Low-doc loans, pawn-broking and payday-lending are responses, not causes

responses to social injustice and policy failure, not causes.

“I believe the reason that low-doc loans, pawn broking and payday lending all exist is because that legal protection you crave is actually what does exclude and marginalise these people”.

So social injustice, policy failure, rapcious business practices and similar problems can be all blamed on “legal protection”, can they? Low-doc “loans”, pawn-broking and payday-lending are responses, not causes.

I’m sorry that my post didn’t address your concerns. Then again it didn’t address nuclear proliferation, global warming, the skills shortage or even the current NSW hospitals crisis.

But I agree that the topics you raise are important. I think you’re (almost) completely wrong. I’ll have a go at a post on it and then we can debate it more fully.

NG I believe is along the same lines as I am here – there have been numerous studies into iniquitious lending practices that have pretty much all concluded that these leeches perform a useful service and that social justice would be impaired if they were banned or further regulated.

Generally, if regulation is your answer then you need to think again.

The ones most vulnerable in our community – those with sufficient ambition to want to get away from paying horrendous rents but are excluded, often quite unfairly, from mainstream borrowing – are the ones in greatest need of legal protection and of sound impartial advice. Yet they are the ones who generally get neither protection nor advice – a lucky few do get some support from our overwhelmed voluntary community and charity organizations but they are the lucky few. The rest fall victim to these very very attractive schemes.

The problem would vanish overnight if the screen-jockeys in the finance industry got off their backside, left their whims and prejudices behind for a moment and went outside to see what was happening in the real market. They would soon realize, as have the purveyors of low-doc “loans”, that there is a profitable and sustainable market out there for low cost housing, even for unfashionable little old dumps. Australia’s migration experience has shown that after a few years of living in a little old dump, almost everyone yearns for a better house; that’s just a normal part of the human condition [or the nagging-wife syndrom, if you like]. The mainstream finance industry could swallow up the low-doc system in a matter of weeks but it will never happen in Australia because of their set-in-concrete mindset.

You are pondering what auditors and ratings agencies do. That’s fine enough …. but getting some sort of oversight, any oversight, on the low-doc “loan” field is far more urgent. Not from a social justice aspect – although that is important. Nor from the aspects of financial stability and reliability either – they are important too. But from a national security aspect. Quite a few of those who become victims of low-doc “loans” could well be true dropkicks and absolute dills, real born losers, but the rest are both impoverished and very ambitious …. a very dangerous combination in our troubled times. Do you imagine that some very nasty groups would neglect to seek out willing recruits from among those who have lost everything?

Sorry but your present discussion, necessary and interesting though it is, seems to me to be like rearranging the deck-chairs on the Titanic when there is a far more urgent and potentially hazardous issue to be tackled.

I still think there was a lot of hyperbole if not outright nonsense in that.

I think Buiter is arguing that such assets should not count on banks’ balance sheets for the purposes of capital adequacy and other prudential supervision. I’d find it pretty hard to believe he wants to run unusual assets out of town. I’ve not read him before, but having a quick squiz at his blog he seems a fairly clued up guy.

This would mean that banks would not be allowed to hold on their balance sheets, or to be exposed to through off-balance sheet connections, complex structures whose valuation cannot be verified easily by third parties. This is tough and will be unpopular with the industry, but necessary for financial stability.

This is stupid. Basically, the very people most likely to understand such instruments, and amongst the most able to assess them, would not be allowed to hold them. Or, in its best light: ‘Aaaghh! I don’t understand it! Ban it, quick, ban it‘!!! Honestly, imagine life if we were governed by the average Joe system – we’d have to ditch our system of government and our legal system, to start with, and we’d probably be back to the stone age before we drew breath.

In any case, if a financial product is too complex for its valuation to be understood by the average Joe, it probably contributes negative marginal social value. Such complex products tend to be motivated by regulatory avoidance and tax avoidance considerations, and should be discouraged by regulatory design.

This too. What ‘average Joe’ understands the valuation of a share? What about a reinsurance contract? Undeniably they offer positive social value, to my mind at least. What about commodity futures? Do the ‘Joe averages’ understand them? That article was undoubtedly too complex to be understood by the average joe, ergo I posit that it probably contributed negative marginal social value.

The problem with ratings is not as such a systemic bias in ratings modelling, it is that products are structured to meet ratings model’s requirements. The problem is one of GIGO, which is a very different kind of problem.

The other main problem is that people don’t understand what the actual ratings mean, ie probability of default. They don’t, for example, tell you anything about the likely liquidity of the rated product – but, as we all remembered recently, liquidity or convertability can be a major factor in price. Then again, the ratings don’t tell you anything about ‘value’ either.

Probably the most legitimate point is in relation to over-structuring. I also suspect that a lot of CDOs are just mechanisms to turn investor’s cash into fees.

I hope that doesn’t sound over-the-top. You said it was a provocative article and indeeed I found it so.