Greedy Goblin

Friday, June 24, 2011

Marshmallows will destroy banks

The PuG update: While others are taken by the pre-patch blues, we are keep raiding.
If you check the armory of the firstkillers, you'll see properly enchanted and gemmed 340-350 gear. 2 of them were tanks, 2 healers. And Halfus HC hit the ground. Skill kills bosses, not gear. If you have, you can raid here!

About the damage meter: In soviet guild the guildmasters girlfriend boosts you!

Another - kind of - doomsday prophecy. I claim no less than the well-known system of "let your money work for you" will soon become impossible and those who try it will lose their money. That's a pretty bold claim as banks took deposits and gave loans for centuries profitably.

At first I have to clarify that gaining money is a zero-sum game (if we correct every incomes with inflation). If I get money, someone must lose money. Of course I'm not claiming that the utility of the trade is zero sum. It can be very largely positive sum, just think of the "2 doctors + 3 nurses spend 6 hours in an operating room, patient lives 40 more years" scenario. However at the end the money the hospital gets is exactly the same sum as the patient pays. Of course the value of living 40 years more is much higher than the bill, so everyone is happy.

Now look at the simple loan giving: Adam gives Ben $10000 with 5%/year interest. At the end of the year Ben gives $10500 to Adam. So at the end of the year Adam has $500 more than at the beginning (inflation is 0 in the examples), without doing anything. Of course there is utility transfer behind this action, for $500 Ben purchased the chance of spending $10000 (almost) a year earlier. Ben wanted to buy a car for $10000 and could save $875 every month. Without loan he could do nothing but collect his money for 11.4 months, and then buy the car. With loan he can enjoy it now. On the other hand Adam has to use his old car for one more year, for the profit of $500. If they are happy with their choice, who am I to stand up against this?

The problem (what revealed itself pretty much in the 2008 crisis) is that the above scenario demands Ben to be able to pay in the future. If Ben crashes his new car destroying it and making himself disabled, he can't repay the loan. In the previous century such defaults were rare accidents. If a man had a paying job today, unless something terrible happened to him he had a job the next year (not surely the same job). The accidents could be covered with an insurance or simply distributed among the clients: I give $1000 to 1000 people, 2 will default, the other 998 repay with 5% interest, I got 4.8% profit for my invested $1M.

One can say that as long as the economy is growing, someone will always be able to pay, and as money transfers are zero-sum, people going down means others going up and my profit on them balances my losses on the defaulters. An extreme example, people want to bet $1000 on tossing a coin. Each of them have 50% chance to lose and in that case I can be happy if they can somehow repay $500, defaulting on the rest. So on an average loan I lose $250 capital + the interest. However the winners can pay, so if I give loans for 60% interest, half of the people will pay me $1600, the other half $500, on average I still made 5% profit and the winners are still motivated to get the loan. Distribution of the risks is the key to success!

The 2008 crisis shown that distribution of risks doesn't help. The reason for that is that the chance of defaulting on a loan is not random, despite the bank is blind to it. The Marshmallow experiment shown that the ability to delay gratification is strongly correlated to success. In the last century there were lot of OK paying menial jobs that gave you a salary at the end of the week if you were out of money. Today the jobs need long education. Those who can't give up on having fun today instead of going to school will have no job 5-10 years from now.

If only I could make a reliable Marshmallow test on the clients, I would know who will be able to repay it! Except I just did! By applying for loan, they proved that they want gratification now. Those who were able to delay their gratification don't ask for loan, they have a savings account! So all I should do to remain profitable is not giving loans to those who ask for it and give only those who don't want it. Oh wait!

Seriously! If someone doesn't want a loan and we'd force him to take it, he would put the money to the bank for interest, so he will only lose the difference between deposit and loan interest. It's 99.99% sure that he can pay that little amount. So those who don't want the loan can't default. On the other hand several of those who take loans default. So we can say without doubt that the best predictor for defaulting on a loan is asking for a loan.


