Posted on

How to value toxic assets (part 6)

Via Tyler Cowen, I am reminded (again) that I should really be reading Steve Waldman more often.  Like, all the time.  After reading John Hempton’s piece that I highlighted last time, Waldman writes, as an afterthought:

There’s another way to generate price transparency and liquidity for all the alphabet soup assets buried on bank balance sheets that would require no government lending or taxpayer risk-taking at all. Take all the ABS and CDOs and whatchamahaveyous, divvy all tranches into $100 par value claims, put all extant information about the securities on a website, give ’em a ticker symbol, and put ’em on an exchange. I know it’s out of fashion in a world ruined by hedge funds and 401-Ks and the unbearable orthodoxy of index investing. But I have a great deal of respect for that much maligned and nearly extinct species, the individual investor actively managing her own account. Individual investors screw up, but they are never too big to fail. When things go wrong, they take their lumps and move along. And despite everything the professionals tell you, a lot of smart and interested amateurs could build portfolios that match or beat the managers upon whose conflicted hands they have been persuaded to rely. Nothing generates a market price like a sea of independent minds making thousands of small trades, back and forth and back and forth.

I don’t really expect anybody to believe me, but I’ve been thinking something similar.

CDOs, CDOs-squared and all the rest are derrivatives that are traded over the counter; that is, they are traded entirely privately.  If bank B sells some to hedge fund Y, nobody else finds out any details of the trade or even that the trade took place.  The closest we come is that when bank B announces their quarterly accounts, we might realise that they off-loaded some assets.

On the more popularly known stock and bond markets, buyers publicly post their “bid” prices and sellers post their “ask” prices. When the prices meet, a trade occurs.[*1] Most details of the trade are then made public – the price(s), the volume, the particular details of the asset (ordinary shares in XXX, 2-year senior notes from XXX with an expiry of xx/xx/xxxx, etc) – everything except the identity of the buyer and seller. Those details then provide some information to everybody watching on how the buyer and seller value the asset. Other market players can then combine that with their own private valuations and update their own bid or ask prices accordingly. In short, the market aggregates information. [*2]

When assets are traded over the counter (OTC), each participant can only operate on their private valuation. There is no way for the market to aggregate information in that situation. Individual banks might still partially aggregate information by making a lot of trades with a lot of other institutions, since each time they trade they discover a bound on the valuation of the other party (an upper bound when you’re buying and the other party is selling, a lower bound when you’re selling and they’re buying).

To me, this is a huge failure of regulation. A market where information is not publicly and freely available is an inefficient market, and worse, one that expressly creates an incentive for market participants to confuse, conflate, bamboozle and then exploit the ignorant. Information is a true public good.

On that basis, here is my idea:

Introduce new regulation that every financial institution that wants to get support from the government must anonymously publish all details of every trade that they’re party to. The asset type, the quantity, the price, any time options on the deal, everything except the identity of the parties involved. Furthermore, the regulation would be retroactive for X months (say, two years, so that we get data that predates the crisis).  On top of that, the regulation would require that every future trade from everyone (whether they were receiving government assistance or not) would be subject to the same requirementes.  Then everything acts pretty much like the stock and bond markets.

The latest edition of The Economist has an article effectively questioning whether this is such a good idea.

[T]ransparency and liquidity are close relatives. One enemy of liquidity is “asymmetric information”. To illustrate this, look at a variation of the “Market for Lemons” identified by George Akerlof, a Nobel-prize-winning economist, in 1970. Suppose that a wine connoisseur and Joe Sixpack are haggling over the price of the 1998 Château Pétrus, which Joe recently inherited from his rich uncle. If Joe and the connoisseur only know that it is a red wine, they may strike a deal. They are equally uninformed. If vintage, region and grape are disclosed, Joe, fearing he will be taken for a ride, may refuse to sell. In financial markets, similarly, there are sophisticated and unsophisticated investors, and unless they have symmetrical information, liquidity can dry up. Unfortunately transparency may reduce liquidity. Symmetry, not the amount of information, matters.

