Grameen Bank Takeover in Bangladesh: Bad Economics.

I wrote earlier about the great work of the Grameen Bank and the Grameen Foundation, groups I have supported for many years.  Founder M. Yunus invented the concept of “microloans”, a tactic that has been helping the poor for many years.   In 2006 Yunus received the Nobel Peace Prize for this pioneering work.

Unfortunately the Bangladesh Government is now in a power play to take over the bank, jeopardizing the welfare of the millions of women and their families who benefit from the bank.

I’d encourage anybody interested in the well being of poor folks to write the government of Bangladesh here:  , urging them to reconsider this bad takeover move.

Here’s the letter I wrote them in June , feel free to copy from it.    I think more important, however, is to write your Congressperson and your Senators to let them know this issue *matters to you*, and that the USA can stand against unwise bureaucratic power plays that will reduce the effectiveness of the Grameen Bank – perhaps even destroy it.

Here are contacts for your Congressperson:

Your Senator:

You don’t need to be Shakespeare here – just let them know you are concerned about the Grameen Bank Takeover and you’d like to know what they are doing about this.

At my son Ben’s commencement address the speaker did a great job of talking about the difference between “first world problems” and “developing world problems”.    Here, we fret over standing in line or the color of our clothes or the price of a fancy restaurant.    There, people worry mostly about feeding their kids, getting them schooling, or surviving   diseases that are virtually unknown in the USA.    Sure we have real problems too.    Health issues, abuse, education, and more.   But on average our challenges are far less than in most of the rest of the world and we can and should support efforts like Grameen that are building viable micro-economies based on free enterprise and entrepreneurial spirit.  These are super low cost, high ROI approaches to poverty and they deserve our support and our political klout.

… Hey, thanks!

Got Optimal?

It seems to me that one of the most underrated notions in the world is that of the “optimal” arrangement.    You hear a lot of folks talking about things like  “exploitation”, “growth”, “fairness”, “maximizing profits”, etc, etc, but it seems to me we don’t talk nearly enough about how to structure the world in the way that best benefits the most people, ie to seek the optimal arrangement given the needs and contributions of all the players involved.

Nearsighted conservatives will sometimes mistake that kind of discussion as “socialist” because they see it as veering away from the competitive, individual forces that very effectively drive  highly productive economies, but they forget that in the game of economics we should generally be looking at metrics such production divided by number of people (GDP), and this number will be bigger if we optimize correctly.

The left in this sense is usually too “far sighted”, looking to distribute the wealth that may vanish if we eliminate those individual and corporate competitive structures that are the hallmark of industrialization and the spectacular rise in the average standard of living in the industrialized world over the past century.

So, how to optimize things?   Economist Vilfredo Pareto  (OMG he’s Italian?!  economic credibility challenge alert!) had some neat ideas with respect to optimizing systems where we’d examine them to find ways to increase the well being of some participants without decreasing that of others.

I think this simple basic idea should factor in a lot more, especially for those who fret a lot about the inequitable distribution of production towards the rich.    Those folks generally, and very wrongly, assume that redistribution won’t have negative effects on production.    It will, although that certainly does not mean we should not redistribute anything.   It just means we need to redistribute with *great caution* to avoid the catastrophic kinds of problems faced by basket case economies like North Korea.

I think the single greatest challenge of optimizing is the degree to which you factor in the needs of other nations.   Optimizing with the rural Pakistan peasantry in mind is different than if we draw our lines at the US border and say to heck with the needs of everybody else.   Although I believe we have a moral imperative to take the needs of the world into much better account than we do now, I also recognize that it’s not practical or even possible for those of us who enjoy the many benefits of industrialized capitalism to successfully integrate our economies with those of countries like North Korea or China or even very friendly “economic allies” like India.     Fortunately for those guys – and probably for us too – industrial globalization and the communications  and technology revolution are handling much of this task, often via the invisible hand of Adam Smith style free marketeering.

The future … is better optimized !

Those poor folks in the 99% who only have 8 million to their name.

After some time looking I finally found the number I’ve been after, which is the cutoff point in terms of the wealth of those elusive and mysterious  “1% people” everybody is talking about.  Here’s the excellent research document:

We learn that the cutoff for moving from the impoverished 99% to those nasty ONE PERCENTERS is …. wait for it …. a  Net worth of $8,232,000 or more..


So here’s the problem if you are an anti occupation person – those one percenters SURE have a LOT of money!    In fact as you go into the category of the super duper rich – the top tenth of a percent, you get wealth so great it’s hard for most of us to even imagine – hundreds of millions of dollars.

HOWEVER if you are a “pro occupation” person I think you have even a bigger problem, and that’s the thing most  would not even call a “problem” at all, it’s the fact that we are SO prosperous here in America that millions and millions of people who are well below the “one percent” mark are incredibly well off .   Somebody with 7 million in the bank won’t make the 1% cut, but clearly they are very rich.