Anonymous said...

This whole post is undermined by the faulty premise: "gaining money is a zero-sum game". if this were true then there would be no concept of economic growth and the combined GNP of all nations would have to be a constant when adjusted for inflation.

This is obviously not true. The combined wealth of the world is clearly much greater today than it was 100 years ago.

Anonymous said...

Meh...I have to take issue with this...
First, banks mostly loan to people with collateral - so there's little real risk there. The mortgage crisis occurred because they weakened their lending requirements because the people selling mortgages were interested in immediate profit and lost nothing when the banks went under.
Second, money's really not a zero-sum game. Eg, the US just keeps printing more...
Look at Bitcoin for an interesting experiment.

Azuriel said...

This post is ridiculous.

1) I'm not a scientist, but when the Wikipedia article says:

He performed an experiment similar to the marshmallow experiment, albeit with a chocolate bar, and discovered that ethnicity did not affect deferred gratification at all, while social and economic backgrounds did. [...]

The first follow-up study, in 1988, showed that "preschool children who delayed gratification longer in the self-imposed delay paradigm, were described more than 10 years later by their parents as adolescents who were significantly more competent". A second follow-up study, in 1990, showed that the ability to delay gratification also correlated with higher SAT scores.

...I have to ask what possible use this study has other than to note that social/economic backgrounds are correlated with success. The delayed gratification seems to have nothing at all to do with it, other than being a rather frivolous detail in comparison.

2) Banks have already been giving loans to people that don't need them for, if not centuries, at least decades. Have you ever applied for a loan? In the US, the only time you get approved for a (bank) loan is if you prove that A) you have a job that pays you X amount above your current bills, B) you have assets worth Y amount (that the bank will seize if you default), and C) you have a good credit score, which is a reflection of how bad you are at math (e.g. a willingness to pay interest for extended periods of time for no reason). If I take out a 5 year car loan but pay it back in 2 years, I get a bad credit score. If I take out a 5 year car loan and pay back in 5 years, despite having enough money to pay it off earlier, I get a good score. If I don't get credit cards, bad score. If I get credit cards and don't use them, good score.

In any case, banks will be fine. What happens nowadays is that banks don't even lend money to regular people anymore, they leverage it in exotic financial instruments and then get bailed out if things go wrong.

Lyxi said...

What about education loans?

Suppose one wants to get an education, but can't afford it, and by the time he earns enough by flipping burgers at McDonald's he's too old, tired and jaded.

You're half right when you're talking about consumer credit. There is, however, investment credit. The person who borrows the money thinks he can earn enough back to pay the loan+interest+profit.

Surely, the GDP the world gains by that person's investment helps the world more than the alternate where he didn't invest.

The answer is at least a nice compromise. I heard that the National Bank here in Romania plans to pass a policy requiring all loans for anything to be backed by at least 20% savings from the client. Meaning that who saves more can loan more.

Brian said...

I don't see anything wrong with the basic concept of a's paying a bit extra for the ability to use an item sooner, which can make the item more valuable. Sure, I spend less money on the purchase if I save for 30 years and buy a house rather than buy a house now using a 30 year mortgage. Except in the saving case, I still need somewhere to live. Apartments aren't free, so having the house NOW might be worth the extra mortgage costs.

The financial crisis didn't happen because loans are inherently taken by people who can't or won't pay them back. It happened because banks and average folks stopped treating loans as paying a premium to have money accessible before you saved it up and they started treating loans like a magical cash machine. People saw loans as a ticket to "buying" houses they couldn't possibly save for or afford otherwise, giving rise to "interest only" mortgages and the like. And banks were happy to lend that money, because it gave them a lot of "valuable" mortgages that they could trade to others and, in the short term, get rather large payments from. And houses were of course not the only place this happened, but they were one of the biggest.

It really seems like the banks constructed a system where they did the OPPOSITE of what Gevlon suggests...they actively tried to give out loans very unlikely to get paid back. Because, in the short term, there were benefits to doing so.