I’m completely okay with this. Symmetric access to information and symmetric understanding of that information is the ideal. From the first paragraph and then the last paragraph :

… Not long ago the cheerleaders of opacity were the loudest. Without privacy, they argued, financial entrepreneurs would be unable to capture the full value of their trading strategies and other ingenious intellectual property. Forcing them to disclose information would impair their incentive to uncover and correct market inefficiencies, to the detriment of all …

Still, for all its difficulties, transparency is usually better than the alternative. The opaque innovations of the recent past, rather than eliminating market inefficiencies, unintentionally created systemic risks. The important point is that financial markets are not created equal: they may require different levels of disclosure. Liquidity in the stockmarket, for example, thrives on differences of opinion about the value of a firm; information fuels the debate. The money markets rely more on trust than transparency because transactions are so quick that there is little time to assess information. The problem with hedge funds is that a lack of information hinders outsiders’ ability to measure their contribution to systemic risk. A possible solution would be to impose delayed disclosure, which would allow the funds to profit from their strategies, provide data for experts to sift through, and allay fears about the legality of their activities. Transparency, like sunlight, needs to be looked at carefully.

This strikes me as being around the wrong way.  Money markets don’t rely on trust because their transactions are so fast; their transactions are so fast because they’re built on trust.  The scale of the crisis can be blamed, in no small measure, because of the breakdown in that trust.

I also do not buy the idea of opacity begetting market efficiency.  It makes no sense.  The only way that information disclosure can remove the incentive to “uncover and correct” inefficiencies in the market is if by making the information public you reduce the inefficiency.  I’m not suggesting that we force market participants to reveal what they discover before they get the chance to act on it.  I’m only suggesting that the details of their action should be public.

[*1] Okay, it’s not exactly like that, but it’s close enough.

[*2] Note that information aggregation does not necessarily imply that the Efficient Market Hypothesis (EMH), but the EMH requires information aggregation to work.

Other posts in this series:  1, 2, 3, 4, 5, [6].

Posted on

How much trouble is Europe in?

The 2008:Q4 figures for the EU-countries came out recently.  It’s not pretty.  But a regular recession is nothing compared to what might be coming.

In the understatement of the day, Tyler Cowen writes:

It’s a little scary:

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region’s GDP. Good luck. The credit window has slammed shut….

“This is the largest run on a currency in history,” said Mr Jen.

The naked capitalism entry that Tyler points us to is itself a wrapper for this article in the Telegraph.  It’s a little hyperbolic, but if the facts it’s listing are correct, not overly.  Here are a couple of paragraphs from it:

Whether it takes months, or just weeks, the world is going to discover that Europe’s financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

Under a “Taylor Rule” analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

To this mess we can add the case of Ireland.  Simon Johnson, writing at The Baseline Scenario, observes:

Look at the latest Credit Default Swap spreads for European sovereigns (these are the data from yesterday’s close).  As we’ve discussed here before, CDS are not a perfect measure of default probability but they tell you where things are going – and changes within an asset class (like European sovereigns) are often informative.

European CDS have been relatively stable – albeit at dangerously high levels – for the past month or so.  But now Ireland has moved up sharply (the green line in the chart).  We’ve covered Ireland’s problems here before (banking, fiscal and – big time – real estate); type “Ireland” into our Search box for more.

Interesting times …

Posted on

How to value toxic assets (part 2)

Continuing on from my previous post on this topic, Paul Krugman has been voicing similar concerns (and far more eloquently).  Although his focus has been on the idea of a bad bank (to which all the regular banks would sell their CDOs and other now-questionable assets), the problems are the same.  On the 17th of January he wrote:

It comes back to the original questions about the TARP. Financial institutions that want to “get bad assets off their balance sheets” can do that any time they like, by writing those assets down to zero — or by selling them at whatever price they can. If we create a new institution to take over those assets, the $700 billion question is, at what price? And I still haven’t seen anything that explains how the price will be determined.

I suspect, though I’m not certain, that policymakers are once more coming around to the view that mortgage-backed securities are being systematically underpriced. But do we really know this? And how are we going to ensure that this doesn’t end up being a huge giveaway to financial firms?

On the 18th of January, he followed this up with:

What people are thinking about, it’s pretty clear, is the Resolution Trust Corporation, which cleaned up the savings and loan mess. That’s a good role model, as far as it goes. But the creation of the RTC did not rescue the S&Ls. The S&Ls were rescued by (1) having FSLIC seize them, cleaning out the stockholders (2) having FSLIC pay down enough debt to make them viable (3) reselling them to new investors. The RTC’s takeover of the bad assets was just a way for taxpayers to reclaim some of the cost of recapitalizing the banks.

