I have never understood why the idea of usury was never applied to credit card APR's, overdraft fees and my favourite, "pay-day" loans.
There had been a Banking Regulation in the United States, Reg Q, that limited the interest rate banks could pay on savings deposits. In a twisted logic this regulation was intended to stop loan-sharking. I will admit, I never understood the connection except in an inverse relationship.
Somehow, a limit on the interest that could be paid on deposits was intended to limit that which could be charged on loans. Of course in a regulated banking system a maximum spread between deposit and loan rates could be set. But how that would have any impact on an unregulated and illegal loan-sharking world is beyond me.
What appears to have happened is that the banks, especially over the last couple of years in response to revenue losses resulting from the financial crisis and the introduction of new regulations have started to move into the loan-sharking space.
Yes, this might strike many as somewhat of an exaggeration. The common image of the loan shark is someone who lends you $10,000 today and demands to be paid $20,000 in two weeks. And yes, there is usually the added incentive of the threat of violence in the event of non-payment.
Now look at payday loans which initially were licensed by "non-standard" lenders. In the name of free market capitalism these lenders were allowed to provide loans to those that didn't qualify for standard loans from banks. In a 2001 report comparing short-term "payday" loans it was found that the rates charged by legal non-standard lenders in California were often considerably higher than the interest rates charged by Chicago crime syndicates for the same loan.
Fast forward to the present. The Franks-Dodd Regulation has instituted limitations on first-year credit card fees and on late fees and restrictions on APR increases as well as the outright prohibition of overdraft fees without opt-in. It was found that some banks charged as much as $300 a day for the use of an overdraft facility on top of the interest charged.
The first response by many banks was to unilaterally raise their APR's, despite the fact that losses and their costs of funding-look to see what your bank deposits earn-have come down. As the banks come under more political and regulatory pressure the terms for APR's will presumably start to decrease on their standard products. The response of the banks has been to go down the credit curve in their search for more profitable areas to exploit.
Banks that claim they could never offer a sub prime credit card with a 30% APR have felt no qualms in moving into the lucrative unsecured loans market that is virtually indistinguishable from the payday loan market, except that they are marketed as "deposit advance loans". They are offered to customers with checking accounts, which is intended to demonstrate that they are not shady loan providers operating in a non-regulated area with shoddy documentation. Now they are above board in charging APR's of 200% and more.
They go further however. To avoid being accused of usury, they don't charge interest rates, but rather flat fees. These too, like the term "deposit advance" loans are another example of changing the name but not the activity. The effective annualized compound interest rate is easily in the triple-digit range.
The only positive in all of this is somewhat ironic. By moving into the "payday" space banks are gathering in people who had no access to bank credit. Despite the fact that the rates charged are exorbitant, they are not accompanied by insinuation or even overt threats of physical violence. It is interesting to see what was an illegal activity be brought into the mainstream, despite the predatory aspects of the activity.
It leaves me in this holiday season wondering what other illegal activities would benefit from being brought into a legal, regulated framework...
Seasons Greetings!
Thursday, 23 December 2010
Wednesday, 22 December 2010
Putting Some Bite into the European Union Eastern Partnership....
It might surprise a number of readers that in addition to concerns on the health of the Euro and the European Union (EU) there is an ongoing undercurrent of how the EU and Russia are interacting in the former East Bloc and Soviet republics.
Following WWII the Soviet Union essentially created a buffer zone consisting of former nations which were allowed to maintain an external semblance of independence such as Poland and those countries which were physically absorbed into the USSR such as the Baltics, Belarus, Moldavia, the Ukraine, Georgia and the various republics in the Caucasus.
Given the recent preoccupation with the Euro and the EU in general there has been a lot of talk with very little action on the "West's" part while Russia continues to re-establish its control in these countries.