Gevlon said...

@Anonymous: US printing $ is still zero sum. US wins, we lose.

@Lyxi: if someone comes with an investment plan, the bank can evaluate the plan itself. Same for education loans (they are investment loans), the bank could evaluate ones previous education scores to see if it's rational to assume that he will graduate and get a job.

En'arka said...

The fact that the Central Banks issue money that is inherently loaned "with interest" to governments make this whole system a pyramidal fraud.

It's funny, it's bullshit, and it's fucking disgusting.

Anonymous said...

Sorry but the zero sum is not correct.

Central monetary agencies increase or decrease the money supply as well as the velocity of the money. ( Milton Freidman suggested the US money supply would be best served by having a computer increase it by 2% per annum rather than relying on the US Federal Reserve. ) In general, money supply is growing.

And this is overly fixated on consumers. BMW borrowing a billion dollars to build a new car plant in South Carolina or Brazil may be as venal as a consumer loan, but it is analyzed differently e.g., ROI, ROE, cost of capital, etc. And it is also not zero sum, a one billion dollar plant could pump 3-4 billion into the local economy.

Imakulata said...

@The last anonymous:
Printing increases money supply but might not increase its value. I'm not an economist but it's clear that with increasing the money supply, the value of currency will decrease.

Casper said...
This is just an opinion column, but it neatly (and entertainingly) sums up what conservatives think about the financial crisis. Take a look if you like.

I usually just dropped a comment and never came back. Today's post's logic seems a bit wobbly overall, but one thing just struck me:
"Those who can't give up on having fun today instead of going to school will have no job 5-10 years from now."
Could you elaborate? Do you mean robots taking over simple labor? Are we going to have howling armies of unemployable people on our hands in a couple of years? :D

Anonymous said...

You’re wrong about the 2008 crisis showing that distribution of risk doesn’t work. The crisis shows exactly what happens when you don’t distribute the risk. The banks were not blind to the distribution of risk, they could see it and manipulate it. US mortgages were sliced and packaged up so that the risk was all clustered into what were later referred to as “toxic” investments, and then marketed as fantastic opportunities to investors who did not have enough transparency to understand what they were getting into, so could not possibly price things correctly. The only surprising part is that people appeared shocked when it all fell down.

You’re in over your head on this subject Gevlon.

Anonymous said...

The system is broken, Goverments passed the buck long ago banks now loan more money than they hold on a daily basis, 2008 was but a glimpse of the future chaos awaiting us, we live on a finite planet using a system of infinite growth all to cater to the M+S , stock up on canned goods and shotguns :-)

Andy said...

Does the money supply increase at the same rate as inflation? If it does, then there's not really "more" money, just larger numbers with the same relative values.

It's like in WoW: in WotLK days, we could do 5000 DPS. Now we can do 13000. Do things die quicker because of this? No, because the rest of the (relevant) content has scaled up too. Just larger numbers all round.

It seems strange to me to suggest that, "The combined wealth of the world is clearly much greater today than it was 100 years ago." Has it? The global economy is a completely closed system, with itself as its only reference point.

The standard of living has, for those of us not living in the third world, obviously increased. Moreover, there are more of us around, so obviously it seems like there is more money around too, but relative to the population, is that really the case?

I realise in some ways it probably is: in Victorian times it seems there really were a great deal of poor people plus a far smaller number of very rich people, with fewer in between. Has the wealth just been redistributed more evenly since then, or has technology merely made everything cheaper, so even poorer people can afford a higher standard of living?

Anonymous said...

At Andy, you want to check out purchasing power parity, and then compare the wealth today and yesterday.

Overall, population seems better off in what they can acquire, indicating an overall increase in wealth

This is just an assumption, though with no hard evidence, as im too lazy to do research for a comment.

Anonymous said...