What’s being contemplated now, if Sheila Bair’s interview is any indication, is the creation of an RTC-like entity without the rest of the process. The “bad bank” will pay “fair value”, whatever that is, for the assets. But how does that help the situation?

It looks as if we’re back to the idea that toxic waste is really, truly worth much more than anyone is willing to pay for it — and that if only we get the price “right”, the banks will turn out to be solvent after all. In other words, we’re still in Super-SIV territory, the belief that fancy financial engineering can create value out of nothing.

Tyler Cowen points us to this article in the Washington Post that describes the issues pretty well.  Again, the crux of the matter is:

The difficulty is that banks think their assets are worth more than investors are willing to pay. If the government sides with investors, the banks will be forced to swallow the difference as a loss. If the government pays what the banks regard as a fair price, however, the markets may ignore the transactions as a bailout by another name.

Tyler Cowen’s own comment:

If the assets are undervalued by the market, buying them up is an OK deal. Presumably the price would be determined by a reverse auction, with hard-to-track asset heterogeneity introducing some arbitrariness into the resulting prices. If these assets are not undervalued by the market, and indeed they really are worth so little, our government wishes to find a not-fully-transparent way to give financial firms greater value, also known as “huge giveaway.”

Right now it seems to boil down to the original TARP idea or nationalization, take your pick. You are more likely to favor nationalization if you think that governments can run things well, if you feel there is justice in government having “upside” on the deal, and if you are keen to spend the TARP money on other programs instead.

Posted on

Negative interest rates on US government debt and Brad DeLong (Updated)

The interest rates on US government debt has turned negative (again) as a result of the enormous flight to perceived safety.  I guess they’ll be able to fund their gargantuan bailouts more easily, at least.

Brad DeLong has written a short and much celebrated essay (available on Cato and his own site) on the financial crisis and (consequently) why investors currently love government debt and hate everything else.  I’ll add my voice to those suggesting that you read the whole thing.  Here is the crux of it:

[T]he wealth of global capital fluctuates … for five reasons:

  1. Savings and Investment: Savings that are transformed into investment add to the productive physical — and organizational, and technological, and intellectual — capital stock of the world. This is the first and in the long run the most important source of fluctuations — in this case, growth — in global capital wealth.
  2. News: Good and bad news about resource constraints, technological opportunities, and political arrangements raise or lower expectations of the cash that is going to flow to those with property and contract rights to the fruits of capital in the future. Such news drives changes in expectations that are a second source of fluctuations in global capital wealth.
  3. Default Discount: Not all the deeds and contracts will turn out to be worth what they promise or indeed even the paper that they are written on. Fluctuations in the degree to which future payments will fall short of present commitments are a third source of fluctuations in global capital wealth.
  4. Liquidity Discount: The cash flowing to capital arrives in the present rather than the future, and people prefer — to varying degrees at different times — the bird in the hand to the one in the bush that will arrive in hand next year. Fluctuations in this liquidity discount are yet a fourth source of fluctuations in global capital wealth.
  5. Risk Discount: Even holding constant the expected value and the date at which the cash will arrive, people prefer certainty to uncertainty. A risky cash flow with both upside and downside is worth less than a certain cash flow by an amount that depends on global risk tolerance. Fluctuations in global risk tolerance are the fifth and final source of fluctuations in global capital wealth.

In the past two years the wealth that is the global capital stock has fallen in value from $80 trillion to $60 trillion. Savings has not fallen through the floor. We have had little or no bad news about resource constraints, technological opportunities, or political arrangements. Thus (1) and (2) have not been operating. The action has all been in (3), (4), and (5).

As far as (3) is concerned, the recognition that a lot of people are not going to pay their mortgages and thus that a lot of holders of CDOs, MBSs, and counterparties, creditors, and shareholders of financial institutions with mortgage-related assets has increased the default discount by $2 trillion. And the fact that the financial crisis has brought on a recession has further increased the default discount — bond coupons that won’t be paid and stock dividends that won’t live up to firm promises — by a further $4 trillion. So we have a $6 trillion increase in the magnitude of (3) the default discount. The problem is that we have a $20 trillion decline in market values.

Some people have criticised Brad for his characterisation of the liquidity discount, suggesting that he has confused it with the (pure) rate of time preference.  I don’t think he is confused.  Firstly because he’s a genuine expert in the field and if he’s confused,  we’re in big trouble; and secondly because the two concepts are interlinked.