Russia has taken advantage of its economic weight and the ambivalence surrounding the role of NATO to actively pursue pro-Russian policies in the former Soviet space. It has played both sides of the "good cop/bad cop" role in trying to influence the ongoing discussion as to the efficacy of NATO in its current format/membership as well as the burning question of allowing former Soviet Republics such as the Ukraine, Moldavia and Georgia to join or not.
Part of the European response has been the creation of the relatively toothless tiger known as the European Union Eastern Partnership (EUEP). Its major support has come from Poland-a nation that is very concerned with Russia's activities on its borders and dreams of former Polish glory and Sweden, a nation also reflecting on past grandeur, that last graced the European stage in the 18th century culminating in a string of wars against Russia, each one more disastrous than the last.
Now suddenly albeit subtly, Germany, which has its own share of East European history, has entered the fray flexing its muscles. Generally the Germans have been somewhat accommodating to the Russians working closer with them then many of the other members of the EU would like. But German interest in the region is potentially a significant boost to the EUEP.
Germany is a financial powerhouse and has been the conduit through which much of Russia's actions both economically-pipelines and energy transit agreements- as well as politically have been co-ordinated.
It was therefore somewhat surprising that Werner Hoyer, German Minister of State in the Foreign Ministry spent yesterday in Moldavia meeting with the Moldovan Minister of Foreign Affairs and European Integration Iurie Leanca.
Moldavia is in the throes of forming a ruling coalition following contentious parliamentary elections in November. The EUEP under Poland and Sweden have been pushing for a pro-EU party while Russia is working to install a pro-Russian government.
Now the Germans have apparently thrown their considerable weight into the pro-EU camp. This is significant as it pits Germany against Russia and will prove to be an interesting case in determining who has more power in influencing the affairs of those states in the border regions of Europe and Russia.
Following WWII the Soviet Union essentially created a buffer zone consisting of former nations which were allowed to maintain an external semblance of independence such as Poland and those countries which were physically absorbed into the USSR such as the Baltics, Belarus, Moldavia, the Ukraine, Georgia and the various republics in the Caucasus.
Given the recent preoccupation with the Euro and the EU in general there has been a lot of talk with very little action on the "West's" part while Russia continues to re-establish its control in these countries.
Russia has taken advantage of its economic weight and the ambivalence surrounding the role of NATO to actively pursue pro-Russian policies in the former Soviet space. It has played both sides of the "good cop/bad cop" role in trying to influence the ongoing discussion as to the efficacy of NATO in its current format/membership as well as the burning question of allowing former Soviet Republics such as the Ukraine, Moldavia and Georgia to join or not.
Part of the European response has been the creation of the relatively toothless tiger known as the European Union Eastern Partnership (EUEP). Its major support has come from Poland-a nation that is very concerned with Russia's activities on its borders and dreams of former Polish glory and Sweden, a nation also reflecting on past grandeur, that last graced the European stage in the 18th century culminating in a string of wars against Russia, each one more disastrous than the last.
Now suddenly albeit subtly, Germany, which has its own share of East European history, has entered the fray flexing its muscles. Generally the Germans have been somewhat accommodating to the Russians working closer with them then many of the other members of the EU would like. But German interest in the region is potentially a significant boost to the EUEP.
Germany is a financial powerhouse and has been the conduit through which much of Russia's actions both economically-pipelines and energy transit agreements- as well as politically have been co-ordinated.
It was therefore somewhat surprising that Werner Hoyer, German Minister of State in the Foreign Ministry spent yesterday in Moldavia meeting with the Moldovan Minister of Foreign Affairs and European Integration Iurie Leanca.
Moldavia is in the throes of forming a ruling coalition following contentious parliamentary elections in November. The EUEP under Poland and Sweden have been pushing for a pro-EU party while Russia is working to install a pro-Russian government.
Now the Germans have apparently thrown their considerable weight into the pro-EU camp. This is significant as it pits Germany against Russia and will prove to be an interesting case in determining who has more power in influencing the affairs of those states in the border regions of Europe and Russia.
