Tag: finance

Categories
Economics

[2702] Tighter lending requirement has its cost

I am unsure what to think about the recent move by Bank Negara Malaysia (BNM) to tighten lending on the non-bank side of the lending system. While the statistics in that sector is scary when compared to the banks, the non-bank sector does provide financial services to the low-income earners. The financial services provided here are not the fancy derivative kinds but rather, it is pretty much bread and butter things: giving out vanilla loans for a lot of stuff.

Without these institutions, these low income groups would probably lack access to financial services that they are enjoying now. That in some way has to mean improved welfare because these loans have to be used for something, either investment or consumption. And investment is simply deferred consumption anyway, which improves welfare eventually.

I have to admit that there are some problems with lending in non-bank financial institutions (NBFI). There is an explosion of personal financing granted by NBFI but in the grand scheme of things, it is small compared to the safer banking sector. Still, in the personal financing sector, more than 50% of loans were granted by NBFI according to BNM in its 2012 Financial Stability and Payment Systems Report. What makes it more worrying is that NBFI has looser requirements compared to the banks. Also, average amount for personal financing given out by NBFIs in 2012 was RM68,000 per person while most of the borrowers are civil servants who do not make much. (Still, impaired loans ratio in 2012 was extraordinarily low in spite of looser requirements. That has to do with a government deduction program. While the program is useful in keeping the ratio low, one wonders what the disposable income level of these borrowers is given that the borrowers are mostly government servants who do not earn too much).

Nevertheless, what would happen if these finance services were restricted? Or tightened?

Some might not go to the banks because they would likely be unqualified to obtain loans. If you cannot qualify for loans from NBFIs, what are the chances of getting loans from a sector with tighter regulation?

Others might not borrow at all, which is probably the ideal outcome for advocates of tighter lending requirements. For those who used the loose requirement to buy unnecessary stuff like buying an iPhone, a widescreen television or an expensive laptop to show-off, then the non-borrowing outcome is good.

But if they borrowed money for education, for food or essentially for smoothing their basic consumption, tightening will make them worse off. In their case, those loans give them a chance to build their life. These loans give them a leg up. Making it costlier for them sounds exceedingly cruel.

The worst outcome is probably if they go to the shadowy part of the economy and that quite possibly means going to the loan sharks. Having borrowers migrating to the least regulated (or even unregulated) sector of the economy cannot be considered a success of regulation. Protection in the underground economy is not as robust in the ”upper ground” economy. There is no bankruptcy law there. Here, not only one increases the systemic risk rather than reducing it through regulation, there will like be human cost — that is costlier than being condemned to bankruptcy — by becoming victims of crime.

That said, the restrictions by BNM are not drastic and those regulations, while it may reduce lending by NBFI, it is unlikely to cause mass exodus from NBFI to elsewhere. So, it is hard to imagine if BNM’s move increases systemic risk at all.

Yet, a small group of individuals will probably do just that and this group may be worse off.

Here is the point I want to stress. There is human cost to the tightening and that has been ignored while the mass media praises the tightening.

Categories
Economics Personal Politics & government

[2572] The bitterness of a financial conservative

I handle my finances conservatively. I spend very little for someone my age and my profile. In fact, I impose a sort of limit on my spending. I am conscious of it and get mildly nervous if my total spending grows too fast even when I can more than afford it.

I probably do buy too much insurance and I do save or invest a large part of my earnings. My credit card service provider probably hates me for having to finance me without getting the chance to charge me interest too often too much.

I can afford to save a lot partly because I do not have too many financial responsibilities.

The other factor behind my saving habit has a lot to do with my upbringing and education.

As a very young school kid, I never really needed to spend too much. Canteen food was clearly subsidized. I rarely asked my parents for expensive items.

The more important thing was that my parents did not give me a generous allowance when I was in primary school. My pocket money was very little. Not that I needed too much anyway but at that age, the limited pocket money effectively curbed any spending impulse I might have then. I was always mindful of my limits. It trained me to be financially prudent.

The same was true as I attended a boarding school in Kuala Kangsar; I rarely had expensive lunches or dinners. Meals were again subsidized and there was rarely a need to spend lavishly in a small rural royal town in Perak. While my allowance did increase, it was definitely less than that of my more well-off peers. I lived spartanly then. This continued during my undergraduate years in America. Formal lessons in economics further solidified my attitude towards personal finance.

During my time living abroad, I did learn to enjoy the finer things in life, but I rarely, if ever, overspent. I rarely overspend still.

So, I can say with certainty that I live by the morality of a financial conservative very strictly.

