Perpetual Debt in the Silicon Savannah
bostonreview.net
bostonreview.net
That's like saying: "Kenyans were the first to enjoy cigarettes, now they call them harmful", and wanting to imply that they are somehow hypocritical or crazy to do so.
Just because you run to adopt something, doesn't mean it is good for you. You might find out that it's cancer (in the case of the cigarettes) or slavery (in the case of the digital loan apps).
The word "benefit" in the title is a weasel word, that presupposes what the article should instead prove. They might had first used such apps, but whether they "benefitted" from them, and even more especially, benefitted long term, remains to be proved...
There's no such implication in that line, especially in the context of the rest of the article, unless you're straining for a reason to be offended. "They did it first" reads just as easily as "they have more experience with it and this is how it developed over time for them".
Only, as I already pointed out, the title is not merely "they did it first", but that they were "the first to benefit".
Now I think of them as loanshark payday loan organizations. Those interest rates are absurd.
What they need is money, not loans, and, in particular, not loans against consumption rather than production, which is what broadly available credit inevitably devolves into. (Look at college loans, which started off ostensibly as an investment in productive assets and has devolved into financing four years of heavily curated consumption followed by crushing student debt.)
Even loans against production are dangerous and eventually lead to debt peonage and wealth concentration, as we have seen time and time again, from roman times onward.
The problem is usury, and there is a long, historical argument about it that is completely ignored in the west. This is because history is written by the victors, and the usurers won. We are all usurers (or aspiring usurers) now.
Learn the difference between a legitimate loan and predatory practices. There is a distinct difference between capitalizing on a market and pure exploitation. The Wall Street/Harvard Business ideal is the latter.
There is nothing wrong with investing in a productive enterprise and expecting to share in the profits of that enterprise.
If a man is starving (or, worse, has convinced himself he needs a new iThing when he does not) and you loan him money you are either violating charity or enabling debt-peonage, respectively.
This is setting aside the exponential nature of compound interest, which is why debt-based economies always go bust, and focusing on the individual morality of the transaction.
But what these companies are doing is essentially giving a loan to anyone, at an incredibly high interest rate, to pretty much anyone who applies. If they can’t pay back, they keep increasing interest, charging fees and if it get really bad, they will make claims on the victim’s future wages.
You’re a bad person if this is how you do it.
The parent is arguing (correctly) that you can't have both high interest rate and a low/zero rate of loan forgiveness while claiming to be ethical.
The market cannot operate without a free market for risk-taking and a free market for assessing confidence of repayment as expressed in interest rates. Borrowers are not entitled to money at a set interest rate in the private market (I would argue this should apply to the public market as well, or at least the markup through banks should be minimized). Saying "these interest rates are too high" is the credit market equivalent of saying "the price of this car is too high, give it to me cheaper".
The individual defaults if they file for bankruptcy. Until then the terms of the loan, voluntarily signed, determine an interest rate and an obligation to repay. The lender is not obligated to forgive a loan; if that were the case credit liquidity would be nonexistent. (IANAL)
> Another of these apps, Okash, took this logic of stigmatization even further, harvesting users’ contacts and calling bosses, parents, and friends to shame defaulters into repaying.
(emphasis mine)
This has nothing to do with free markets for risk-taking or confidence assessment. If you want markets like these to work well, you build them using information, not shame. Shame is a tool of last resort used by abusive lenders who are too lazy/stupid/corrupt to do their homework.
This is just another bog standard case of powerful actors abusing weaker ones. These lenders are targeting populations who don't have the knowledge or the resources to "correctly" default or file for bankruptcy, or to defend themselves against abuse when they do manage to do it correctly.
If the borrower defaults, the lender is supposed to stop hassling them and write off the loan. There are a whole bunch of other things they can do, but again, those things are not ethical.
Tala, Branch, and all these fintech firms are taking out debt themselves in order to lend to these individuals. Thus, they are paying interest. If you are late in your payments, they are floating you on their debt lines for longer.
