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Too Small to Fail

November 20, 2008 in Economics - General | No comments

In “Too Small to Fail, ” The Washington Monthly writes on the success of conservatively-managed small banks in the midst of the financial market collapse. 

Why are small banks succeeding?  First, they are running their business more conservatively; in the tradition of, well, traditional bankers.  Secondly, they develop personal relationships with customers giving them superior information about their customers credit worthiness.   Ben Bernanke terms this being rich in “informational capital.”  Of special note is the following quotation:

“According to FDIC data, the failure rate among big banks (those with assets of $1 billion or more) is seven times greater than among small banks.”

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The worst of capitalism: Fannie and Freddie

September 2, 2008 in Economics - General, Public Policy | Permalink

Should the Treasury bail out Fannie and Freddie?  A recent Economist article gives a level-headed solution: nationalize and then dismantle them.

Most libertarians would say that Fannie and Freddie should fail.  Having these two giant players collapse, however, add dynamite to an already explosive mortgage finance market.  Thus, the short term solution must be to bail out these two entities and nationalize the assets.  Sending Fannie and Freddie a financial lifeline to benefit private shareholders, however, does not make sense and is not fair to taxpayers.  In the words to the Economist, “That is capitalism at its worst: it means shareholders and executives reap the profits, but the taxpayer bears the losses.”

In the long term, a housing market without Fannie or Freddie is likely in the U.S.’s best interest.  Taxpayers won’t be on the hook to bail out private shareholders and the mortgage finance market will likely be more competitive.

“The two Leviathans have squeezed private firms into the riskiest ends of the mortgage market, such as subprime lending. They have not brought sharply lower mortgage rates to America.  Europe, where mortgage markets are fully private, is no worse-off.”

Thus, I whole-heartedly agree with the Economist’s prescription: nationalization and dismantlement is the the best route.

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The success (or corruption) of Microfinance

July 2, 2008 in Economics - General, Health Care in Developing Nations | Permalink

This blog has repeatedly reported on the success of microfinance organizations such as Nobel-prize-winner Muhammad Yunus’ Grameen Bank and ACCIÓN (see 26 Mar 07 and 26 May 06 posts). Up to this point, the organizations who have worked to make loans to the world’s poor have been nonprofit organizations. Now, however, The Economist reports (“Doing good…“) that CompartamosBanco is a private for-profit business who is aiming to make money making loans to the poor.

Having for-profit businesses service loans shows that microfinance is expanding. The profits from these loans can be used to offer more and more loans to the the world’s poor. However, for-profit firms do charge high interest rates. Interest rates at CompartamosBanco are currently 79%. These figures are so high because it costs $152 to service the average $450 loan.

While Muhammad Yunus is somewhat troubled by the advent of for-profit microfinance, ACCIÓN has partnered with CompartamosBanco on some projects.

Should microfinance be a for profit business? What is your opinion?

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