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loan piranhas

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The word subprime is hitting world headlines today, as the cause of a global stock market “correction”. I subscribe to various news feeds related to economics, including those belonging to authors Tim Harford (FT), Bob Sutton, and the authors of Freakonomics., so I’ve been hearing the rumblings for some time now. Business Week did a very good article on it, back in March, which is online here. I’d like to give my take on the situation, which should be prefaced with the standard “I Am Not An Economist” disclaimer.

A subprime lender is a financial institution that offers loans to debtors who have poor credit records. They might not use the word subprime here in Europe, but we have them too: the kinds of companies that put ads on cable TV, offering credit to people who have been turned away by banks. These are people who need credit more than most: you get a poor credit record because you took out too much credit in the past, since “too much” is defined as the amount that you can’t pay back.

Unforeseen circumstances can turn a comfortable financial situation nasty, so it’s normal to have insurance of different kinds, to “smooth out” the financial impact of unforeseen events. In the USA, however, many poorer people have been hit hard by disasters such as Hurricane Katrina and the flooding of New Orleans, and can not afford health insurance in particular. The federal Medicare scheme is inadequate, covering only the very poorest, and a middle class family can be bankrupted by a single car crash, even if they have health insurance.

The result is that you have more subprime borrowers than before, and subprime lenders are created to cater to them. The added risk to the lender is handled primarily through the application of higher interest rates, which is a double-edged sword: those who pay higher interest are those who can least afford it, meaning they are at even higher risk of defaulting on their subprime loans.

If a loan is secured on property – a standard subprime loan requirement – the bank can foreclose on the property, leaving the lender out on the street. This is not a theoretical exaggeration: in the poorer parts of the USA, it is happening with disappointing regularity, and the frequency is growing.

Why, then, is the crisis in subprime lending having such a global impact? The most direct effect is due to the fact that the subprime lenders re-sell the loans (or derivatives) to other financial institutions, including some in the Far East and Europe. The third-party exposure is limited, however: to quote the Business Week article, “the buyers of the loans started exercising their right to sell the bad ones back to the lenders at face value. The true value of these delinquent or foreclosed loans was far less than face value, but the lenders were forced to swallow the difference.”

In other words, the subprime lenders are carrying the can. Even if they can foreclose, the debtors often have bankruptcy protection, and the lenders lose money in the foreclosure process, rarely getting back the full loan value.

Indirectly, people in financial distress are a relative burden on an economy, simply due to their reduced standard of living. Property prices are being affected, with lenders making less on foreclosure, and less on new mortgages. On a wider scale, property prices and mortgage lending are key economic indicators, and the indicators in the USA are not good; the property bubble, that got a lot of mortgagees in to trouble in the first place, is deflating. This is similar to what happened in the UK in the early Nineties: they called it Negative Equity.

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Written by brian t

August 10, 2007 at 6:16 pm

Posted in america, economics

plane thinking

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At the beginning of 2006 I speculated that I would be doing less travelling. That suited me, simply out of general consideration for the environment. I didn’t need news headlines , or the European Union, to tell me that air travel is not good for it. So, I imagined, 2006 would be a quieter year for me, with fewer flights.

The reality turned out to be very different:

  • April = 4 flights: Dublin <-> London, Dublin <-> Lisbon
  • May = 1 flight: Dublin -> Copenhagen
  • June = 5 flights: Copenhagen -> Dublin, Dublin <-> Amsterdam <-> Lyon
  • July = 2 flights: Dublin <-> London
  • November = 2 flights: Dublin <-> London
  • December = 4 flights: Dublin <-> Dubai <-> Bangalore

That makes eighteen (18) flights in one year; eight of those for work-related reasons, the other ten for no good reason. By way of comparison, I calculate that I took nine (9) flights, half this year’s tally, in my first 25 years. Must do better this year – the environment needs me to cut back on the flying!

Besides, the romance has gone: RyanAir is working hard to make flying as exciting as taking a bus, and even though I didn’t fly with them last year, Aer Lingus are not that far behind, out of competitive pressures. I think I’ll take the ferry next time I visit the UK.

Written by brian t

January 5, 2007 at 8:23 pm

exemption thursday

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“Motorists indulging in brawls with autorickshaws drivers are a common scene on the busy Bangalore roads. But then, Thursday was an exemption.”

— from a front page story in today’s Deccan Herald, about yesterday’s autorickshaw strike.

Common? I suspect this writer is “sexing-up” the story. Somewhere between a car and a motorbike in size, the autorickshaw is one of Bangalore’s essential services. The strike was called in protest over an increase in fines imposed on drivers of un-roadworthy vehicles. I was surprised to read that one main service the autorickshaws provide is ferrying kids to school – so much so that the authorities were seriously considering closing some schools, but that didn’t happen. They’re all back on the road today: we were nearly T-boned by one at the entrance to Electronics City.