Thus, even without loan forgiveness, a higher interest rate make sense to account for the risk if delinquency.
Secondly, even if they don't forgive the loan formally, internally it will eventually be taken as a writedown. You can default on a loan and they never get the money back without loan forgiveness existing. That again affects their rate of return and thus needs to affect their interest rate.
If instead they shouldn't be allowed to charge above a certain interest rate, then that will internet come with denying credit to a lot of the population.
People always want to have it both ways: don't discriminate against poor people by denying them credit but don't charge them the interest rates that are required to offer them credit. It's why people simultaneously complain about how sub-prime was predatory but also complain that the banks aren't doing enough to get low income people into home ownership. You can't have it both ways.
I'm not saying that there shouldn't be regulation limiting the types of loans allowed, interest rates, etc. Uneducated people in developing countries are probably not the best rational actors when it comes to making complex financial decisions. Some regulatory paternalism (and even libertarian paternalism by the govt through forcing clearer information on loan terms) is definitely warranted.
My point is fundamentally you can't have it both ways. Interest rates are a reflection of risk. And the result would be denying people access to financial services. We should be honest ourselves about these tradeoffs instead of pretending we can simply have our cake and eat it too.
There is only so much philanthropy money from the Gates Foundation, World Bank, etc. The rest of the capital to fund development ultimately comes from the private sector wherein there must be a sufficient return on that capital to justify its use in that scenario. Otherwise, the capital will simply just go elsewhere.
And again there could be other solutions. A massive overhaul to tax policy worldwide could provide a massive new source of capital to solve the problems of economic development. But I'm not holding my breath for such changes in a world where the super rich have only become more adept at tax evasion.
Disclaimer: I worked in online lending at Avant. I know some of the Tala guys as I live in Santa Monica. And my wife works at the World Bank in international development.
The article mentions "...high rates of borrowing on weekend nights as evidence that loans are marketed and taken in moments of inebriated revelry."
Assuming that's true, and considering all the data these fintech operations are collecting, surely they can't believe they're funding development rather than consumption.
Is it evidence that they're marketed as such?
That’s only true if the future repayment was interest and fee free. When repayment is at a high interest rate this is just more profits.
The banks in Kenya do deny these lenders credit. Which is exactly why they actively approach the higher-credit lenders.
I should add a disclaimer: While this is a harmful consequence of loan availability, I wouldn't conclude from it that credit is harmful in sum. E.g. higher house prices eventually increase the supply (there are exceptions, like if the supply is limited by some other factor, like land availability).
But whatever the other effects of credit may be, empirically, it sure does look like it concentrates wealth.
So, in simpler terms, we've spent more or less 4 centuries robbing these people blind, stealing their resources, occasionally their actual people, and murdering them in droves as we did. And now, we sold them cheap phones, and linked them to a network of banks that allow westerners to loan them a tiny, infinitesimal amount of money to us, in exchange for getting a profit when they pay it back.
Now there are people who are going to downvote you and also me because they don't like being reminded that the alabaster clad civilization we all enjoy is built on the backs of just, stressful amounts of slavery, be it literal slaves, economic slaves or political slaves, but it's true. It's also true that our vaults are packed to the brim with wealth that was taken from those who had rightful claim to it. These are unambiguous historical realities.
We here are not fortunate; we are the victors in a war that's been going on since about the time the first iteration of the Dutch East India company was chartered; the war between the haves, and the have-nots. And we have won so hard that it will probably take generations of dedicated effort to make things even remotely equal again.
Edit: Just to make this clear, when I say we are not "fortunate" I merely mean to say that it is not good fortune or some divine will that's put us in this position, as is a common citation of those seeking to maintain this status quo. I'm saying that it was a concentrated, often violent effort that put us here.
