Economic Worries and Payday Loans | Hacker News Reader

Economic Worries and Payday Loans

bloombergview.com

58 pointsAmorymeltzer51 comments

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.

> 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.

> 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.

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...

>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.

Which is a very good reason the Chinese probably shouldn't follow our lead. Letting Lehman fail was a huge disaster. It essentially seized the capital markets and sped up the collapse of a bunch of other banks. In my opinion, the solution is making the bailout so impalpable to the shareholders than it's really the last solution before bankruptcy. Or maybe even some special bank only bankruptcy that allow it to fully operate with government backing.

See my cousin-comment in this thread: they did not let Lehman fail.

Yes they did. They were stopped by their ideology. The government could have easily nationalized it.

Here's Paul Krugman talking about it right after Lehman went under: http://www.nytimes.com/2009/02/23/opinion/23krugman.html

Your narrative is directly contradicted by Bernanke himself. Read the NY Times article I linked to that references his book. He is clear on the matter.

Bernanke and treasury alone could not have done it. The government could have. What he left out was that they never considered nationalizing the banks. No narrative here; just pointing out what a Nobel prize winning economist laid out.

  >My suspicion is that China will actually let a few banks fail before the government steps in

Too late, the government has already stepped in. http://money.cnn.com/2015/02/04/news/economy/china-economy-s... (cutting the reserve ratio is basically like giving money to banks)

Don't expect to see something like TARP, the central banks have found less controversial ways to fund banks (by buying mortgages, etc)

I think China has learnt from the US example that letting big banks fail is a stupid thing to do..

Krugman on this: http://www.nytimes.com/2009/02/23/opinion/23krugman.html

Bass was kinda wrong on his Japan trade though. Doesn't work every time. Also the big issue with 2008 was that the government led Lehman fail; a huge mistake. They should have nationalized it or taken a majority equity stake in it at punitive terms.

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

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

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

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.

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.

> 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. 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).

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.

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.

.... have you EVER been to a poor neighborhood? There's a payday loan company around every other corner. If they lack ANYTHING, competition is at the bottom of the list. We have laws that specifically prohibit banks from being that damned usurious. We need the same against private lenders.

> 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.

I don't think that helps much; if payday loans are really low-margin, CFPB won't be able to offer better effective rates -- unless you are proposing that this is positive-cost taxpayer subsidized line of credit.

>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.

Because people who exhaust their existing credit as if it were free money won't exhaust this? The Vimes problem [1] is well known and yet no one can come up with a systematic way to break the cycle and create a virtuous upward cycle by making the kind of small cheap loan you're describing.

[1] The oft repeated meme that not being able to afford some long-term-cheaper option because you can't front the cash, thus making you even poorer.

This solves nothing - the people who are generally signing up for payday loans almost certainly don't have great credit. (If they did, they'd be a lot more likely to be able to get a real loan or put the short term needs on a card)

And as I put my anecdata hat on: There's plenty of competition among payday lenders. I live in what barely qualifies for a city, and there are at least 10 different outfits within about 5 minutes drive, some standalone, some pawn shops.

The people who need credit the most obviously don't have any. Insisting that the only alternative to missing payments is with obscene-interest loans is like a doctor giving you the option of dying or sticking you with leeches.

"Insisting that the only alternative to missing payments is with obscene-interest loans "

The money has to come from somewhere and the interest rate is based on risk. If someone doesn't have any credit, it's most likely because they have no income or had credit and defaulted. This is high risk and should have a high risk accordingly.

The other question is, why can't they get credit from a bank?

I could get a $5000 line of credit at 18 years old..and I had no connections, a low-paying job, and no credit history. The only way you can't get credit is if you continue to misuse the system and become a risk to everyone.

We should be investing in more financial education.

The interest rate is NOT based on risk. It's based on them being able to do it because these people have no alternative. It's usury, plain and simple, and should be stopped.

The entire idea of a payday loan is necessarily high risk for reasons discussed ad nauseum, and that dictates the interest rate.