Saturday, 18 December 2010
It's All About the Narrative
It is interesting to see how terms from specific disciplines make their way into the vernacular of the media over time.
For me the first real example of this was on a return to the USA in the early 90's on a business trip and I noticed that what had previously been terminology reserved for the financial industry had been assumed by the news broadcasts and the newspapers. Walking down the street in New York the snippets of conversation from little old ladies to young fashionistas all seemed to be totally preoccupied with things financial.
Recently as the entire family got together for the holidays I found that the idea of the "narrative" was common across different academic courses as my son spoke of the narrative within political science and history, and my daughter discussed the role of the narrative in the medical context.
My wife too chimed in as in her recent Masters Degree in Design History she said after the first couple of weeks she was being driven to distraction by an apparent preoccupation with the idea of the narrative in the History of Design.
I for my part can't remember having been confronted with the concept in my various degrees from over 30 years ago, and certainly not within the context of a trading floor or even the boardrooms of various financial institutions.
And yet this weekend in both the International Herald Tribune and the London Sunday Times the term was used by two very different writers to describe totally different situations all in the same vein as regards the importance of understanding the narrative.
My interest is that I generally think of the narrative in terms of literature, and more specifically fiction, so although I now understand the use of the concept, it did seem somewhat removed from what is actually happening-in the first instance.
But the more I reflect upon it, the more useful it becomes.
I have just finished reading "The Best and the Brightest", and although the term was not used explicitly, I find myself using it to understand what the underlying (hi)story of the relevant participants and its significance, whether it was on an individual basis, within a political party or government office, or on a national level.
The next book on the agenda is "The Selling of the President". After the dog's breakfast of the Johnsonioan entry in the the Vietnam conflict with all its myriad narratives I look forward with some trepidation to see how Madison Avenue, whose sole purpose is to create narratives, propelled Richard M Nixon into the White House.
For me the first real example of this was on a return to the USA in the early 90's on a business trip and I noticed that what had previously been terminology reserved for the financial industry had been assumed by the news broadcasts and the newspapers. Walking down the street in New York the snippets of conversation from little old ladies to young fashionistas all seemed to be totally preoccupied with things financial.
Recently as the entire family got together for the holidays I found that the idea of the "narrative" was common across different academic courses as my son spoke of the narrative within political science and history, and my daughter discussed the role of the narrative in the medical context.
My wife too chimed in as in her recent Masters Degree in Design History she said after the first couple of weeks she was being driven to distraction by an apparent preoccupation with the idea of the narrative in the History of Design.
I for my part can't remember having been confronted with the concept in my various degrees from over 30 years ago, and certainly not within the context of a trading floor or even the boardrooms of various financial institutions.
And yet this weekend in both the International Herald Tribune and the London Sunday Times the term was used by two very different writers to describe totally different situations all in the same vein as regards the importance of understanding the narrative.
My interest is that I generally think of the narrative in terms of literature, and more specifically fiction, so although I now understand the use of the concept, it did seem somewhat removed from what is actually happening-in the first instance.
But the more I reflect upon it, the more useful it becomes.
I have just finished reading "The Best and the Brightest", and although the term was not used explicitly, I find myself using it to understand what the underlying (hi)story of the relevant participants and its significance, whether it was on an individual basis, within a political party or government office, or on a national level.
The next book on the agenda is "The Selling of the President". After the dog's breakfast of the Johnsonioan entry in the the Vietnam conflict with all its myriad narratives I look forward with some trepidation to see how Madison Avenue, whose sole purpose is to create narratives, propelled Richard M Nixon into the White House.
Friday, 17 December 2010
Is It Politics Or Is Dr Steinmeir Correct?
Yesterday the leader of the Opposition in the German Parliment stood up and made a speech outlining the denouement of the Euro.