It seems to me that this is one of those cases where people are conflating a larger problem (global poverty) with a system that incrementally helps the situation (access to credit), due simply to its adjacency. The outcome, in this case and others, is to advocate for making these people's lives _worse_ by removing access to credit.
That is to say, I'm a stronger theoretical supporter than most of radical global redistribution, whether as recompense for colonialism or out of a duty to our fellow humans. But this is more or less a complete non sequitur when it comes to debt, since that responsibility, to the extent you agree with it, says nothing about whether access to credit is helping or harming these people (and all the evidence I'm aware of says that marginal credit extended to the developing world tends to help, though this is an oversimplification).
It's not about "a little extra" (a fixed amount), it's about the interest (which can get many times the amount).
Historically and globally, from the ancient Greeks to the Arab world, and from Japan to Americas, in all kinds of moral systems, people agreeing to it are not just "bad people", but the scum of the earth.
Historically also, loaning, from ancient Babylon, to 19th century USA, and even today in many places, has been closely associated with slavery. Many ancient slaves were debtors, all the way to debt bondage, indentured servitude, and so on.
High interest rate loans to people who can never repay them don't do much of anything to help actually lift people out of poverty. Being in the loan business is fine, but accepting a world where a kid's entire life is stunted because of who they happen to have been born to is not.
You don't give a handgun to a toddler or a case of whiskey to an alcoholic, for someone who can't ever repay your loan, then it's not ethical to loan to them.
But when the lender can garnish the borrower's future wages, sabotage his job applications, and force the borrower to repay with the threat of criminal prosecution, the lender's risk of losing his initial collateral goes down significantly. What justifies the lender charging exorbitant interest rates when he has all these tools available to avoid the loss of his initial investment and earn even more profit?
I think that combination why usury is reviled. It's not just the high interest rates, but the tools and punishments lenders use to lower the risk of default below what justifies their high rates. It's high interest rates + debtor's prisons that's really repulsive. Having a lender offer you higher terms because he says you're more likely to default, but then refusing to let you default and seizing your economic production for the rest of your life.
It obviously often doesn't work out this way, but the baseline assumption in a competitive market should be that businesses aren't able to charge significantly over the market-clearing price. OTOH there's no evidence behind your assertion that rates are "unjustifiably" other than a gut feeling, only one step removed from the classic "money doesn't have time value, any interest payment is theft". Why do you think the price is higher than the risk would imply (including the cost, delay, and failure rate of recovery efforts), and why wouldn't a competitor have filled the gap with lower rates?
Again, I get that markets aren't instantly perfectly efficient, but there's usually something you can point to that shifts the equilibrium away from efficiency.
Even the article doesn't just focus on high interest rates, but discusses hectoring people during their daily lives, calling bosses, friends, and family to shame them into repaying, and linking credit ratings to job applications.
Maybe the outrage on usury would be lower if it was legislated that lenders cannot use public shaming, criminal sanctions, or garnishing wages to force repayment on someone that has stated their intent to default on their loans. The borrower would be blacklisted from the lender in the future and overall interest rates would go higher due to less recovered funds. However, there may be less outrage because as I stated, the key issue isn't just rates but rates + unreasonable lender behavior. The difference between a bank and a loan shark isn't just different rates, but that a bank will only downgrade your credit rating in a default while a loan shark will break your legs.
If you're interested in some reading, check out David Graeber's "Debt: The First 5000 Years." It's a pretty interesting presentation of the social nature of money beyond just a number on a balance sheet.
> tools and punishments lenders use to lower the risk of default below what justifies their high rates
My point was that this assumption was unfounded, and it's a better baseline assumption that the counterfactual of aggressive recovery tactics would be even higher rates.
It seems we're in agreement that it can be entirely salutary for the government to decide to limit the actions you can take to recover debt (at the likely cost of higher rates), but it's important to be clear on the model we're using here.