There would be no payday loans (smallish quantities of cash for short periods) without commensurately high interest rates. There's a very real risk of default, and smaller amounts of cash are not economical to process. (Have yet to see one that allows you to borrow <$100)

Put another way, imagine you're a VC type and want to disrupt payday loans. You do this by loaning money at more reasonable APRs - say something like 15%. On a one week loan at $300, your profit isn't even 25c. Even with economies of scale, even with all the automation and tech SV can muster, this operation won't even pay its own infrastructure bills. One default and you've wiped out weeks of profit.

Removing the option removes a useful and occasionally necessary tool for emergencies.

Nobody is saying not to allow payday loans. What's being said is to stop the unethical and usurious lending practices. I'm sorry, but being a "useful tool" is NO EXCUSE for what's being done.

Those two things are flatly equivalent, because short term loans do not work without high interest rates to both make the loans even a little profitable and to offset the absurd risk.

High interest rates are not automatically abusive just because you'd like them to be.

  > We should be investing in more financial education.

Yes. If you are making a startup related to payday loans (like this one: https://www.lendup.com/ ) make sure that you include a financial education program in there somehow.

What was the last payday loan chain you saw go bankrupt?

It's extremely profitable as an industry, if not on margin, on volume.

If it were so risky, they'd not be in it. They're making out very very well.

I'm still of the opinion that using APR's to describe a loan held for ~a week is about as useful as the weatherman giving you the forecast in degrees kelvin: technically correct, but completely worthless.

"Get $300, pay it back plus $30 a week later" is much more relatable. And isn't a bad deal, when you need cash now. Think medical, car impound, etc.

"Missing a payment" isn't even a thing you can have happen on most classes of payday loan. You have to provide a pay stub, and a post-dated check, and the money just gets taken out on the day of.

Regarding leeches: http://www.livescience.com/203-maggots-leeches-medicine.html - when the options are lose a foot or put a couple of sanitary bugs on it, I'll pick the leeches every time :)

> You have to provide a pay stub, and a post-dated check, and the money just gets taken out on the day of.

That doesn't prevent missing payments; if it did, the risk profile on payday loans would be much different than it is and the costs would be much lower, in line with other, lower-risk, loans that exist in the market. There are several reasons why it is possible to miss the expected payment even with the paystub + postdated check approach.

(1) There's no guarantee that the next paycheck will be the same size as the previous one, particularly with the population (largely not salaried, often without paid leave available, and often with little job security) that needs payday loans.

(2) There's no guarantee that someone else won't reach into the account and take money before the payday lender gets it (including the bank itself, which absolutely will beat anyone presenting a check if there are fees, etc., due.)

(3) Its possible to cash/deposit paychecks other places than the account on which the postdated check is drawn, and people might do so if they have another unexpected expense, and decide paying that is more important than paying the loan.

> I'm still of the opinion that using APR's to describe a loan held for ~a week is about as useful as the weatherman giving you the forecast in degrees kelvin: technically correct, but completely worthless.

It's a comparative figure, which is particularly important for underscoring the consequences of owing money in the long term.

> "Get $300, pay it back plus $30 a week later" is much more relatable.

That's certainly OK to show in the UK, you just also have to show the APR.

> And isn't a bad deal, when you need cash now.

Assuming you can pay pack $330 next week and don't need to borrow $330 to pay $363 the week after...

> "Missing a payment" isn't even a thing you can have happen on most classes of payday loan. You have to provide a pay stub, and a post-dated check, and the money just gets taken out on the day of.

Again in the UK, but this is certainly possible. A post dated cheque can bounce, and should never be given out in the first place (you can cash them at any time).

>It's a comparative figure, which is particularly important for underscoring the consequences of owing money in the long term.

But it's not comparative -- in e.g. mortgages, they separate out costs (e.g. "closing costs", PMI, inspection) that should rightly count towards the effective interest rate [1]. If they did the same for payday loans, they could (reasonably IMHO) break out the (far more legit) processing costs -- say, $5 in labor, $5 (amortized) for overhead like security, and then you're paying more like $20 for "interest" if you measured by the same basis as a mortgage.