How moved should we be by a movement that considers millionaires to be among the disadvantaged in America?  

Of course the 99% folks don’t mean it literally, rather they are concerned that a small number of elite rich folks control the whole show.   It’s an important topic, yet it seems to me the concept of exploitation of the poor by the rich weakens as you examine closely the actual data as well as the procedures and power structures as well as how things work in the country’s business and political circles.  Lots of redistribution is already taking place, though tax critics will reasonably note that taxes go mostly to entitlements for the middle class and the defense department.   Higher taxes are not necessarily a path to “greater fairness”.

Certainly we want more even distribution of America’s massive wealth, but it’s also important to keep the production levels high so we have something to redistribute.  This balance is not easy.  Not easy at all.

To Prosper or NOT to ?

Last year I began an experiment with PROSPER peer to peer lending.    The concept is great – cut out the banking middlemen and middlewomen, delivering higher returns to lenders and more borrowing power to investors.     Years ago PROSPER struggled with its initial implementation, running into SEC issues which, I think, related to them effectively overreporting the interest PROSPER lenders could reasonably expect to get.   Part of the trick here is that as far as I can tell their are a LOT of borrowers on Prosper who have no plans to ever repay the loans.   They are assuming, perhaps reasonably, that collections on these small, unsecured loans in this wild online environment will be inadequate and they’ll simply default on them without much consequence.
My strategy last year was to start by lending a total of $500 to the  “higher risk, higher return” types of loans.  After noting that the return appeared positive I added $2000 to this amount for a better test of the overall return.
I pretty much forgot about this experiment until last week when I logged in to see what was going on with my PROSPER investment.   Unfortunately  it’s very hard to tell if the return is even positive.  They provide me with several numbers but they are confusing. The 4% return they cite seems like the return I’m getting so far – clearly NOT good enough to hassle with this and take the risks,  even though it appears I also have an extra 2% from “bonuses” that are given for investing in certain loans at certain times.
All that said, it’s possible I’m going to start to make a much higher return now that the “bad loans” appear to have defaulted.   I intentionally picked risky loans that said they’d have a much higher net return  and I’m still not clear if Prosper reflects this in the current stats.     The average “expected” return on my loans per Prosper would have been well over 10%, so if I wind up with 4%  it would seem Prosper could be up to their old trick of under-reporting the risks and/or inflating the expected returns.
Note that with fairly small investments – like my $2,500 in this Prosper Experiment – your TIME starts to  matter more than extra money.    Making an extra 1% on 2500 is only $25 per year, so it’s worth an hour or two of hassle time but NOT WORTH many hours of hassling, extra tax issues, etc.
I’m skeptical that Prosper offers more than a few extra percent if even that much.  THUS thus it would only be worth hassling with if you were investing tens of thousands.   In THAT case there is some serious uninsured risk involved, so I’m leaning against Prosper until I see more results from others who, like me, have tested them out and hopefully, unlike me, can figure out the Prosper reporting.
Prosper loans are often paid early or defaulted, which complicates the earnings calculations a lot.    They also do NOT pay interest on the ‘float’, or time between funds going into your account and getting invested.   Thus you’ll always have some days – perhaps months – where you earn 0% interest.   Not a big deal in the current interest environment but even a few weeks at 0% will trim a total rate down quickly.   I think there are “auto invest” options to lower this float time and I don’t think it’s scandalous – but it’s not a good thing.
Also, the tax issues alone appear like they may be a major hassle with Prosper.  I think one may need to report the total interest and then deduct the “bad loans” as capital losses or gains to avoid overpaying on interest received.  This is NOT a simple deal since one generally funds dozens of notes per year.   I’m still confused by this part of the PROSPER adventure.
Of course if LENDING is a bad idea at Prosper, Borrowing may be a GOOD idea, though I’m wondering if those who simply default immediately are the big beneficiaries here.    The interest rates on borrowing seem incredibly high with Prosper – much higher than a home equity line or even many auto borrowing situations, so if you pay it all off you are going to be paying … a fairly high rate of interest on these small loans.
Overall I’m thinking this may be a “high risk” loan environment and therefore not all that Prosperous one for anybody.
I’ll have more in another post where I’ll show my statement to see if others can figure it out.

Eat those mofo CEOs! Or maybe not.

For me the  “Eat the Mofo CEOs!” argument, aka “CEO pay is an outrageous inequitable violation of human rights”, etc, etc.  isn’t necessarily wrong, it’s just very incomplete.

