
Economic Worries and Payday Loans - Amorymeltzer
http://www.bloombergview.com/articles/2016-02-11/economic-worries-and-payday-loans
======
chollida1
I think the biggest issue that Levine writes about today is the fate of the
Chinese banks. If you thought that the American banks were in bed with the
government then you haven't seen anything yet.

The worry is that the banks are currently propping up alot of companies that
are for all intents and purposes already bankrupt. The linked article mentions
that about 10% of their loans could go bad which may wipe up to 3.5 trillion
of equity away.

Most of these companies are limited to China with a bit of exposure due to
their ADR's trading in North America so there isn't much direct market worry.

The real worry is that to prop up their own economy China may have to:

\- start selling US Dollar holdings to keep its own at a rate that the rest of
the world can't absorb,

\- have their economy grow at a zero rate, something that was almost
unthinkable even 2 years ago.

Both of these have significant knock on effects for the rest of the world.

I have no insight to this myself, I'm not an economist but the guy really
making noise about this is Kyle Bass who made alot of money off the 2008 crash
but whose fund hasn't done so well since then.

So you can either believe he knows what he's talking about and get ready or
assume he's a "one hit wonder" who is unlikely to be right about such a big
event again.

I will say this. I talk to alot of people who would love to short China but
are afraid of getting burned as there is really no way of predicting if the
govnermnet will let some banks fail or if they will throw everything at the
problem to prop up their financial sector.

My suspicion is that they will follow the US example and throw billions at the
banks in an attempt to right them.

~~~
exelius
> My suspicion is that they will follow the US example and throw billions at
> the banks in an attempt to right them.

My suspicion is that China will actually let a few banks fail before the
government steps in. And China culturally prefers to find scapegoats - it's
easier to say the bad action taken by a company is not reflective of the
company, but the result of a few criminals who betrayed the rest of the
company for personal gain (this rationale is often used in government
corruption cases).

In any case, if they let a bank or two fail, then anger about economic losses
is redirected away from the government and towards the corrupt, greedy
bankers, and the government is the knight in shining armor that comes and
heroically saves the day. The US did the exact same thing with Lehmann - they
found the bank that was more fucked than the rest, let them fail in a
controlled manner, and it sent a signal to the market that "this is serious,
equity will be wiped out, but it's not financial Armageddon". I expect China
to send the same signals.

~~~
chollida1
> The US did the exact same thing with Lehmann - they found the bank that was
> more fucked than the rest, let them fail in a controlled manner, and it sent
> a signal to the market that "this is serious, equity will be wiped out, but
> it's not financial Armageddon".

Umm, I guess this could be a matter of opinion but this seems completely wrong
to me.

I'd argue the Lehman failure was anything but controlled, and so would pretty
much anyone in the finance industry.

I'd also argue that the government didn't let them fail to be an example, that
was done with Bear Sterns. The government try extremely hard to save Lehman
and ultimately it was Lehman's ownership,who refused to have their equity
wiped out, who sunk the company.

~~~
scott_s
Agreed that the quoted account on Lehman is wrong. Bernanke was clear in his
book last year:

 _“In congressional testimony immediately after Lehman’s collapse, Paulson and
I were deliberately quite vague when discussing whether we could have saved
Lehman,” Mr. Bernanke writes. “But we had agreed in advance to be vague
because we were intensely concerned that acknowledging our inability to save
Lehman would hurt market confidence and increase pressure on other vulnerable
firms.”

Now, however, he appears to have some misgivings about some of those early
statements. “I wonder whether we should have been more forthcoming, and not
only because our vagueness has promoted the mistaken view that we could have
saved Lehman.”_

See [http://www.nytimes.com/2015/10/06/business/dealbook/in-
ben-b...](http://www.nytimes.com/2015/10/06/business/dealbook/in-ben-
bernankes-memoir-a-candid-look-at-lehman-brothers-collapse.html)

------
pc86
To clarify for anyone coming to the comments first, "Economic Worries" and
"Payday Loans" are two unrelated sections in this article.

~~~
morgante
From the headline, I was really hoping to see an analysis linking the volume
of payday loans to market sentiment.

------
Shivetya
with regards to Payday loans the take away is that regulation is often uneven
in application and not timely, worse activities which were not expressly
illegal can one day become so with prosecution of said activities at a much
later date.

Note, I am not excusing the behavior of the example cases. I am not a fan of
reaching back so far to prosecute for actions that were not illegal unless it
can be shown that an investigation was already in process and those performing
them were notified their actions were irregular and subject to legal action

~~~
fennecfoxen
There's a bit of a Moral Crusade against payday lenders, because the rates
they charge are exorbitant and their customers are poor, and people find that
shocking. Since they're so obviously Bad Guys, then it's okay to do things
like this to Get Them, right?

Never mind that a payday loan may be a much better deal than a late payment on
something important (or, for instance, if your car has been towed and is
accruing storage fees by the hour). Never mind that the money lent stands a
substantial risk of being lost forever and that economic studies find the
actual profit margins on loans are often in the ~3.5% range, consistent with
many other businesses. No, there's _prima facie_ evidence that this is EVIL
USURY; burn it with fire.

~~~
rm_-rf_slash
Perhaps the problem is that because rates are so high, and people who need
them so desperate, it is a no-brainer why the profit margins are low.

Perhaps a better alternative would be a general credit line available to all
Americans managed by the CFPB. The credit limit would be rather small, in the
low hundreds, but would be higher for citizens with better credit scores.

Why subsidize loans to this degree? Because there are many, many people that
are so poor, payday loans can be their only option, burrowing them into
crippling debt, which makes them scarcer consumers (less tax from commerce),
economically precarious (more likely to require welfare of some kind), and
societally corrosive (what happens when the children of severely indebted
parents grow up? Another generation of poverty, most likely).

By all means, let payday lenders do their thing, but they need competiton.
Before homeownership policies of the mid 20th century, you would have to be
rich to afford a house (when a 50% down payment was normal). Now it's an
expectation of middle class life. Competiton is a good thing, and so is
letting the government compete.

~~~
rayiner
> By all means, let payday lenders do their thing, but they need competition.

The studies referred to by fennecfoxen show that payday lending is extremely
competitive: [http://fee.org/articles/busting-the-myths-of-payday-
lending](http://fee.org/articles/busting-the-myths-of-payday-lending). That's
why the margins are so thin.

You're not talking about government "competing" in this space. You're asking
for the government to subsidize payday loans either directly or across
borrowers with different credit ratings (like the government does with student
loans).

~~~
SilasX
Some people further want the Bernie Sanders plan of having post offices do
banking (including such short term loans), so the lines can be choked with
people trying to figure out banking while you just want to pick up your
package.

~~~
deciplex
This is just cowardly defeatism, a trend all too common these days in American
public policy. Too many ideas which are provably sound as borne out by their
implementation by other nations (cf universal health care for another
example), waved away as "impossible" (or at least, impossible _in America_ )
by much of the electorate.

Too many Americans like yourself are too quick to grasp for any excuse they
can which will allow them to perceive a real weakness (shitty health care is
the big one, but also failing institutions generally) as an imagined strength.
You can fool yourself for a very long time, but you don't solve any real
problems that way.