The liquidity discount is that an inability to readily buy or sell an asset – typically evidenced by low trading volumes and a large bid/ask spread – reduces it’s value.

The pure rate of time preference is a measure of impatience.  $1 today is preferred over $1 tomorrow even if there is no inflation. [Update: see below]

The two are linked because if you want to sell assets in an illiquid market, you can either sell them at a huge discount immediately or sell them gradually over time.  The liquidity discount is (presumably) therefore a monotonically increasing function of the pure rate of time preference for a given level of liquidity.

Minor update:

A more correct illustration of the pure rate of time preference would be to say:

Suppose that you could get a guaranteed (i.e. risk-free) annual rate of return of 4% and there is no inflation.  A positive pure rate of time preference says that $1 today is preferred over $1.04 in a year’s time.

Posted on

Why Obama chose Hillary for State

I like both of these answers:

Tyler Cowen:

This is exactly the kind of detailed political question I don’t follow so let’s try some crude, fact-poor economism. Hillary Clinton commands the loyalties of significant segments of the Democratic Party. The implication is that Obama will need these segments for what he is trying to do. Since Obama already has 58 (?) Democratic Senators on his side, we should conclude that Obama will try to do lots in the first few months of his term; this is the “throw long and deep” scenario.

He can always encourage her to leave later, if the relationship does not work out. Latinos, on the other hand, are stronger as voters than as a lobby or as an organized segment of the Democratic Party. The implication is that they will get relatively little at the beginning of Obama’s term — when lobbies are needed — but successively more as the next election approaches.

Andrew Sullivan:

Earlier this year, it seemed a good idea to plonk her on the ticket to defang the threat. That would have followed the “team of rivals” concept that Obama wanted to purloin from Lincoln. It would also have given the Clintons an independent claim on power. By winning without them and even, in some measure, despite them, Obama can now bring the Clintons into the power structure while retaining clear dominance. The State Department appointment is prestigious enough not to be condescending, yet also keeps Clinton off the Washington circuit more than any other position. She’ll be on a plane or abroad a great deal. Extra bonus: Bill will just love that. Sending his wife to the Middle East is the ex-president’s idea of a good time.

There’s also the small question of Iraq. Think of the appointment this way: “You voted for this bloody war, Hillary; you can end it.”

Withdrawing from Iraq will not be easy and it may well be gruesome. I have no confidence that the place won’t erupt into an even nastier civil war when the United States pulls out than it did when the United States didn’t fully push in. How does a president avoid the domestic blow-back of essentially cutting his losses on a doomed adventure? He uses Clinton as a protective shield from domestic critics. It’s also a rather brilliant manoeuvre against those elements on the right – from Fox News to Washington neocons – who came out in praise of Clinton in the spring when she sounded more hawkish than Obama on the Middle East. Having hailed Clinton as the Iron Lady of the Jews, the stab-in-the-back right will find it hard to pivot immediately and accuse her of treason if and when she ends the Iraq occupation.

But why did Hillary accept the job?

The best I can imagine off the top of my head is that (a) she really believes that the Obama presidency will be a successful one; and (b) a successful stint as Secretary of State after time in the Senate would look very, very good on the resume in eight years time.

Posted on

Paul Krugman wins the Nobel (updated)

There is no doubt in my mind that Professor Krugman deserves this, but who doesn’t think that this is just a little bit of an “I told you so” from Sweden to the USA?

Update: Alex Tabarrok gives a simple summary of New Trade Theory.  Do read Tyler Cowen for a summary of Paul Krugman’s work, his more esoteric writing and some analysis of the award itself.

I have to say I did not expect him to win until Bush left office, as I thought the Swedes wanted the resulting discussion to focus on Paul’s academic work rather than on issues of politics. So I am surprised by the timing but not by the choice.
…
This was definitely a “real world” pick and a nod in the direction of economists who are engaged in policy analysis and writing for the broader public. Krugman is a solo winner and solo winners are becoming increasingly rare. That is the real statement here, namely that Krugman deserves his own prize, all to himself. This could easily have been a joint prize, given to other trade figures as well, but in handing it out solo I believe the committee is a) stressing Krugman’s work in economic geography, and b) stressing the importance of relevance for economics

Posted on

Formalism and synthesis of methodology

Robert Gibbons [MIT] wrote, in a 2004 essay:

