.
A story that's somewhat disruptive to a few narratives out there (TheSpectator):
It’s not surprising that America’s best-paid 10 per cent are wealthier than top 10 per cent. That fits our general idea of America: a country where the richest do best while the poorest are left to hang. The figures just don’t support this. As the below chart shows, middle-earning Americans are better-off than Brits. Even lower-income Americans, those at the bottom 20 per cent, are better-off than their British counterparts. The only group actually worse-off are the bottom 5 per cent.Update: Maybe the Brits are poorer than even Mississippi (Forbes)
The US Obama Administration is attempting to decimate the pay day lending industry through regulation and coercion. Lawyer, Ronald L. Rubin argues in the WSJ why this is misguided - and these attacks hurt those they are most supposed to help:
The CFPB should only create programs to educate consumers about payday loans, pass regulations to ensure that lenders follow existing laws and prosecute businesses that don't treat borrowers honestly. The Dodd-Frank law requires these actions, and no more. The CFPB wasn't created to protect consumers from themselves.
Informed consumers who take out a loan have calculated that they are better off with that loan than without it. A borrower's desperation does not alter this equation. A man whose car is about to be repossessed may calculate that he is better off taking out a payday loan than losing his job because he lacks transportation. The government is blind to such motivations, and it can harm consumers by substituting its judgment for theirs. It is better to help consumers make good decisions than to make decisions for them.
More on why income inequality shouldn't matter (reason.com):
It's true that today the rich are richer than ever. And the wealth gap between rich and poor has grown. Now the top 1 percent own more assets than the bottom 90 percent!
But focusing on this disparity ignores the fact that over time, the rich and poor are not the same people. Oprah Winfrey once was on welfare. Wal-Mart founder Sam Walton was a farmhand. When markets are free, poor people can move out of their income group. In America, income mobility, which matters more than income inequality, has not really diminished.
Economists at Harvard and Berkeley crunched the numbers on 40 million tax returns from 1971-2012 and discovered that mobility is pretty much what The Pew Charitable Trusts reported it was 30 years ago.
Today, 64 percent of the people born to the poorest fifth of society rise out of that quintile—11 percent rise all the way into the top quintile. Meanwhile, 8 percent of people born to the richest fifth fall all the way to the bottom fifth.
The poor got richer, too [...] over the last 30 years, incomes of rich people grew by more than 200 percent, but according to the Congressional Budget Office, poor people gained 50 percent. That growth should matter more than the disparity. Piketty's data reveal times in our history when income inequality decreased: during world wars and depression. Do we want more of that?
For anyone who has been following the news in the last few weeks, those who favor redistribution over wealth creation have been dealt a setback with the Financial Times' review of the data Piketty used in his book "Capital in the Twenty-First Century" (Amazon). In a way his book has been a Rorschach test (Qz). While many of his supporters have been reduced to name calling (or dismissing the criticisms, HuffingtonPost) despite some fundamental problems with his claims, I'm not sure why it matters.
As Scott Adams, author of Dilbert points out (Dilbert):
If you could snap your fingers and magically double the wealth and income of every human on earth while somehow keeping inflation in check, would you do it?Further, as Prof Deirdre McCloskey asks, in the context of the fact we are so much wealthier today at effectively every socioeconomic group than our ancestors, how much does inequality matter?
Before you answer with some version of "Duh, yes." keep in mind that you would be severely worsening income inequality. And that, as we are often reminded by the media, will destroy civilization.
I'm not entirely clear why income inequality leads to doom, all other things being equal, but I hear it has something to do with the French. The analogy, as I understand it, is that Marie Antoinette and her historically inaccurate philosophy "Let them eat cake" is exactly like Bill Gates pledging his fortune to eradicating malaria, fixing education, and providing clean water to the poor.
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.
An article that could provide some of the clues of why inequality is growing as it "enable[s] the best producers to extend their reach" (NYT via GregMankiw):
Analogous forces help explain the surge in income inequality that began in the late 1960s. In domain after domain, we reasoned, technology has enabled innovative business models to serve broader markets. Local accountants have been displaced by tax software, brick-and-mortar shops by Amazon.com and other online retailers. And now, there is even worry that live, in-theater HD broadcasts of Metropolitan Opera performances could displace local opera companies across the land.
But similar advances in production and distribution methods also exert countervailing effects. As the former Wired magazine editor Chris Anderson explained in his 2006 book, “The Long Tail” (the title refers to a property of statistical distributions), digital technology has made music, books, movies and many other goods economically viable on a much smaller scale than before.
For example, films once generated revenue only by mustering large-enough audiences to justify screenings in theaters. Many niche offerings, like Hindi-language movies in medium-size American cities, were simply not viable. Services like Netflix, however, changed all that. Because digital movies cost next to nothing to ship, people can now watch them without having to assemble a posse of ticket buyers.
Ever since its public offering, there's been a debate on the supposed morality of the profitability of Banco Compartamos (CGAP) to which I offer three points:
Our results suggest modest but generally positive average effects on our sample of borrowers and prospective borrowers. We make five broad inferences. First, increasing access to microcredit increases borrowing and does not crowd-out other loans. Second, loans seem to be used for both investment—in particular for expanding previously existing businesses—and risk management (through a reduction in asset fire sales). Third, there is evidence of positive average impacts on business size, reliance on/need for aid, lack of depression, trust, and female decision making. Fourth, there is little evidence of negative average impacts: the only “negative” impacts are reductions in asset purchases and temptation goods, and these results have normatively positive or neutral interpretations as well. Fifth, the positive effects are not sweeping or transformative. Although some of the AIT effects are economically large, and all of the statistically significant effects are likely large in treatment-on-the-treated terms, we find statistically significant effects on only 12 of the 35 more-ultimate outcomes we evaluate, and no positive effects on household/business income, consumption, or wealth.I'd add a few additional thoughts. There has been tremendous pressure on Compartamos to reduce its interest rates but as this study suggests, the social impact of decreasing those rates would be "slight":
These results, taken together with a paper showing strong price elasticities of demand for Compartamos credit (Karlan and Zinman 2013), contribute to a strong business and policy case for lowering interest rates: profits do not decrease, and social impact presumably increases (slightly). One missing piece for this case is evidence on heterogeneous treatment effects. If average impacts mask dispersion where some (potential) borrowers are much better off and others worse off, this would have important implications for modeling and policy concerned with the effects of expanded access to credit on inequality. We are undertaking further research to identify the presence or absence of heterogeneous treatment effects from Compartamos credit and hope that others will pursue similar inquiries in other settings.
Reframing incentives in social programs (Freakonomics):
“What if you personalize it?” he asks. “What if individual officers, and administrators, personally benefitted by reducing recidivism rates? If you created the right kind of bonus, something that was really meaningful, it would just be fascinating to see how quickly things would change. Guards would be desperate to get educational facilities, they’d want classes, drug treatment, safe environments. Their interests would align with the prisoners’ — they’d care if people came out. They’d care about who shouldn’t come out. It would have an impact on how they think about their work, their life. And you — we, taxpayers, the system — wouldn’t be spending new money, you’d just reallocate.
What have we learned in the past two decades, and what do we need to know? (MIT via Chris Blattman). A short read, but a must read if you're interested in development.