In his address he predicted that the European Central Bank (ECB) is on its way to becoming the "bad bank" for the Eurozone, taking more and more high-risk and overvalued assets stemming from the "eventual core countries" onto its books in order to salvage the Euro while debt restructuring would take place in the periphery zone countries.
Now I am a confirmed supporter of the Euro and the European Union. I believe the launch of the Euro was perhaps done a bit too early. I would have preferred to have seen the introduction of a unified tax, labor law and budget policy for the entire EU before the roll-out of the Euro, but the politics didn't allow for that.
It is ironic that if it were not for the financial crisis we wouldn't have the present Euro crisis. These crisis' however are forcing the issue on the Euro.
Dr Steinmeir is an opposition politician, specifically Chairman of the Social Democratic Party of Germany (SPD) and as such his rhetoric has recently been more populist than usual as he senses the opportunity to regain power in the next election.
This makes it difficult to differentiate between his political posturing, and perhaps a proper analysis of where we are.
But in this case I think he has touched on the keystone to the whole process. There will be a certain amount of debt restructuring. This was echoed at the EU Leaders' Summit in which they announced “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”
Although this is being discussed as a compromise and being downplayed, the fact is that bondholders will take some pain in this. The question will be high up the capital structure the pain goes. There is little doubt that the holder of perpetual subordinated debt will get hurt. It remains to be seen if all subordinated debt and even if senior debt holders will be impacted.
The question of moral hazard would appear to be back in the limelight-which would be the beginning of a more rational allocation of loss which to date has been to the taxpayers.
In his address he predicted that the European Central Bank (ECB) is on its way to becoming the "bad bank" for the Eurozone, taking more and more high-risk and overvalued assets stemming from the "eventual core countries" onto its books in order to salvage the Euro while debt restructuring would take place in the periphery zone countries.
Now I am a confirmed supporter of the Euro and the European Union. I believe the launch of the Euro was perhaps done a bit too early. I would have preferred to have seen the introduction of a unified tax, labor law and budget policy for the entire EU before the roll-out of the Euro, but the politics didn't allow for that.
It is ironic that if it were not for the financial crisis we wouldn't have the present Euro crisis. These crisis' however are forcing the issue on the Euro.
Dr Steinmeir is an opposition politician, specifically Chairman of the Social Democratic Party of Germany (SPD) and as such his rhetoric has recently been more populist than usual as he senses the opportunity to regain power in the next election.
This makes it difficult to differentiate between his political posturing, and perhaps a proper analysis of where we are.
But in this case I think he has touched on the keystone to the whole process. There will be a certain amount of debt restructuring. This was echoed at the EU Leaders' Summit in which they announced “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”
Although this is being discussed as a compromise and being downplayed, the fact is that bondholders will take some pain in this. The question will be high up the capital structure the pain goes. There is little doubt that the holder of perpetual subordinated debt will get hurt. It remains to be seen if all subordinated debt and even if senior debt holders will be impacted.
The question of moral hazard would appear to be back in the limelight-which would be the beginning of a more rational allocation of loss which to date has been to the taxpayers.
Wednesday, 15 December 2010
Brief Note to "A Communist"
It was brought to my attention that the 8 demands in the "Communist" post were very poorly written and, given that I had not put them in quotation marks there was a question if I were perhaps forgetting proper grammar.
Rest assured, they were copied directly from the advisory letter I had read, and so the grammar within the 8 demands was not mine. I was remiss and should have put them in quotation marks.
Mea Culpa
Rest assured, they were copied directly from the advisory letter I had read, and so the grammar within the 8 demands was not mine. I was remiss and should have put them in quotation marks.
Mea Culpa
German Financial Hegemony in Europe
This weekend the European Union (EU)Leader's Summit will take place. News is emerging that Germany will push for a change to the Lisbon Treaty and create a permanent rescue fund for the euro zone rather than the European Financial Stability Facility (EFSF) which expires in 2013.