Written by brian t

December 15, 2006 at 3:12 am

Posted in culture, economics, india

idiocracy and devolution

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For years I’ve been a little worried about a demographic trend that has the potential to stop “positive evolution” in its tracks. By “positive evolution” I mean the idea that evolution leads to better, smarter people. Perhaps it’s considered elitist to wish for such a thing, and I know that assuming it would be a fallacy, but one may hope, may one not? After all, we don’t have another life to look forward to, so it’s natural for me to wish for more from this one.

I’m hardly the first to wonder where the human race is heading – as any Devo fan will know – but the trend that worries me is the falling birth rate in the developed countries in general, and among the most intelligent and educated sections of society in particular.

Unfortunately, in the absence of education and intelligence, it’s back to “survival of the fittest”, in my estimation. Today that seems to mean “breed like bunnies”. In poor countries this seems to imply “have many children, because some will die, and who will look after you in your old age?”. In the lower demographic strata of Western societies, especially Europe, this is read as “have many children, because the government will pay you and do what you can’t do for them”. I won’t get in to the politics, but this is compounded by poor education and awareness of family planning, which religion sometimes plays a part in. The Catholic ban on contraception is the obvious example here.

I keep in touch with various people I’ve met over the years: many of them are not married, and those who are have families of one or two children. One friend has a third on the way, which is very much the exception. I’m not exactly “high class”, whatever that is, but my acquaintances are all professional, working people, the “salt of the earth”.

Compare and contrast that with the poorer countries of the world, and the less-educated parts of the developed countries: Africa, Central America, the US South. I was shocked to see the 2005 statistics for Afghanistan, which had a birth rate of 46.6 per 1000 per year, and a 20 per 1000 death rate, that still leaves them which a 2.67% growth rate. I have all the stats in a spreadsheet, so I can sort them by the different factors, and they make sobering reading. The poorest countries – nearly all in Africa – are growing the fastest, thwarting any attempts to improve their living standards.

In the USA, this trend has not gone unnoticed by Mike Judge, creator of Beavis and Butthead and Office Space, whose new film Idiocracy was belatedly “dumped” in US cinemas and has not made it to Europe yet, if it ever does. It imagines an ordinary man who spends 500 years in stasis, and emerges in to a world that has gone downhill, intellectually, leaving him the smartest person in it by far.

In my view, even if things don’t go all the way down that road, we are still facing a “cap” on the intelligence of the human race: with the smartest people the best at reading the signs all around them and having small families, while the lumpenproletariat* think only of their short-term needs and desires, and not about how their world will be affected by their profligacy.

I am well aware that talk of “improving the human race” carries all sort of negative connotations, from elitism to eugenics, and I’m not suggesting any kind of direct intervention in what I perceive as a negative trend. However, what strikes me as most relevant to this forum is the way organized religion prevents individual people from realizing their potential in many different ways. Wilful ignorance of leaders, obstructions to family planning initiatives, education sabotaged by religious beliefs… those are the areas where I hope Prof. Dawkins’ book can make a difference, perhaps eventually proving me wrong!

* I’m kidding! Please stop hitting me with copies of Das Kapital!

Written by brian t

October 15, 2006 at 11:29 am

age gaps

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(I wrote the following as a comment to an article lamenting the decline in fertility in the developed countries. Like many respondents, I’m not convinced it is a problem. Other comments have noted that attempts by countries such as Germany to import skills have been a failure: the immigrants tend to use more resources from the social system than any benefit they brought in – which is not an anti-immigrant opinion, just a demographic fact. I’m an immigrant, after all!)

Isn’t it a basic point that any given country or region is limited in the number of people it can support? NB: by “support” I’m factoring in everything, including politics & aid – factors that will change the numbers, drastically, but don’t invalidate my basic point. When the land can not support the people, they will starve, or leave; as this point is neared, costs soar, and people can’t afford to have large families any more. I see this here in Dublin, too – one colleague of mine is being so badly hammered by the care costs, for his one (1) child, that a second is out of the question, unless they move to a cheaper country (ideally where the in-laws are).

My take on this: in any mature society, the population will stabilize, because some resources are fundamentally limited – such as land to build houses on. A country like Japan has gone just about as far as it can down this road. Yes, the balance is currently on the side of the elderly, and the young are bearing the burden of caring for them, but is that the way it’s always going to be? To be blunt: more of the Baby Boomer elderly will die per year than normal, which means the resources they use (esp. property) is freed up more quickly, restoring the balance eventually.

So, in a stable society the supported numbers are stable, and the population can adapt to them, eventually. (Oversimplification, I know!) In an unstable society, the number of people a country can support can change suddenly, due to factors beyond the control of the people. Zimbabwe is a great example: people are starving because of recent politics, not because of poor land or lack of natural resources, and there is hope that that can be reversed.