When I first read Coase’s (1984: 230) description of the collected works of the old-school institutionalists – as “a mass of descriptive material waiting for a theory, or a fire” – I thought it was (a) hysterically funny and (b) surely dead-on (even though I had not read this work). Sometime later, I encountered Krugman’s (1995: 27) assertion that “Like it or not, … the influence of ideas that have not been embalmed in models soon decays.” I think my reaction to Krugman was almost as enthusiastic as my reaction to Coase, although I hope the word “embalmed” gave me at least some pause. But then I made it to Krugman’s contention that a prominent model in economic geography “was the one piece of a heterodox framework that could easily be handled with orthodox methods, and so it attracted research out of all proportion to its considerable merits” (p. 54). At this point, I stopped reading and started trying to think.

This is really important, fundamental stuff.  I’ve been interested in it for a while (e.g. my previous thoughts on “mainstream” economics and the use of mathematics in economics).  Beyond the movement of economics as a discipline towards formal (i.e. mathematical) models as a methodology, there is even a movement to certain types or styles of model.  See, for example, the summary – and the warnings given – by Olivier Blanchard [MIT] regarding methodology in his recent paper “The State of Macro“:

That there has been convergence in vision may be controversial. That there has been convergence in methodology is not: Macroeconomic articles, whether they be about theory or facts, look very similar to each other in structure, and very different from the way they did thirty years ago.
…
[M]uch of the work in macro in the 1960s and 1970s consisted of ignoring uncertainty, reducing problems to 2×2 differential systems, and then drawing an elegant phase diagram. There was no appealing alternative – as anybody who has spent time using Cramer’s rule on 3×3 systems knows too well. Macro was largely an art, and only a few artists did it well. Today, that technological constraint is simply gone. With the development of stochastic dynamic programming methods, and the advent of software such as Dynare – a set of programs which allows one to solve and estimate non-linear models under rational expectations – one can specify large dynamic models and solve them nearly at the touch of a button.
…
Today, macro-econometrics is mainly concerned with system estimation … Systems, characterized by a set of structural parameters, are typically estimated as a whole … Because of the difficulty of finding good instruments when estimating macro relations, equation-by-equation estimation has taken a back seat – probably too much of a back seat
…
DSGE models have become ubiquitous. Dozens of teams of researchers are involved in their construction. Nearly every central bank has one, or wants to have one. They are used to evaluate policy rules, to do conditional forecasting, or even sometimes to do actual forecasting. There is little question that they represent an impressive achievement. But they also have obvious flaws. This may be a case in which technology has run ahead of our ability to use it, or at least to use it best:

  • The mapping of structural parameters to the coefficients of the reduced form of the model is highly non linear. Near non-identification is frequent, with different sets of parameters yielding nearly the same value for the likelihood function – which is why pure maximum likelihood is nearly never used … The use of additional information, as embodied in Bayesian priors, is clearly conceptually the right approach. But, in practice, the approach has become rather formulaic and hypocritical.
  • Current theory can only deliver so much. One of the principles underlying DSGEs is that, in contrast to the previous generation of models, all dynamics must be derived from first principles. The main motivation is that only under these conditions, can welfare analysis be performed. A general characteristic of the data, however, is that the adjustment of quantities to shocks appears slower than implied by our standard benchmark models. Reconciling the theory with the data has led to a lot of unconvincing reverse engineering
    …
    This way of proceeding is clearly wrong-headed: First, such additional assumptions should be introduced in a model only if they have independent empirical support … Second, it is clear that heterogeneity and aggregation can lead to aggregate dynamics which have little apparent relation to individual dynamics.

There are, of course and as always, more heterodox criticisms of the current synthesis of macroeconomic methodology. See, for example, the book “Post Walrasian Macroeconomics: Beyond the Dynamic Stochastic General Equilibrium Model” edited by David Colander.

I’m not sure where all of that leaves us, but it makes you think …

(Hat tip:  Tyler Cowen)

Posted on

From marriage to trade with China

In another great example of bouncing topics around in the often-academic blogs, we have this:

Betsey Stevenson and Justin Wolfers wrote an article for Cato Unbound: “Marriage and the Market“. Here is a brief summary of their idea (the exact snippet chosen is stolen directly from Arnold Kling):

So what drives modern marriage? We believe that the answer lies in a shift from the family as a forum for shared production, to shared consumption…the key today is consumption complementarities – activities that are not only enjoyable, but are more enjoyable when shared with a spouse. We call this new model of sharing our lives “hedonic marriage”.