German success is not guaranteed-all 27 EU members have to approve it. It will the first step in the German plan to redesign the EU in a more rational fashion. Their goal is the creation of a structure which will allow member states whose currency is the euro may establish amongst themselves a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under said the mechanism will be made subject to strict conditions.
To succeed will require some compromise on the part of the Germans-they have already withdrawn their requirement that any states which fail to follow EU fiscal rules will be "automatically" subject to penalty fines and there will be others.
The real goal is evolve to a fiscal union which would also include synchronization of tax, labor law and budget policies-under German control.
It would appear that Germany's willingness to push the idea of a fiscal union despite the fact it would undoubtedly involve some level of fiscal transfers from Germany to the poorer states is predicated on the immediate creation of the permanent fund, which, like the EFSF would be an institution independent of the EU bureaucracy and actually therefore under German control.
I am not troubled by this. I have lived in Germany, and the UK. I have travelled extensively in Western Europe and more recently to former East Germany and Poland. "Germany works" is the best description I can think of.
Many people will see the spectre of Germany's past in this "power grab". I do not. Europe has evolved and will continue to so. It is a functioning democracy, which cannot necessarily be said for all of the EU's members, and certainly not Russia and many of the members of the CIS.
And, in comparison to the opinion of my courtly Baptist lawyer friend the honorable Spencer Bachus, you won't find any German politicians suggesting that the role of the Federal Government is to "serve the banks".
Strangely the German idea of a Social/Market Economy means they still think they are there to serve the people!
German success is not guaranteed-all 27 EU members have to approve it. It will the first step in the German plan to redesign the EU in a more rational fashion. Their goal is the creation of a structure which will allow member states whose currency is the euro may establish amongst themselves a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under said the mechanism will be made subject to strict conditions.
To succeed will require some compromise on the part of the Germans-they have already withdrawn their requirement that any states which fail to follow EU fiscal rules will be "automatically" subject to penalty fines and there will be others.
The real goal is evolve to a fiscal union which would also include synchronization of tax, labor law and budget policies-under German control.
It would appear that Germany's willingness to push the idea of a fiscal union despite the fact it would undoubtedly involve some level of fiscal transfers from Germany to the poorer states is predicated on the immediate creation of the permanent fund, which, like the EFSF would be an institution independent of the EU bureaucracy and actually therefore under German control.
I am not troubled by this. I have lived in Germany, and the UK. I have travelled extensively in Western Europe and more recently to former East Germany and Poland. "Germany works" is the best description I can think of.
Many people will see the spectre of Germany's past in this "power grab". I do not. Europe has evolved and will continue to so. It is a functioning democracy, which cannot necessarily be said for all of the EU's members, and certainly not Russia and many of the members of the CIS.
And, in comparison to the opinion of my courtly Baptist lawyer friend the honorable Spencer Bachus, you won't find any German politicians suggesting that the role of the Federal Government is to "serve the banks".
Strangely the German idea of a Social/Market Economy means they still think they are there to serve the people!
Tuesday, 14 December 2010
A Communist Under Every Stone-or Maybe That's Really a Fascist
I just received a copy of an investment advisory letter from a "libertarian" company. Forgetting the fact that it is alarmist/sensationalist bordering on the rabid it is also insidious.
In its zeal to rid us of (any?)government interference it ran through 8 demands from Marx's Communist Manifesto and 'translated' them into modern vernacular. They are:
1. Abolished property rights and applied all rents towards public purposes. [Modern corollary: Don't pay your property taxes, lose your house. So who really owns your house?]
2. Levied a heavy, progressive income tax to equalize wages. [Modern corollary: Combined federal and state marginal income and payroll taxes approach (or surpass) 50% in many U.S. states.]
3. Abolished all rights of inheritance. [Modern corollary: The estate tax.]
4. Confiscation of the property of all emigrants. [Modern corollary: The 2008 "Hero's Act" which forces people leaving the U.S. to pay the equivalent of their estate taxes on the global assets before they turn in their passports.]
