Is it acceptable to profit from the poor? | Hacker News Reader

Is it acceptable to profit from the poor?

economist.com

12 pointsjyu40 comments

The comments at the economist are pretty scary.

Even if the poor get high returns by investing the loan...it is not fair for the lender to capitalise on the good fortune and/or efforts of the borrower.

Answer to the question: Yes, it is acceptable to profit from the poor. If you disagree, please do not allow them to purchase bread or sell their labor.

Yes, the comments seldom reach the quality of the articles. Some are downright scary. Perhaps they should restrict comments to people with a subscription? That should swing the ideologic balance in favor of hardline capitalists.

(Disclaimer: I have a dead tree subscription.)

There is a gap between profit and exploitation.

He alleges that it is charging interest rates of over 100% a year, little different from what illegal loan sharks demand, and that it is deliberately making it difficult for poor borrowers to understand how much they are paying for their loans.

PS: Compartamos concedes that its rates may seem high—though it reckons they are closer to 70% so it's not like his numbers are pulled from thin air.

I don't see how it's difficult to see the "right" thing to do - it almost never is, really.

"The right thing" (TM) is to treat the poor like you would any other social entity. You (as a businessman) can profit off of them, but not by taking advantage of their desperate situation. You make a fair offer, you get a fair return, and everyone lives happily ever after.

Now if you choose to give them a more-than-fair offer (interest rates that just cover inflation, pretty much no profit involved) out of the goodness of your heart - kudos to you.

Keep in mind the most important thing: the current sub-prime woes were all caused by banks taking advantage of people who couldn't afford to pay them back; "balancing-off" the high risk of investment with even higher interest rates - and look where that's put the global economy. There's a lesson in there - you can't make a quick buck, and ripping people off can never help society as a whole in the long run.

Maybe. Here is my opinion.

The poor need goods and services just like the rest of us. More to the point of the article, they also require credit and some faith in their productivity, to even attempt to rise out of their situation.

Theoretically, an efficient market will help provide credit to the poor people most able to use it in a productive manner. In reality, it seems like things get a little non-linear below the poverty line. By definition, those in poverty can't reach up to meet the price of goods (including credit) in the general market. Also by definition, a market exists only when buyer and seller reach a mutually beneficial agreement. So it seems that when those who are not poor are dealing with the poor, they are not acting as rational market participants because they may not reach a mutually beneficial equilibrium. Who would even try? I think this is why micro-finance needs to be a somewhat humanitarian effort.

Coincidentally. the economic crisis engulfing the U.S. right now is an example of why profiting from the poor doesn't work (well...without some productivity requirements). Not lending to the poor, per se, but lending to people who had no chance (and possibly no intention) of using the credit productively and paying it back. This has partly been due to incentives which are/were outside of the market between lender and borrower -- fees, and a secondary market which was hungry for securitized debt. The demand in the secondary market was met by trying to do the impossible (lending on bad bets) and selling it off as a package of good bets.

This last bit should actually make you upset on many levels. The U.S. patent office won't accept inventions which violate the laws of thermodynamics, and I'm still confused why the Federal Reserve does...sorry, on a tangent. Back to the salt mines for me!

Short answer: It is always acceptable to provide goods and services to those who are willing to buy it at a price that they are willing to pay for it.

There's been alot of anti-capitalist sentiment lately in the media, from stories about overpaid CEOs to record oil company profits. Simply put, if a person can not get fair market value for their good or service, they have no incentive to provide it. What is better: that which is expensive, or that which is not available?

For some, the question of "that which is expensive, or that which is not available" is irrelevant. If a good is priced such that it's out of reach, it may as well not exist.

I would agree, for all values of "willing" that don't involve some sort of coercion. For example, if someone is "willing" to pay $100 for a loaf of bread if you have a gun to their head, then I would question the use of the word "willing." Likewise, if a group of people controlled the food market in a region and used that power to force the people to hand over their life savings in order to buy food and avoid death by starvation, I would question the use of the word "willing."

As always the question is -- can those involved opt out of the transaction? If the answer is yes, then there is probably no evil involved.

I don't understand how an interest rate of 70% could be fair, and who in their right mind would agree to such a rate?