Who informed you of this? The person who wrote the histories of given events absolutely matters. Time and again textbooks have had to be recalled and reprinted because of crazy amounts of slighted disinformation that amounted to little more than sexism or racism on the part of the original authors.
The past might be "constantly interpreted", but it's the winners of each period who make the re-interpretation...
This is specially important if you want to know how people truly felt during big historical moments, and compare them with modern lifestyle. We know very little about most of humanity throughout history, their feelings and worries and suffering and if they slept in 2 phases or whatever. So we have records of those big events, and practically no clue what the hell regular folks at that time thought about them.
You can say 'it was always like this' as much as you want, that doesn't make it true.
Not a single society that didn't have 'usury' ever developed a middle class, human rights, a welfare state and most other things in modernity. The reason the 'usurers' have won is because it is a far superior system and no society that has experiance it actually goes back to the old system.
People like to complain and complain, but when somebody actually tries to remove these insitutions from modern society its a total failure. As we have seen with different communist and other revolutions.
In fact broad access to credit was a major driver for the industrial revolution and for the modern world. It didn't lead to wealth concentration but rather to a broad wealth explosion.
EDIT: Submitted at https://news.ycombinator.com/item?id=21032154
The last thing they need is money as that will lead to increased consumption or even increased population growth!
This is a climate EMERGENCY so we should limit their ability to gain money, not ease it
Is it any different in the USA?
A friend just got his downpayment from his friends.
I always think of the Amish model of big project management to be just a more formal version of the economy of reciprocity that goes on everywhere that your neighbors are your safety net.
You may recall in the '90s and into the '00s there were a bunch of people crowing about the 'gift economy' that was going to come about. In hindsight it's pretty clear to me that these are the children of city folk who have discovered a new idea and think they're the first to think of it.
What may be bothering the Kenyans is the over-precise nature in which a bank wants to do you a 'favor' versus a neighbor. To an extent you can borrow on credit and the strength of your personality, and you are expected to repay 'in kind', but the math is fuzzy. I do a 'big favor' for you, you do a 'big favor' for me, but it's loosey goosey.
In a social exchange we are square when I've done something that is approximately on par with your act (+/- 10%) in anything like a reasonable time frame. With a bank we are only square when my act is at least 5% larger than yours, and the act always gets bigger the longer I delay.
Also the bank's transactions are always between 2 individuals. A generous person within a village might be able to enjoy (or even expect) dividends from people he has no previous transactions with. You helped my grandma when she was sick. You can borrow my plow.
The bank doesn't care how much charity work you've done, or how much business with another bank. You've still got to pay. And soon.
Debt only really seems to work as an investment or to solve liquidity issues. The problem sounds like these debtors never had investments they were looking to finance or wanted liquidity for capital assets. They are just poor people who struggle to get by.
You may criticize someone for going to debt in such short term thinking but it's hard not to empathize. If you were about to be homeless or go a day without a meal, would you take a loan?
It's interesting after looking it up that Kenya passed some sort of "Insolvency Act" in 2015 which did some bankruptcy reforms. It apparently made it more difficult to qualify for bankruptcy which might explain what's going on here.
This is why I'm against UBI. This is why I'm trying to figure out how to help poor Americans, including homeless Americans, access ability to earn an income.
This is why I'm trying to figure out how to start a pilot program in my small town, which has a huge homeless problem for such a tiny berg.[2]
I don't know how we solve it globally, but I can see a path forward for some portion of the problem in the US. I just don't know how to get buy-in.
[1] https://streetlifesolutions.blogspot.com/2019/09/homelessnes...
[2] https://streetlifesolutions.blogspot.com/2019/08/a-small-tow...
There is the root cause. Its simply not mathematically possible for a single salary in a competitive global economy to support more than an immediate family.
Potatoes are still available, eggs are still available. Buying the cheapest available food, buying devices used, etc, can allow people to live an uncomfortable but low time preference life.
Is APR normalized for the inflation rate ?