What we DO KNOW is that most folks are a lot better off here in USA than in most of the alternative economies.  This is particularly true for those of us making more than a modest amount per year, but I think it’s hard to make a case that even welfare folks here are not better off than in, say, any of the other top 10 populated countries with perhaps Japan as an exception.

What has generated that prosperity for so many?    Certainly “high CEO pay” is at best only a small factor in this, but I’m not clear how you can start modifying things like “maximum CEO benefits” without running into some complications with innovation and productivity.

One can reasonably note that there’s not a correlation between CEO pay and corporate productivity  (at least I think this is indicated by several studies).   However a better question is really “is there a correlation between the lack of intervention in economies and productivity?”.   This has been tested now for many centuries across many countries, and we generally find that lack of intervention seems to create more total wealth and massive intervention as in old school communist crazy stuff tends to bring a sh**storm of economic trouble.

However US style ALSO seems to push the distribution more to the rich.    Of course it would be better to have more equal distribution IF you could keep all that productivity, but how do you arrange that?

It’s the biggest question of our lives.  I don’t have the answer, but when I look around the USA (where distribution is NOT equitable even after heavily progressive taxing of the rich) I see a LOT better standard for pretty much everybody than when I look around places that don’t have vibrant capitalistic economies (or have only had them a short time).

One can offer up Scandinavia as the “alternative model” and I’d agree that if we could duplicate Scandanavian standards of living at US scale we should do so.    but I don’t think you could apply that model effectively to a country the size of the USA.   These countries  have some major advantages that have to do with oil wealth and demographics and history.  They are smaller than many US states and thus not really comparable if you are talking about global economic architecture, as you must do when trying to “fix” the many problems the world is facing after the boom and recent mini-bust of the post WWII era.

It seems to me that the *first* line of discussion with respect to any economy needs to be “how do we create wealth?” rather than “how do we distribute he wealth we have created?”

This point is completely obvious to pretty much anybody I talk to from the right or in business, and seems to be completely opaque to many on the left side of the political equation, especially the wall street occupation forces.   Many of those folks seem out of touch with basic business economics and hell bent on the destruction of capitalism – naively assuming that massive productivity will continue under all scenarios, so the only thing we should focus on is making sure the rich don’t get … richer, because then we’ll see all that prosperity flow more equitably to … usually… their causes or even to them.

But be careful what you wish for because when taking a global perspective on things redistribution will not necessarily flow in your direction!   Folks in China and India are living at much lower levels than almost anybody here in the states, so as we work for equitable distribution (as we should), we’ll need to work to get THEM more involved in the economy so they can raise their standards to a fraction of ours!   Globalization is taking care of this right now in the sloppy form capitalism usually takes, but it’s ironic to me that occupiers seem to think the wealth of the super rich should be heading back to mainstreet USA rather than to the truly needy.    Rich or poor, pretty much everybody seems to think they are the underpaid and overworked folks.    Take out a map folks and put your finger on your location.   If it’s in USA then equitable distribution is likely to flow AWAY from you.

I’m all for more equitable distribution IF you can do it without hurting productivity, though I also would like to see that prosperity flow to those who really need it rather than simply bloating the bureaucracy as we tend to do when taxes go up.

Ray Dalio of Bridgewater Capital – the world’s largest Hedge Fund – both makes a ton of money and pays a ton of taxes.    Like most of the rich he pays both a greater total amount and a greater percentage of his income to federal taxes.   His point on Charlie Rose the other night was direct and simple.   Like Gates, Buffett, and legions of other super-wealthy folks Dalio is going to be giving most of his billion dollar fortune away to the poor.   He’d be happy to give it to the government IF they’d spend it wisely, but he knows that they will NOT.

Robert Reich’s interesting 2 minute explanation of the economy. Dude, surely you jest!

In the interest of putting up good arguments *against* my general point of view (which I posted in “Shut up or Cut”, here’s the always-sharp-but- often-wrong Robert Reich. As with most tribal viewpoints, Reich makes several correct points and connects them in ways that are fairly rational. HOWEVER, what you miss with this type of analysis is the full and bigger picture that emerges when the many other factors in an economy are included. It’s a game super smart folks like Reich play super well, but for me it undermines their long term credibility since he’s more advocate and politico here than economist. Reich is a left wing economist and therefore focuses too narrowly on distribution issues as in this video. Compare with the CATO boys – the “right wing” economists who focus too narrowly on the *production* side of the equation. They largely ignore income distribution issues and mostly whine about how tax and government inhibit economic development (good points, but too narrow). On balance I line up more with the CATO views because I think they are far more representative of the forces and ideas that created our massive, vibrant, and mostly successfully economic powerhouse, but I’d like to see more from the right about the desirability of a more level income distribution. NOT so much because it would seem to be “fairer”, but simply because it is likely to create more stability both economically and culturally. So I’d agree with Reich about that part at least.