Andy: "The global economy is a completely closed system, with itself as its only reference point." the economy is most certainly not a closed system. the fundamental building block of an economy is taking in raw materials (resources) from all over the earth and bringing them into the economy. this is called production. economics is not just buying and selling.

the translation of resources to goods is constantly being fed by several things:
- resource discovery: we are constantly finding and exploiting new resources.
- scientific advance: allows us to do more with fewer resources and find/exploit resources which were previously impossible, and in some cases even finding uses for resources which we previously had no knowledge of or use for.
- population growth - more workers equals more production
- education - creates more efficient workers
- equal rights - again, more workers equals more production
- globalization - enables countries which previously were not able to contribute significantly to the global economy. more production and more resources exploited.

furthermore, the whole concept of capital investment is that you are building machinery/infrastructure/whatever which further enables you to bring more resources into the economy and to exploit them more efficiently.

given that the earth is a closed system (not really true), this will all eventually come crashing to a halt, which is the doomsday scenario many are afraid of. I suggest that technological advance can stave this off for quite some time still and potentially get us out of the system so that we can exploit resources which aren't part of the earth.

Anonymous said...

Worldwide economic growth over time can be seen here:

If it's on wikipedia then it must be true...

Alrenous said...

Naturally, the one time you're actually wrong, Squishalot is nowhere to be seen.

I think the argument applies to credit cards, but that's about it.

You'll note a common complaint is that banks will only give loans to those who don't need them. This is because they're aware of the problem and have already solved it.

The US crisis was actually caused by outlawing prudent banking. Responsible bankers were persecuted out of existence. Shockingly, we found out it wasn't racism that was stopping illegal immigrants from getting loans, it was their inability to repay. As judged by the fact they all defaulted.

Well, that and several other mistakes, going all the way back to the founding of the Bank of England. Without fractional reserve, a bunch of bankers losing money is a problem for bankers, not anyone else. With fractional reserve, it represents sudden and severe deflation.

(The Fed then helps by preventing interests rates from responding to the shift in supply.)

Anonymous said...

Money is not a zero sum game.

You put 1000 euro in a bank deposit. The bank is obliged by the national bank to keep (let's say ) 100 euro as reserve .

Next day the bank give your 900 euro as a loan to John. John buy a TV . The store put the 900 money in the bank. 90 reserve , the bank give loan the next day 810 euro to Henry to buy a refrigerator.
And so on and on.

At the end of the week the bank expanded your money . Basically in the economy for that week were 1000+900+810+...+...+...

Is not a zero sum game.

Varuun said...

So we can say without doubt that the best predictor for defaulting on a loan is asking for a loan.

Of course not. Past behavior is actually the best predictor of defaulting on a loan. That's why credit scores are heavily based on things like have you ever defaulted on a loan in the past.

Granted, it's not a perfect system, but without credit, nothing would get done. Credit is not an evil thing. Like everything else, it's something that can be abused (as we've seen in the US), but if correctly used, it can be very beneficial (as we've seen in Canada).

The Gnome of Zurich said...

Your analysis assumes a number of things that simply aren't true.

First of all, the idea that money is zero sum assumes that velocity of money is constant and that the money supply is hard. Neither of these is true in any kind of modern economy (even under a gold standard).

As long as the government does not print money in excess of the growth in economic value, it will not cause inflation, or a decrease in the value of the money, but the money supply will grow -- not zero sum unless GDP growth is zero. In reality they will usually print more, but inflation only eats the amount over and above economic growth.

When GDP growth actually drops, as during the 2008 crisis, you have huge problems, but this is something that only happens rarely except in cases of terrible government mismanagement (i.e. soviet) or if we have some kind of long-lasting worldwide calamity (really awful climate change scenario, for instance).

Secondly, you assume all loans are essentially consumer loans, while most are not.

My business takes loans in a couple forms. One is to make certain large expense bulges without keeping large amounts of money in non-interest bearing accounts. We have a credit line that we can pull from to make payroll if incoming $ are a bit slow, then we pay it back in a couple days -- this allows us to have more money invested in the actual business.

