Monday, November 9, 2015
What could possibly go wrong...........
......................................................with the Uberization of money?
The most immediate change will be an explosion in peer-to-peer lending. Just as Uber returns us to a world where anyone with a car could offer a ride to anyone with a thumb, peer-to-peer lending is both new and old. Before there was a robust retail and commercial banking system, there were people with money to lend and people who wanted to borrow it. But the current wave of peer-to-peer services takes this much further, into a hypercharged virtual realm where pools of small lenders can combine online to disperse pools of small loans. And they can do it without the friction, cost or heavy regulatory hurdles of traditional banking.
-as extracted from this WSJ published essay on the topic.
For almost forty years, we have watched, with more than a passing interest, the intersection of real estate and finance. We don't know much for certain, but we are fairly sure that any financial practice that can be described as "hypercharged" will end badly.
One of the frictions involved with borrowing from traditional banks is their quaint notion of return of capital as well as return on capital. Or more plainly stated, they firmly believe that they should get their principal back, with interest and on time. This may seem odd, but one of the major causes of the late recent economic unpleasantness was Wall Street's hunger for more securitized mortgage products to sell. That hunger had grown exponentially once Wall Street learned that they could disconnect, without risks to themselves, the act of first lending money from the second act of getting the money back, with interest, over time, and on time. That simple disconnect almost brought down our financial system. It will be interesting to watch how the latest innovations in "peer-to-peer" financing handle the all important repayment issue.