While I have written many time about the lack of expertise in corporate, sovereign and personal debt I don’t think I have ever addressed the major problems that ultra low interest rates have inflicted upon all of us. Eminent economist Dr. Gerard Lyons one of the UK’s most prestigious economists has done just that. While I agree with a lot of the content of this article I am not sure that he is completely right. We all know quite a bit about how this whole thing affects all of us because most of us are constantly trying to deal with it and to mitigate its affect both economic and political. Perhaps its most insidious effect is that it discriminates at a street level in favour of those those who are creditworthy and against those who are not. It also discriminates against people who have no debt in favour of those who do. It also massively discriminates in favour of those who own assets against those who don’t. To put it bluntly it makes the rich richer and the poor poorer. So much for levelling up. Politically unsustainable ? in the long term almost certainly. In the short term governments do not have a clue. Banks have developed product sets that make a nonsense of the low risk environment. A cartel of UK banks are now all charging overdraft rates approaching 30% per annum. Base cost of funds 0.35%. Credit premium 29.65%. In most cases totally justifiable. If the new tech disrupters had any sense they would undercut the clearers and reintroduce secured lending techniques at a third of the cost and still make a killing.
It seems that the craze for borrowing money for things that you can’t actually afford to pay for has some way to run before it bankrupts half the population. It doesn’t seem to matter what it is going on holiday, repairing or servicing the car that you should never have bought in the first place it doesn’t matter. How about bet now pay later? It is only a matter of time. Regulators take note: this is not good for individuals who need some kind of financial discipline and believe me there are lots of them. Lending has its place in a civilised society so long as it is done responsibly. Where we are now is quite frightening. Instalment debt is just as toxic when you have too much of it and it is not as easy to manage as one might expect. As far as the people who are pushing this stuff they can take advantage of the teckie premium for app based businesses. I feel sorrier for the poor borrowers who after having had a week in the sun are still paying things of nearly a year later and the suntan has gone months ago.
The FCA are apparently launching an investigation after the big three Moodies, S&P & Fitch indicated that they would be raising their prices this year by between 25 and 50%. The dominant position held by these three have raised eyebrow alongside accusations that a de facto cartel exists. We all know that rating agencies only exist to help lazy fund managers do their job without doing any heavy lifting and at the same time keep them safe from criticism when it all goes wrong. When a systemic sub prime collapse came along it became apparent that the ratings couldn’t be relied upon as the analysts they used did not know what they were doing and were a lot less smart than the fast Eddie’s in the Investment Banks. This market sector is ripe for disruption by smart techies.
Howard Tolman is a well-known banker, technologist and entrepreneur in London,We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.For context on Alt Lending please read the Interview with Howard Tolman about the future of Alt Lending and read articles tagged Alt Lending in our archives.
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