We also have leases or loans on large pieces of equipment. If judge that we can make profit from having a press in excess of the amortization paid on a lease, then it makes sense to purchase it now, rather than to wait 2-3 years until we can save enough money out of current profits to buy the machine whole.

Even most consumer debt is more like a business lease than like your scenario.

Buying a house with a mortgage, saves me rent payments. If I will live in the house long enough and the price is not too high (and I don't buy a much bigger and more expensive house/condo/coop than I would ever rent), then this is a no-brainer. I spend on my mortgage only what I would otherwise spend on rent, but at the end of 15-30 years, I will own my home free and clear. If I wait to save, I might not even be able to do it in 30 years, and it will end up costing me more money.

Student loans are another example that is much like a business loan. I have no money (haven't started working yet), but I need an education in order to get better jobs. I get student loans because I expect to earn more with a BS/MS/PhD/whatever than wtihout it, and for this to be enough of a difference to account for the interest paid etc.

If I wait and try to save money first, I will work half my life before I save enough, losing all the opportunity of having the degree from 20-45.

Then, suppose I work a relatively low wage job and my car dies, I need another to keep my job, but I don't have the $4-5000 needed for a reliable used car. Waiting 6-12 months to save the money might mean losing my job if there are enough hassles arranging transportation. But I can afford the car loan -- why not get it?

All these are examples where applying for a loan are not about failing to delay gratification, but about making a determination that I will be better off in the long run by getting a loan now rather than waiting. And these are the most common scenarios in which people take on large loans.

It's only things like revolving credit card debt and unsecured consumer loans that follow your scenario, and that is exactly why the interest rates on such debt are so high, and why nobody should ever take on that kind of debt except in real emergencies, and then pay it back as soon as possible.

Anonymous said...


Student loans are a bit odd. As far as a debt goes most people recognize that the pain of a student loan now generally will result in a much easier time later on with greater earnings. However, what people fail to do is recognize a reasonable amount of this debt to take. They will take almost the entirety of tuition as debt which in itself is an indicator of future success.

Mortages lending practices gravitate towards requiring significant down payments to buy a home. The average is 20%. The benefit to mortgages is that the asset tied to that loan is not a depreciating asset. It can depreciate but it can also appreciate in value. The trick, to understanding the success of the individual grabbing that loan is the down payment, just like with a car. If a couple has 50,000 cash and they're getting a mortgage, the industry standard would say they could be buying a 250,000 house. This isn't a huge problem but to identify the potential success of that couple you need to look at the couple's behavior after they have bought the home. Does this couple wish to entirely furnish the house after they buy it or are they content with the necessities or just using the furnishings from their apartment until they have replenished their savings?

Campitor said...

Money is an illusion and capitalism can only sustain the illusion by promoting spending. As soon as the spending stops the illusion collapses. It is the belief of this illusion that stops investors from making a run on their banks and placing it in another bank or stuffing it into a personal strongbox. Money has purchasing power as long as people have confidence that it does. What I find scary is that capitalism is the best system we have come up with so far but it all depends on keeping someone from yelling out " hey - the emperor has no clothes!". A self delusion is keeping the world running... I suddenly feel as if I'm in the Matrix.

zenga said...

Pure poetry from Gevlon here:

Skill kills bosses, not gear.
If you have, you can raid here!

Should use that as the slogan for the Pug.

Anonymous said...


Wise analyse of how this system works....people start waking up, next major bankcrash inc.

Varuun said...

Campitor said Money is an illusion and capitalism can only sustain the illusion by promoting spending

Money is not an illusion. Money is a intermediate form of exchange. Without it, there would be no way to exchange good and services other than through bartering, which is significantly less efficient than having a universal intermediate currency.

Here's an example of the mess we'd be in without money. I think you can agree that everyone needs food and shelter. I'll ignore shelter, for the sake of simplicity. Without money, you'd have to grow your own food, and build your own house. To keep this simple, let's say you only need a shovel. Well, you're going to need wood, metal, and some tools to make that shovel. Etc, etc.

