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Bypassing the Banks: Good News, Bad News

By Shlomo Maital      


    A new Israeli website called e-loan will open for business in the next few days. It will import an idea proven abroad —  Web surfers can borrow up to NIS 50,000 (about $12,500) at 8% – 10% interest, with a 2% commission to the website,  from funds invested by surfer-investors with spare funds.  Background checks will on would-be borrowers will be done by the website but investors are urged to diversify their loans, and spread the risk. 

    This is a trend toward what economists typically, in their impossible jargon, call financial disintermediation.  That means, we no longer need the banks to intermediate between those who have money and those who need it and want to borrow it.    We can bypass the banks.  We can do this on the Web.  Banks are hoarding their cash anyway, fearful of lending it.  So we need to find our own solutions. 

      Financial disintermediation is already a strong trend, as large corporations access capital markets directly by issuing bonds.  This has not proven successful in Israel; tycoons are now struggling to redeem the bonds and ask for ‘haircuts’ (reductions of half or more in the principal of the debt).    Will it work better for ordinary small investors and small borrowers?  Will they have higher standards than the tycoons?

    I think the e-loan phenomenon, bypassing banks, is both good news and bad.  Good news, because it provides access to credit when none would be available otherwise.  Bad news, because, look at the price!   Interest of 8% to 10%, plus 2%, is very high, hard to pay back, hard to find investments that make such debt worthwhile.  It is high, because of the risk premium.  And because ordinary citizens, and small businesspersons, do not have the privileges that the fat cats have, of borrowing at low interest, without full collateral, or any collateral at all, from banks.  

    Let’s wish e-loan well.  Above all, let’s wish for new alternatives to the banks,  disintermediation,  to lower their power and to lower our dependence on them.  The less power they have, the less they can scalp us.  



The Rich 1% Recovered; The Rest of Us Didn’t

Fat Cats: Let’s Have Another Bubble!

By Shlomo Maital

fat cat   

  Paul Krugman’s New York Times column “Rich Man’s Recovery” draws our attention to Annie Lowrey’s   New York Times blog Economix (Sept. 10).  Using data from a study by French economists Emmanuel Saez and Thomas Pikkety, she shows alarmingly that for the U.S.:

  *  In 2012, the top 10 %  of income earners took home more than half the country’s total income.  This is the highest recorded level of inequality ever, higher even than in 1929!  (Income includes capital gains).

  *  The top 1 % of income earners took home one fifth (20%) of all income, close to the previous record in 1929, and among the highest levels since 1913, when the income tax was imposed.

   Recovery?  It’s all gone to the fat cats.  None to us, not even crumbs.  That is why the ‘recovery’ is so weak and tenuous.

    According to Lowrey:  “The figures underscore that even after the recession the country remains in a new Gilded Age, with income as concentrated as it was in the years that preceded the Depression of the 1930s, if not more so.   High stock prices, rising home values and surging corporate profits have buoyed the recovery-era incomes of the most affluent Americans, with the incomes of the rest still weighed down by high unemployment and stagnant wages for many blue- and white-collar workers.”

Fat Cat 2

    I would stress another related explanation.  The U.S. Fed has fought the Depression with the only tool available, by printing scads of cheap money, lent at virtually zero interest.  Directly and indirectly, this benefits the fat cats.  But it hasn’t benefitted us ordinary people.  Why?   Because the goal of the Fed was to spur investment.   But businesses aren’t investing, who needs to invest with demand so weak?  Why is demand so weak?  Because we don’t have money?   Why don’t we have money?  Because the fat cats have it.   Why?  Because they have quickly returned to the games that caused the financial collapse: financial manipulation, in place of real economic investments, leveraging cheap money. Not only that – by manipulating bond prices, they have panicked Fed Chair Bernanke into retreating from his plan to stop printing more and more and more money.  If you think the Fed  policy is independent,  examine what happened when Bernanke just mildly hinted he might stop printing money.  Wall St. slammed bond prices down, and stock prices – and Bernanke quickly backtracked.

     The Fat Cats caused the crisis.  We bailed them out.  And now they’re back to their original games.  They might as well all put this bumper sticker on their Porsche’s:   “Hey…let’s have another bubble.  Why the hell not?”



Blog entries written by Prof. Shlomo Maital

Shlomo Maital
September 2013
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