5. Centralize access to credit in the hands of the State by means of a national bank and an exclusive monopoly. [Modern corollary: Fannie Mae and Freddie Mac, which make more than 90% of all of the mortgages in the U.S. and have dominated the market for mortgages for decades.]
6. Centralization of the means of communication and transport in the hands of the State. [Modern corollary: AT&T was a legal monopoly for decades. Amtrak is a ward of the states. The government owns all the roads. And the State controls all air traffic.]
7. Free education for all children in public schools. [Note the emphasis on public schools. Paying for education isn't enough. What counts is indoctrinating the kids in glorifying the State.]
8. A common agricultural policy to maximize the productivity of the land. [Modern corollary: Massive ethanol and agricultural subsidies.]
What was great, as well as totally scary was how he concluded that democracy was actually communism and this was the root evil inherent in our governments.
What I don't know is what the author of the report really thinks for the gist was actually that you should buy gold and silver and, because in their view shorting a stock is "no big deal at all – no different than buying a stock", you should short the largest home builder in America!
Now I know if you are trying to stampede people into investment decisions you have to first scare the bejesus out of them so it might be that the anti-democracy diatribe was merely posturing-they didn't offer an alternative-and maybe their readers don't reflect on the underlying message.
Except that is perhaps exactly what is wrong with America. It's always blame something/someone else. And in the pursuit of Mammon it is perfectly acceptable to saw on the limb you are sitting on. How else do you explain getting rid of democracy as a means of making money?
So in the end capitalism is a political movement...
In its zeal to rid us of (any?)government interference it ran through 8 demands from Marx's Communist Manifesto and 'translated' them into modern vernacular. They are:
1. Abolished property rights and applied all rents towards public purposes. [Modern corollary: Don't pay your property taxes, lose your house. So who really owns your house?]
2. Levied a heavy, progressive income tax to equalize wages. [Modern corollary: Combined federal and state marginal income and payroll taxes approach (or surpass) 50% in many U.S. states.]
3. Abolished all rights of inheritance. [Modern corollary: The estate tax.]
4. Confiscation of the property of all emigrants. [Modern corollary: The 2008 "Hero's Act" which forces people leaving the U.S. to pay the equivalent of their estate taxes on the global assets before they turn in their passports.]
5. Centralize access to credit in the hands of the State by means of a national bank and an exclusive monopoly. [Modern corollary: Fannie Mae and Freddie Mac, which make more than 90% of all of the mortgages in the U.S. and have dominated the market for mortgages for decades.]
6. Centralization of the means of communication and transport in the hands of the State. [Modern corollary: AT&T was a legal monopoly for decades. Amtrak is a ward of the states. The government owns all the roads. And the State controls all air traffic.]
7. Free education for all children in public schools. [Note the emphasis on public schools. Paying for education isn't enough. What counts is indoctrinating the kids in glorifying the State.]
8. A common agricultural policy to maximize the productivity of the land. [Modern corollary: Massive ethanol and agricultural subsidies.]
What was great, as well as totally scary was how he concluded that democracy was actually communism and this was the root evil inherent in our governments.
What I don't know is what the author of the report really thinks for the gist was actually that you should buy gold and silver and, because in their view shorting a stock is "no big deal at all – no different than buying a stock", you should short the largest home builder in America!
Now I know if you are trying to stampede people into investment decisions you have to first scare the bejesus out of them so it might be that the anti-democracy diatribe was merely posturing-they didn't offer an alternative-and maybe their readers don't reflect on the underlying message.
Except that is perhaps exactly what is wrong with America. It's always blame something/someone else. And in the pursuit of Mammon it is perfectly acceptable to saw on the limb you are sitting on. How else do you explain getting rid of democracy as a means of making money?
So in the end capitalism is a political movement...
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