What you could do instead, is make a bartering deal with someone else. He makes the tools you need to farm (shovel, etc), and you provide him with food, since you can farm more now that you don't have to worry about tools.

This works great if there are only a few people. But in modern times, you need far more than simple tools. There's food, shelter, health care, transportation, entertainment, etc. Trying to barter for all this is simply too time consuming.

Money, as an intermediate form of currency, makes all of this possible. So no, it's not an illusion. It's an essential component to modern life. It's just been heavily abused in recent years, mostly because greed and fear.

Lyxi said...


Commodity money worked for quite some time. (Despite the commodities had no real value then, you couldn't do anything with gold and silver in ancient times. Now, at least, they have a reasonably large use in precision electronics.)

Any kind of currency suffers from trust. As long as it's backed by 'real stuff', then there's no problem. The illusion often shatters when inflation goes out of control. Just look at Zimbabwe.

Money isn't a measure of capitalism. Capitalism is relatively new, while currency was one of the first inventions of humankind.

True, 'fiat money' is also new, but, as I argued previously, old commodity money (like gold and silver coins) were also floating on the same illusion.

Now then, my previous post was misunderstood even by Gevlon. I merely wanted to say that his doomsday prediction isn't actually true, unless he means a restraint on consumer credit. Because other kinds of credit will still work.

Gevlon's argument leans on hyperbolic discounting. However, in some types of credit, the discounting isn't taking place. Thus, he makes a formally fallacious argument in assuming all premises are unshakeable.

Sometimes, eating a marshmellow now will give you three in the future, rather than saving it now and getting two in the future.

WoWMidas said...

You often provide food for thought, which would be made even better with some basic econ. Gaining money is absolutely NOT zero sum.

To mention two gaping holes in your assessment:

1. Productivity. This allows more widgets to be produced for less money. This puts downward pressure on prices (i.e., restrains inflation).

2. The multiplier effect. The $10,000 you lend goes to pay for something else, which goes to pay for something else, and so on. The more times that happens, the more income is generated.

Samus said...

Gevlon, you seem to have an incomplete understanding of the 2008 financial crisis.

Financial regulations put in place after the great depression were largely removed. The important things were derivatives (you can bet AGAINST a loan being paid back), and separating various financial institutions (the same banks that give out loans to customers can also sell packages of loans to investors).

You're a goblin, so tell me, what devious plan would you come up with if you could A) sell your loans, and then B) bet against them?

That's right. You intentionally take out bad loans, sell off those loans to investors (by lying to them), and then bet against your own loans.

This is all fine and goblinish until so many banks do this, and so many loans fail, that the real estate market actually crashes. Now the "good" loans that you did NOT sell off start failing too (especially because those smart, responsible "good loan" people know what to do when you owe more on a house than it is worth -- walk away!).

It is worth pointing out that Goldman Sachs sold ALL of their loans, and made tens of billions of dollars off of the financial crisis.

It is also worth pointing out that the financial regulations have NOT been replaced, and it is still 100% legal to bet against the US economy and then intentionally crash it.

Stubborn said...

I'm not discussing your main point, since so many others have done so. However, your argument about people going to school versus having fun, I'll argue, is problematic but might also actually fit into your thought.

I'll preface this by saying that both my wife and I got advanced degrees (her a PhD, me just a master's) without any debt. We have no credit card debt; I don't even have a credit card, and she's a "deadbeat" user in the sense that she pays hers off every month. The only debt we have is our house, which we put a huge chunk down on to ease the monthly payments and make it less painful if we have to sell in a few years.

So take all this from someone not struggling with debt, but severely allergic to it.

If I go to school and work really hard, I can get a full scholarship. Maybe many. Maybe I can get any degree I want and still be debt free. However, it's extremely unlikely. It's far more likely that I end up in a deep educational debt, which I'm told by Mother Culture to be "okay," but still it's tied around my neck like an albatross (he shot the albatross, you accepted the debt, so it's a fair metaphor).

