[ExI] Micro-loan programs not as successful as hoped

[Dan]

I'm not sure microlenders here are creating money. My impression was they have 
money that they loan out -- not that they are, say, like fractional reserve 
banks or fiat money central banks, producing money beyond their reserves.

As for charging interest, there's nothing fundamentally wrong with this. Market 
interest rates, setting aside other coercive interferences in them, basically 
have three components: a risk premium, a price premium (which confuses things a 
little here, but that's the terminology), and time preference. The first is the 
lender's assessment of how likely it is for the borrower to pay back the loan -- 
the risk of default, in other words. The second is what the likely inflation is 
going to be when the loan is paid back. For instance, if inflation were going to 
double the money supply by the time of payment, the lender would want to be paid 
at least twice the amount back.

The third, however, is a stumbling block for most people. Time preference is how 
much someone values the present over the future -- or, more particular, a 
present good or service or what one believes its future otherwise equivalent 
good or service (this is, of course, based on subjective valuations -- not 
physical identity). For a trade to happen here, there must be a difference in 
how the lender and borrower value these things. (This is true of all trades. 
Trades only happen because people have different valuations for things.* If, 
say, you value my apple more than your pencil and I value your pencil more than 
my apple, we have the basis for a trade.) In essence, the lender and borrower 
must come to some agreement on what's to be loan, for how long, and what's to be 
paid back. The difference, in money terms, in what's paid back is the interest. 
(The interest rate is merely dividing the money amount of what's paid back by 
what's loaned out over a specific time period -- and stated in percentage 
terms.)

Plugging this back into people complaining about high interest rates, this only 
amounts to people not liking the interest rates being offered. There is nothing 
scientific about this -- in other words, if it's uncoerced, these interest rates 
are merely what people agree to pay and no third party can say they are too high 
or too low. In an uncoerced setting -- which doesn't mean nirvana or a setting 
where everyone gets whatever she or he wants -- there is no such thing as the 
interest rate being wrong. (And if particular people can't agree to trade here 
-- as happens often enough as merely wanting to lend or borrowing or buy or sell 
doesn't always end in a trade -- then the trade simply doesn't take place.)

Regards,

Dan

* This is not to say the valuations don't change. In the example that follows, I 
might latter regret trading my apple for your pencil. Of course, any trade is 
going to be forward-looking with the people trading both expecting to be better 
off in the future -- maybe immediately following the trade or, in the case of 
long-term loans, years afterward. (Think of someone who trades nights when she 
could be out partying for night school to get an advanced degree. Her benefit is 
definitely not immediate and she might be completely wrong about her 
expectations: maybe her goal was more money, but she finds she doesn't make 
enough to even cover the student loans.)


From: Stefano Vaj <stefano.vaj at gmail.com>
To: ExI chat list <extropy-chat at lists.extropy.org>
Sent: Tue, November 23, 2010 9:38:33 AM
Subject: Re: [ExI] Micro-loan programs not as successful as hoped

2010/11/22 Dan <dan_ust at yahoo.com>:
> Basically agreed. When people complain about a price being too high or too
> low (in an uncoerced setting*), they demonstrate a misunderstanding about
> how prices work. None of these claims hold up under scientific scrutiny.

OTOH, money need not be supplied "for a price", let alone after having
been produced out of thin air by some private entity.

-- 
Stefano Vaj


      
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