…Hedonic marriage is different from productive marriage. In a world of specialization, the old adage was that “opposites attract,” and it made sense for husband and wife to have different interests in different spheres of life. Today, it is more important that we share similar values, enjoy similar activities, and find each other intellectually stimulating. Hedonic marriage leads people to be more likely to marry someone of their similar age, educational background, and even occupation. As likes are increasingly marrying likes, it isn’t surprising that we see increasing political pressure to expand marriage to same-sex couples.

…the high divorce rates among those marrying in the 1970s reflected a transition, as many married the right partner for the old specialization model of marriage, only to find that pairing hopelessly inadequate in the modern hedonic marriage.

It produced a flurry of responses and reactions, but the chain I want to follow is this one:

Which finally brings me to why I wrote this entry. I love this sentence from Tyler:

Symbolic goods usually have marginal values higher than their marginal costs of production; Americans for instance love the idea of their flags but the cloth is pretty cheap, especially if it comes from China.

Brilliant. 🙂

Posted on

Beaten to the punch

I had a brilliant idea over the Christmas break. It would save some people money, it would give other people flexibility, it allow me to get a “markets in everything” link from Tyler Cowen. I couldn’t lose! It turns out that I’m too slow and have been beaten to the punch by a good few years.

I wanted to build a website that allowed people to trade store credit and gift cards. The sellers would get the flexibility of cash, the buyers would get a discount at whatever store they were buying the card for and I’d take a (tiny) slice out of the middle.

Here are two articles from 2005 speaking of exactly that market: one from Wired and one from MSNBC. Between them, they list five different sites already doing what I thought of. Oh well.

They still don’t seem to have realised the full potential of this, though. I would like to see a site to exchange all currently-non-tradable forms of pseudo money (that is, things that effectively are a store of value, but are tied to particular stores or providers). That includes gift cards, store credit, frequent flier miles, supermarket reward programmes and Second Life Linden dollars.

There are clear issues of fraud risk to overcome, but I wonder how those sites get around the various stores’ policies of making gift cards non-transferable (i.e. not for resale).

Posted on

Western Union and incomplete (financial) markets

Via Tyler Cowen, I came across a fascinating article at the New York Times:  “Western Union Empire Moves Migrant Cash Home.”  Tyler is bang on the money when he calls it consistently interesting throughout.  What really grabbed my attention was the last few paragraphs:

[Western Union] has an estimated global market share of 14 percent, versus 3 percent for its closest competitor, MoneyGram. Though Western Union has responded to increased competition by cutting its charges, it typically remains the most expensive service.

An Oakland group, the Transnational Institute for Grassroots Research and Action, began a boycott campaign in September, demanding that Western Union lower its prices and increase its corporate giving. But it has gained little traction, in part because of the company’s recent courtship of migrant groups.

One critic who now gives Western Union grudging credit is Donald F. Terry, an official at the Inter-American Development Bank. He has spent years trying to get more migrants to use banks, so they could establish financial histories and qualify for loans.

But banks have not fully welcomed migrants, he said, while Western Union and other money transfer companies have more locations, better hours and agents who know their customers’ language and culture.

“You could say they were ripping people off, or you could also say they’re providing a service that poor people desperately needed and were willing to pay for,” Mr. Terry said. “Any consumer company in the world would like to have the customer loyalty they have. They’re doing something right.”

I’ve always been a bit surprised at the rates that financial intermediaries are able to charge.  Whether we’re speaking about “instantaneous” money transfer ala Western Union, money lenders charging 80% (an usurer in the U.S., a life-changing charity in Africa), or the rates charged by bail bondsmen, they’re enormous.  Why?

To a large extent it’s surely to do with a lack of competition, but given the profitability of these ventures, why don’t we see new entrants?  Why don’t we see country- or even region-specific competitors to Western Union?  Where is the all-Spanish-speaking competitor that is staffed entirely with Latinos in the US working off a natural, built-right-into-the-community advertising mechanism?  Even with enormous risk premiums, lending money at 80% is much, much more profitable than putting it in a US-based deposit.  Why don’t people based in that developing country do it?

Update:  Okay, okay, the market isn’t incomplete if there are transactions taking place, but there are real economic profits being made here.  What are the barriers to entry that are keeping suppliers away?