Now I'm basically forced to work in whatever job I can get, regardless of whether it actually needed a degree of some kind. I go to work and make my money, spending it on paying off my enormous educational debt (look into the statistics, Gev - it's horrifying). Essentially I'm a wage slave.

Compare that to someone who gets no education and has to work a likely menial, perhaps manual labor job. There's not much difference except, perhaps, air conditioning.

The advancement of education in this country helps only the companies who fund educational loans. Most jobs don't need a college degree, they need a training period, an apprenticeship of sorts, and most of them provide that anyway.

I'm a teacher, and I'm really not sold on the higher education system here in the US. Any thoughts? (You never respond to my comments; I'd make a emoticon of a face with a tongue sticking out here, but I know you don't like that. Instead you get several lines of text; see why people do it?)

The Gnome of Zurich said...

"The US crisis was actually caused by outlawing prudent banking. Responsible bankers were persecuted out of existence. Shockingly, we found out it wasn't racism that was stopping illegal immigrants from getting loans, it was their inability to repay. As judged by the fact they all defaulted. "

This "explanation" of the crisis has been debunked over and over, but like a zombie, it always comes back to eat more brains.

Samus is much closer to what actually happened.

If you look at the various loan portfolios and which ones had problems, the subprime loans which were aimed at low-income first time buyers did not start having problems until *after* the crisis when the general economy crashed and unemployment rose, and these problems were little worse than those faced by "prime" borrowers.

The subprime market segments which caused the problem were basically liar loans, and most of the people taking them out were middle-class or investors who discovered that they could get stupid/sleazy banks to loan them money for housing they couldn't actually afford, or for investors, give them amounts of leverage they could not realistically handle outside of magical housing markets that never grow less than 5%/year.

All these people getting all these stupid loans bid up prices leading to a bubble, and eventually when the market started to slow, they were all in big trouble. The reason banks were willing to do this is exactly what Samus explains. They were able to sell their bad loans and then bet against them, so they didn't care whether they were any good or not, as long as they met the rules of the buying agents. (And note that the primary buying agents of subprime were not FNMA and FMAC, their portfolios were still mostly prime)

low-income borrowers, as a class, weren't in trouble until all this nonsense ended up crashing the general economy, and the federal reserve and congress did far to little to return nominal growth to trend fearing the wrath of rentiers should inflation uptick even to a non-dangerous 2-4% range -- leading to the longest stretch of >8% unemployment seen in the US since the great depression.

Anonymous said...

Orosei was (it appears) one of your first-time tanks. His armory page currently shows that his tanking gear is missing a number gems (2 empty sockets and no belt buckle) and a number of enchants (head, legs, chest, feet). All of this gear was obtained at least a day before the Halfus kill.

Anonymous said...

I'm surprised by your lack of perspective as a lender, Gevlon.

Let's assume that I make $1,000 more than I spend in a month. What shall I do with it? Unless I consume more or invest in an asset (like stocks, real estate, wine, art, beanie babies, gold, etc.) or put it under my matress, I'm going to lend it.

I can lend it to the guy on the corner saying "i can haz 1k USD pls" (a bad credit risk); I can lend it to you to get past a cash-flow problem (a better credit risk); I can lend it to my bank in the form of an account deposit (a very low-risk choice in the US); I can lend it to a company by buying their bonds (a wide range of risks and returns). In all cases, I am handing over my money in return for a contractual obligation that it be returned at some point with interest.

It's trivial and banal to say that only people who ask for loans default on them and naive to think that all of these lending opportunties carry the same risk. As I lender, I demand interest for two reasons: 1) there's a chance that the principal amount won't come back at all and 2) there is demand for my money and the interest rate is effectively a bid by possible borrowers. But interest alone is not enough. I have no confidence at all the the lolkid will make even one payment, which is where diversification of risk and credit scores come in. Ideally they let me compare otherwise anonymous borrowers so I can choose where to lend profitably.

