mf - story #931 - I don't follow your

posted by dsk on March 20th, 2008 at 1:55AM

I don't follow your reasoning. Even under your simplistic assumptions, a choice between starvation and being in debt, is by far better than having starvation as the only option.

//
Onto the main point - the usury I was referring to is what Muhammad Yunus, a Bangladeshi economist, won the Nobel peace prize for. It turns out that micro-loans (even with high interest rates) targeted at the poorest tend to have a huge impact on reducing poverty (50 million recipients rose from acute poverty due to the actions of Yunus' bank). The main clientÃ¨le in Bangladesh are women who would otherwise have no capital available to them. Payback rate is 98%. So when I asked if this kind of usury is "Good" or "Bad", it was rhetorical. Its actually really good.

Link | Parent

posted by rick on March 20th, 2008 at 11:42PM

Just to be clear, usury in the form of microcredit seems to work well. Usury in general isn't necessarily a good idea (and this was the original question). Usury in the form of large loans has had disastrous results.

Link

posted by rick on March 21st, 2008 at 1:04PM

Alright so I might have jumped to conclusions here a little bit ...

What I meant to say was that giving large loans (meaning large principal, not necessarily high interest) to poor people is a bad idea. And that is a reference to the subprime mortgage crisis again. Giving them smaller loans in the form of microcredit is more prudent. And that makes sense - smaller loans are less of a burden, and it forces the borrower to manage the money more carefully, which is more important for poorer people.

As a side note, the term /usury/ simply refers to subprime loans, right? I know in the US there are legal ramifications to charging above a usury rate, but for this discussion we're simply referring to loans with excessive interest rates.

Link

posted by dsk on March 21st, 2008 at 2:18PM

>What I meant to say was that giving large loans (meaning large principal, not necessarily high interest) to poor people is a bad idea.

I agree but not because the action is bad in itself. Lenders balance risk with return. Poor people carry with them a higher risk of defaulting on a loan, hence why credit issued usually carries a higher interest rate (you balance out the higher risk with a higher return). Further, applications for high principle and low interest loans (such as a mortgage) would in most situations be rejected. The risk is simply unacceptably high when compared to the potential return. On a small scale there will be fuck-ups, as certain loans will be issued for clients that are inherently too risky. And when that loan eventually gets defaulted on, the lender loses tons of money (or goes bankrupt) and learns a valuable lesson.

Clearly the onus is then on the lenders to protect their money by making rational decisions, because ultimately they are the ones who pay for defaulted loans.

The subprime mess requires its on explanation, because its a fuck-up on a large scale. Its almost inconceivable that so many lenders would choose to make so many high-risk gambits. Obviously human nature plays a part but I think massive market distortion is the culprit. The fact that the big lenders are protected from bankruptcy by government, lowers risk for them in issuing credit. You can take chances on higher-risk clients because there's a level that the government will not let you fall through, choosing instead to bail you out if you fall flat on your face. Another culprit is the rate cut and the injection of capital into markets post 9/11, to prevent a recession. I've read a few articles that made a convincing case that this was in fact the reason for the subprime bubble.

Link

posted by dennisn on March 21st, 2008 at 2:08PM

What I meant to say was it's not usury that is the problem -- it's stupid people. I don't think there should be any legal ramifications to charging any kind of interest -- it's entirely voluntary (unlike taxation). It's the same as me offering you $100 to jump off a cliff.

Link

posted by dennisn on March 21st, 2008 at 11:48AM

Disastrous how, and on who's fault?

Link

posted by Nylorac on March 20th, 2008 at 2:28PM

Well, it still rips the women off. In light of the payback rate, it's unfortunate that the interest rates were so high. I still say it's a bad system (because of the high interest rates) that works (because of the high payback rates).

Link

posted by dsk on March 20th, 2008 at 2:43PM

Define "rip off". Because everything has to be balanced against risk. The reason why the interest rate is as high as it is, is because these people are poor, have no credit history and frankly the bank has no legal recourse if the borrower defaults on the loan as repayment is purely based on trust (although they have a very clever system). In fact the reason for this bank's existence is the fact that no other financial institution was willing to take the risk of lending to people who have no assets.

Looking at it another way, if this bank wasn't self-sustaining, it would not have been able to help 50 million people.

Link

posted by dennisn on March 20th, 2008 at 11:29AM

Well, just to recall, my "good" vote was qualified. It is a good thing insofar as it doesn't harm anyone, and can potentially help some -- it's "better than nothing", which is far better than a bad thing. I still don't feel that, in absolute terms, it is a good thing. I can accept a little interest to offset whatever losses occur when people don't pay back -- but to make a substantial profit for doing nothing -- I just can't like that. I would accept the loan grudgingly, but I would never invite the loan offerer to dinner.

Link