Thats because such rates typically assume that the loans run for a long time. If the loan is only for 14 days the interest (given as %apy) quickly skyrocket.

You mean it is not a yearly interest, but a constant? Like "we give you 100$ if you promise to pay us back 170$ whenever you are ready"?

It is yearly interest, but the loan terms are typically much shorter. If the loan only lasts 14 days, a quoted APR seems much higher than is typical for, say, a mortgage, which lasts 30 years.

This makes some sense if making the transaction has a fixed cost. If I had to spend the same amount of time to fill out a 14 day loan as a multi-year one, I'd need to price the shorter one higher even if I wanted the same APR otherwise.

...but if the borrower is on the same thin financial ice when the loan is due as he or she was when the loan was taken out, and rolls the loan over, then things get out of hand very quickly. This is how the people offering paycheck-anticipation loans rack up their profits.

If the default rate is high enough then 70% could be what it takes for the lender to make a profit. Someone who thought that was the best rate they could get could agree to such a rate.

Then they should focus on lowering the default rate, not increasing the interest rate. The Grameen bank gets repayment rates of over 98%.

Assuming a cost of capital of 3%, if they need to charge 70% interest to make a profit then roughly 40% of their loans are defaulting. A 40% default rate means people are using these loans for consumption, not investment. You need better financial education then, not better access to credit.

That sounds like a good next step. Move from no access to capital to lousy access to better access. The attitude I saw from critics of the program was that some how people should go from no accss to good access, and if that's not possible they should stay with no access.

Perhaps it's not the default rate - but the overhead. Those loans are pretty small.

Yet it's possible to run a current account on far less? I doubt that's the problem.

Or perhaps it is just a sign of an immature market. They charge so much because they can get away with it.

With competition the rate should go down. Even if it is mainly caused by overhead, as companies will figure out how to operate more efficiently.

Feel free.

Nothing is stopping you from loaning your money at a lower rate, from providing education, etc.

What? You only tell other people what to do with their money? If your advise is not good enough for your money....

It's ok if your costs are that high (70% of 50US$ is just 3.5US$ which even with a very little salary is hardly enough to do due dilligence). Usually the rate of return for micro-entrepreneurs is far above 100% so it's still a good deal. The alternative would be not to give any loans which would hurt the poor most.

If you are interested in this topic you check out my master thesis of 2004 (if you don't mind my crappy English) here: http://www.scribd.com/doc/92714/Microfinance

It covers exactly that topic.

VCs charge far more than 70%. Is that fair?

Please elaborate? Do VCs have an interest per year?

Actually, it's interesting. If you look at prosper.com and people-to-people loans, the high risk loans run at exceedingly high rates. It's easy to assume lenders are sharks until you look at the interest rate required to make a profit which will offset defaults and try it yourself. As for who would agree, anyone who can get a greater than 70% risk-adjusted return on their money who has no other source of funding.

So why are they primarily giving out high risk loans? Is it really a good idea to encourage poor people to undertake high risk ventures?

> Is it acceptable to profit from the poor?

Haven't read the article, but ... yes, it's called 1) the labor market, and 2) the goods market

I'm still looking for the rest of the article. For an Economist article, this one was pretty short and thin....

to me it depends. I don't see anything wrong in trying to be like a Walmart (minus Walmart's abuses), though personally I feel that businesses such as 'payday loans' (as opposed to something good like kiva) and 'rent to own' stores are somewhat sketchy

Sure, but they're sketchy because they're sketchy, not because they're targeting the poor. They're sketchy because they're bait-and-switch -- fooling people into signing a pretty onerous contract without reading it properly.

Yes, so long as you don't rig the game to keep them poor.

As long as it's win+win should be fine.

Other considerations involve morals and equality of opportunities in education to be able to evaluate how unbalanced is the win+win. And that's a terrible ground for discussions.

if people aren't poor after you profit from them, you need a new business model

Scrap a negation and you have a fine comment:

If people are poor after you profit from them, you need a new business model.

that wouldn't be amusing.

You should sell tobacco.

But where would the wordplay be in tobacco selling?

Watch the film Thank You For Smoking and find out.

http://rogerebert.suntimes.com/apps/pbcs.dll/article?AID=/20...

I think it would be acceptable if the people were still poor but significantly less so.

Sure. Or in another way better off.

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