The best predictors for defaulting on a loan are things like a weak employment record, a history of late payments and debt defaults, a history of criminal behavior, etc. I don't care if a borrower wants the money to buy ice cream or if he keeps a credit card balance. I care whether he can and will repay my loan. What the crisis in 2008 showed is that fraud and loose lending practices will end in losses. This isn't news. The best predictor for losing money while loaning has always been a weak underwriting process.

Campitor said...

:the state or fact of being intellectually deceived or misled.
: perception of something objectively existing in such a way as to cause misinterpretation of its actual nature.

Money is an illusion - if it wasn't its worth wouldn't be so elastic. I stand by my statement. Most of our currency only exists as bytes on a set of computers - just ask the banks who went out of business and their customers. One day your economy is rock solid and your money is strong and then you have an oil spill or a plane hits a building and suddenly it drops in value. Why? The market gets panicky and suddenly decided to dump shares and invest elsewhere because the confidence BEHIND the money is gone. If confidence is the only thing giving your money value then your money is an illusion.

I never said it was a useless illusion or that it doesn't have value but it's still an illusion. And the illusion requires never ending spending. If everyone suddenly became a frugal-Fanny the economy would stop and all of us would be in the crapper.

If I sold you a Picasso forgery so good that no one could tell it was a fake it would have value but if I get up and admit it's a forgery it would be worthless. The painting might be real but its value was only an illusion. You would say you were misled and robbed. Money is the same way - it has value until the market says its worthless. The paper its printed on is real (or the hard drive its stored on) but its worth is only an illusion.

Squishalot said...

@ Alrenous: "Naturally, the one time you're actually wrong, Squishalot is nowhere to be seen."

Sad, isn't it? I missed out on the opening hours of posts!

The marshmallow concept doesn't tell the whole story. Really, all it says is that a person who is willing to defer is MORE LIKELY to be able to repay, and a person who wants a loan is LESS LIKELY. The desires to achieve gratification is a relative thing - if you are willing to defer for 1 year, you are more demanding than a person who is willing to defer for 2 years.

With this in mind, it is worth noting that although banks do offer loans to people who come through the doors requesting a loan, many banks these days now approach customers with offers of loans (i.e. attempting to lend money to the ones not asking for money).

Although the motivation has nothing to do with the marshmallow effect, it is because the bank, with its increased knowledge of its existing customers, is better able to predict the likelihood of repayment in a similar way that the marshmallow effect is a (poor but significant) predictor of academic results. So the actual spirit of the exercise is the same - attempt to target lower risk customers.

That being said - marshmallows will not destroy banks. Banks charge (or are supposed to charge) a sum of interest that covers a) ongoing costs of managing the account; b) the cost of default, over a large number of borrowers; and c) a profit margin on top of this. The distribution of risks is fine as long as you can accurately predict what the risks are. The reason for the GFC in 2008 was because business makers in banks were ignoring the warning signals about the risks and were not adequately pricing for them, not because distribution of risks failed.

Anonymous said...

Central banks increase the money supply _to decrease the value of money_ in a predictable fashion over time. Money's only value is as a medium to facilitate barter. If money's value increases over time, people start piling it under mattresses and trade (and generation of real value) suffer.
If inflation gets too high, people stop accepting money, so there's a happy medium that seems to be 2-4% yearly.

Since there will always be inflation, banks will nearly always be better off lending money somewhere. Unless, you do something silly like letting them borrow at 0% interest, and buy federal bonds at 1% interest.

Anonymous said...

This problem must be considered in the context of a two-level fractional reserve banking system.

If a bank has 10$, at a 10% reserve rate prescribed by law, it can borrow 100$ to somebody. The problem is, the interest the recipient is obliged to pay is not created by the bank. Of course, since there are lots of transactions like it, some will able to pay back their loans, and some will necessarily default on it.