But in other parts of Africa, where countries & regions have been poor for generations, I would say the supported population is stable at a level well below the actual population. I really do not understand why women continue to have large numbers of children – or why men continue to force repeated pregnancy on women. They KNOW most of the children will die, but they still have them, and we get badgered by charities to “save the children”!

I think we don’t need more people: we need better people, which means dedicating more resources to each of them. Which means lower fertility is a good thing, in my opinion.

Written by brian t

August 18, 2006 at 5:08 pm

Posted in culture, economics, politics

golden eagles

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Saturday night, and there’s probably nothing on TV. I say “probably” because I haven’t checked; too busy reading, and enjoying a free concert. The Eagles are well in to their second set at Lansdowne Road, about 200 metres from my window. Right now I can hear Joe Walsh soloing on Don Henley’s Dirty Laundry, the third of his solo tracks they’ve played tonight, along with at least one of Joe’s and one of Glenn Frey’s (I think).

An interesting post tonight, from the Radical Mutual-Improvement blog, asks: What are your beliefs about money? It has a list of questions I’ll try to answer:

Do you believe more money will make you happier?
To a point. Money can’t buy happiness, but it can buy off the causes of unhappiness, after which you have no-one to blame but yourself.

Do you spend money as soon as you get it?
No – I’ve been in “saving & investment” mode for at least 5 years now, eventually I’d like to buy a place to live. The house price situation in Dublin makes this impossible for the forseeable future.

Do you have enough money?
For my current needs, yes, but the future is uncertain.

Where does money come from?
It’s an expression or relative value: it’s a number that specifies how people see the values of various things at various times.

Does making money require hard work?
I think there’s enough evidence to suggest that the easiest way to make money is to have money.

Does money corrupt?
No. If a person is corrupt, money is just the vehicle that carries them across that burning bridge.

What can money buy?
Anything acquired or created by people. Including people.

Is there a shortage of money in the world?
See “Where does money come from”, and Economics 101 about what happens when governments try to print money with no value behind it.

Do you want to be rich?
Do you deserve to be rich?

Depends on how you define “rich”. In some ways, I feel that I am already rich, but it’s not reflected in my bank balance.

How much money does it take to be rich?
If you don’t have to worry about money, you’re rich. There are people who don’t have to worry, but still do, which is missing some important point.

The concert is almost over; a single encore (Hotel California) isn’t enough, they’re doing a Joe Walsh number, possibly Rocky Mountain Way. Half the taxis in Dublin are tailgating outside my door, cruising round the block, as the first crowds hit the street. That extended voice-box solo would clear any venue, which must be why it’s at at the very end of the show.

Not had enough? A Don Henley number, All She Wants To Do Is Dance. Already Gone? Or staying for the closer, Desperado? The thousands who have already left probably didn’t know that was coming, and so what if they went past the 11PM watershed? Good Night, Dublin.

Written by brian t

June 10, 2006 at 11:03 pm

weblarney

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Though I’m based in Dublin, Ireland, I’m not an “Irish Blogger”. The fact that I’m not Irish is only the half of it: I seem to have a completely different attitude to the “local” bloggers, starting with the concept of “local”.

For starters, I place very little importance on location and/or nationality. Of course these factors will be relevant to what I write, because they’re interesting details, but I could be in the UK, Europe, USA or Canada, for all the fundamental difference it makes to me. There are countries where location is a major influence – countries with reduced internet or press freedom – but Ireland is not one of those.

This is partly why I find the upcoming Web2Ireland conference amusing, but not terribly interesting. It’s got an Irish slant to it. It’s organised by an Irish government body, Enterprise Ireland. I’m not in the target market, as the blurb says:

Web2Ireland is for entrepreneurs, investors, software developers and for those in academia, politics and public policy.

Finally, and most importantly, my views on Web 2.0 would be completely out of place. I wrote a bit about this last week, but I would summarize my position as seeing Web 2.0 as an attitude that informs what you do and how you do it. It’s not a product, or a technology, or a standard, or anything else that can be neatly packaged in a form fit for sale to anyone.

While government is all about centralisation of power and resources, the web is about decentralisation, disintermediation, the removal of barriers between people and information. I see no need for any national government, Irish or otherwise, to try to “shape the agenda” or “help our country catch up”. It’s already here, because it’s already everywhere, it does not respect borders any more than Web 1.0 does.

Besides, how Web 2.0 is it to have a registration process that involves downloading and filling in a Microsoft Word document? Web 2.0 is as Web 2.0 does, people. This sends the message that your parochial little conference will be all talk, and no action. No thanks; I can wait for reboot at the beginning of June, my flights and hotel are already booked.

Written by brian t

April 18, 2006 at 12:58 pm