I think I can say without too much pretension that I am an economist. I understand the various reasons for fiscal deficits. Some of the causes for deficit are justifiable, and some are not. I do understand how the government is not a household in a way that the government can do certain things beyond typical household economics, the point which many defenders of the roles of government in society rush to in deflecting criticism against many facets of government spending. After six years of education in economics, I do not think I need too much schooling in that matter excessively.

Rather, put the economics aside and understand the psychology instead. Understand the worldview of a financially conservative taxpayer.

The state of federal government finance does not impress a person like me. Deep inside, I do feel something along the lines of ”if I can do it, why can’t Putrajaya?” It is a dismissive attitude towards the federal government. It is a damning judgment against a failure to adhere to certain brands of secular morality.

It is a kind of sentiment that is almost always in the background. It is the ever-present demand for financial discipline. Putrajaya violates this conservative morality so blatantly. Each violation accumulates further moral condemnation.

What further justifies the dismissive attitude is the inevitability that the indiscipline — add in the irresponsible economic populism that has happened throughout the year and earlier — will one day, one way or another, result in higher tax on the conservative, and everybody else, sooner or later. Whether I like it or not, I, will have to finance the fiscal indiscipline of Putrajaya.

That fuels my bitterness towards Putrajaya.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malaysian Insider on July 26 2012.

Categories
Economics

[2403] The world has gone crazy

“…Treasuries have become a form of insurance against their own downgrade.” [Chris Reese. Bonds climb with safety buying as stocks dip. Reuters. July 26 2011]

Categories
Economics

[2072] Of the market can live without government bonds

Not too long ago when the Australian government ran a budget surplus, the Howard administration announced a plan to stop govenrment borrowing. That was around 2003. The financial industry was unhappy with it and lobbied the government to abandon that plan, citing havoc it would cause in the Australian financial market. The lobby was succesful. The Australian government continued to borrow even in times of fiscal surplus.

The idea how absence of government bonds in the local market may cause havoc is simple. All interest rates are more or less dependent on interest rate of a risk-free asset. In most cases, a risk-free asset is a sovereign bond of a reputable government, which more often than not, members of the Organization of Economic Cooperation and Development, the OCED, which is a grouping of the most developed as well as the most influential economies in the world.

It is risk-free in a sense that these governments, and in this case, the Australian government, would not default on their obligation to service the debts. Given the certainty that it provides, others instruments are priced with the rates of sovereign bonds considered. In other words, government bonds provide benchmark interest rate for the financial industry to use for other purposes ranging from simple lending and saving activities to complex derivatives.

How much disturbance would it cause if a government ceases issuing bonds?

I am quite concerned with this question because as a libertarian of largely minarchist tradition, the argument provides a hurdle to smaller government.

Firstly, by connecting the centrality of sovereign bonds as risk-free asset to the health of the financial industry and the economy at large, it legitimizes government intervention in the market.

Secondly, in time of budget surplus, it prevents valuable resources from being used in other areas. Borrowing imposes cost and the cost is being borne for no productive spending at all. It is like Santa Claus throwing money to the streets, except that it is the taxpayers that ultimately pay for it. It is not so much an issue in time of deficit because such deficit spending is grounded on other rationale, regardless whether that rationale is acceptable or not.

Thirdly, borrowing in times when the government has little use for extra fund introduces an unnecessary opportunity cost. “Oh, extra money! Let us spend it”. After all, with interest charged on that idle money, surely there are better ways to utilize it. That involves reinvesting that borrowed money into investments that provide higher returns. Or funding new government programs that veer away from the role of a limited government. That is not a libertarian-friendly idea.

Returning to the question, how much disturbance or havoc?

I would argue not much since the market will adapt to a scenario without government bonds in the local market.

It is true that without government bond in the market, market players will not have a risk-free asset to base their pricing on, within local context. I am sure they will be able to substitute it with other assets locally however. It will not be risk-free but it is still high quality assets. That probably may cause cost of borrowing to go systematically up since the minimum interest rate in the market that forms the base of all pricings increases to correspond with greater risk faced by market participants. Nonetheless, the industry will find an alternative benchmark.

Furthermore, that alternative benchmark does not have to originate from the local market. Other governments do borrow and some of the most reputable governments, as far as fulfilling their debt obligation go, borrow massively. Save for foreign exchange rate fluctuation risk, there is no reason why the rate at which reputable foreign governments borrow cannot be the benchmark.

I suspect the argument against zero-debt made by the Australia financial industry players is about protecting their revenue rather than problem that it might cause to the market’s ability to price assets.