[1] For example, if they loan you $300k for the home at 5% but require $3000 in such costs, then they've really loaned you $297k at ~5.05%.

In the UK the APR is supposed to be a figure which includes all costs, it's why payday loans have such high values as any fixed costs are considered part of this. As far as I understand it anyway.

Really? UK mortgage APR numbers account for inspection costs and mortgage/title insurance?

Any required costs, yes:

http://www.ybs.co.uk/mortgages/mortgage-glossary.html

> Overall cost for comparison

> APR (Annual Percentage Rate) - This is a figure which all lenders must quote when referring to mortgages. It is designed to show the total yearly cost of a mortgage stated as a percentage of the loan. It includes items such as the interest rate payable at the start of the mortgage and after the initial rate period has ended, Mortgage Application Processing Fee, Product Fee, Valuation Fee and Mortgage Fee. It is the overall cost for comparison purposes. This figure is intended to help customers to compare the overall cost of different loans.

I'm not sure what mortgage and title insurance are, perhaps they're more US specific things.

External costs (solicitors, taxes like stamp duty, etc) are not included in the figure.

100% agreed on the APR thought. It's because people don't think about the time of the loan when they look at APR - the only reason Payday loan APR looks expensive is because you have a week to pay it back instead of a year. If you could pay back a payday loan over a year (which why skyrocket the risk profile), the APR would be very low.

We don't think about any other product like that. Do you consider your tv cheaper if you pay for it over a year rather than at purchase? Of course not...

Err, that last thing you mentioned is the entire business model of the rent-to-own outfits like Aarons, Rentacenter, Fingerhut...

Generally physical items are considered more expensive if you pay back over time, not less. For total cost, loans are the same way, but are measured by APR instead.

Using APR to describe payday loan seems fine to me, because the major problem with them is when people get stuck perpetually rolling them over. Each individual loan may only last one pay period, but the debt can last a long time.

It's a tough area, because they can be extremely useful, but the exact same product can be a lifesaver or an anchor depending on who's using it. And naturally people who are most strenuously for or against tend to focus on the aspect which favors their argument.

How much of increase in home ownership is due to building costs coming down? Not necessarily in recent decades, but in the first half of the previous century.

I look at government insurance and interest subsidies on 30 year mortgages and am really skeptical that it puts any downward pressure on housing prices.

>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?

It absolutely is. They're bottom feeding scum whose profits are driven by the irrational financial decisions that occur under conditions of desperation and panic.

>Never mind that a payday loan may be a much better deal than a late payment on something important

Never mind that they capitalize on two very common cognitive biases:

* Shortened time horizons of the financially distressed (your limbic system kicks in when you panic, causing people to make irrational decisions).

* A bias towards optimism in emotionally healthy adults.

When payday lenders are prohibited (like in Ohio) the poor end up better off in the long run.

Only if you believe the neoclassical, neoliberal fairy tale that is the eternally rational consumer would it make sense to support these scum.

A payday loan being better than those alternatives does not change the fact that payday loans are absolutely terrible, and should not be allowed to operate the way they are.

The alternative is to just tell them they can't get the money. Hope they didn't really need it.

No, that is not true at all.

If they had another source for money they would've already used it. Maybe not for the first payday loan, but once they noticed the cycle they would've gone to the other source of money. People only pick the worst option when it becomes the only option.

People on that moral crusade never seem to take the time to actually think about what those words and numbers mean. If a friend let you borrow $100 for 2 weeks, I don't think a 6 pack of beer ($8) would be an unreasonable "thank you"/interest payment when you pay them back. That would be a 192% APR.

These are small, short term loans. Of course the rates become insane when you extrapolate to a year.

The other side is a lot of people seem to assume they're compounding rates, I have never seen one with compounding interest. Sure, the fees keep accumulating but they are not compounding.

Those example cases are not 'retroactive' illegalization. They're examples of uneven enforcement. Usury was entirely illegal throughout the life of the two businesses in question. Both businesses made multiple explicit attempts to evade the laws in question (using tribal sovereignty) which says they knew perfectly well their actions were illegal.

They just weren't enforced very well.

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