40 replies to this topic

[Lokifluff]

Hello everyone

This is my first time posting on these forums, although I confess I have been lurking for a few weeks.  I guess up until now I didn't really have anything to say, preferring to learn from you all instead.

However, it has slowly been dawning on me how P2P lending, if it takes off, will create a major economic headache... for the everyday person and not just for the banks.  (I know... thinking takes me a while so forgive me.)

The problem in a nutshell, is that it is likely to potentially shrink the money supply. Should this be correct, then the question arises as to whether this is a good or a bad thing - a bit of both I would expect, a large degree of pain in the short term, but a 'balancing of the books' in the long term.  I will explain.

It is my understanding that the current form of banking means that banks create money as debt in the form of loans, and that the amount of leverage used by them to do this was previously capped, then became uncapped owing to loosening of the regulations, and following the 2008 crisis, became capped again, but with various ring-fencing introduced as well so that deposits could be protected (in the UK anyway).

It is also my understanding that during times of boom, the money supply gets over-inflated, and contracts during times of recession as a direct result of leveraging.

The thing that attracted me to the P2P lending models (and I am now with both Zopa and Funding Circle as a result!) is that it eliminates all forms of leveraging. What money actually exists to lend out is exactly what money gets lent out.  What money exists to pay back, is exactly what money gets paid back.

Is the (potential) demise of leveraging through this sort of funding a good thing though?  At first, I thought it was brilliant - and the perfect way to stop the boom & bust cycles created by the banks behaving recklessly, not to mention filtering profits to just a few.  Upon further reflection though, it occurred to me that if the monetary economy was slowly shrunk to only accurate reflect the money in actual circulation, then this could potentially create a whole new economic problem, in that the current levels of leverage within the banks would have to be absorbed somewhere.  I expect this could create a whole new massive economic problem as the usual person to take the hit on such things is of course the taxpayer.  Over the longer term, I would expect the government to print more money to cover it (with all the associated problems that would bring), but this would take time.  What would happen if the government did not realise where the economic problem lay, and kept giving the money to the banks to inject into the system... as they do now?

I should also point out, that this perhaps might only occur if there was a rush to move to P2P lending faster than the banks could economically account for.  P2P lending, however, if it does take off in a big way will have a direct impact on leverage based banking models as it will absorb more of the 'in existence' money on which they rely.

Just thinking about the implications of this tends to make my head hurt, so I thought perhaps there are other people out there who are wiser than me on such matters who could perhaps shed some light on the topic.

Anyway, thanks for all the posts in the forums concerning how to get your head around the finer details of P2P lending - you have all been great!

Lokifluff

[Deddington]

Lokifluff, on 23 June 2012 - 13:41, said:

Hello everyone

This is my first time posting on these forums, although I confess I have been lurking for a few weeks.  I guess up until now I didn't really have anything to say, preferring to learn from you all instead.

However, it has slowly been dawning on me how P2P lending, if it takes off, will create a major economic headache... for the everyday person and not just for the banks.  (I know... thinking takes me a while so forgive me.)

The problem in a nutshell, is that it is likely to potentially shrink the money supply. Should this be correct, then the question arises as to whether this is a good or a bad thing - a bit of both I would expect, a large degree of pain in the short term, but a 'balancing of the books' in the long term.  I will explain.

It is my understanding that the current form of banking means that banks create money as debt in the form of loans, and that the amount of leverage used by them to do this was previously capped, then became uncapped owing to loosening of the regulations, and following the 2008 crisis, became capped again, but with various ring-fencing introduced as well so that deposits could be protected (in the UK anyway).

It is also my understanding that during times of boom, the money supply gets over-inflated, and contracts during times of recession as a direct result of leveraging.

The thing that attracted me to the P2P lending models (and I am now with both Zopa and Funding Circle as a result!) is that it eliminates all forms of leveraging. What money actually exists to lend out is exactly what money gets lent out.  What money exists to pay back, is exactly what money gets paid back.

Is the (potential) demise of leveraging through this sort of funding a good thing though?  At first, I thought it was brilliant - and the perfect way to stop the boom & bust cycles created by the banks behaving recklessly, not to mention filtering profits to just a few.  Upon further reflection though, it occurred to me that if the monetary economy was slowly shrunk to only accurate reflect the money in actual circulation, then this could potentially create a whole new economic problem, in that the current levels of leverage within the banks would have to be absorbed somewhere.  I expect this could create a whole new massive economic problem as the usual person to take the hit on such things is of course the taxpayer.  Over the longer term, I would expect the government to print more money to cover it (with all the associated problems that would bring), but this would take time.  What would happen if the government did not realise where the economic problem lay, and kept giving the money to the banks to inject into the system... as they do now?

I should also point out, that this perhaps might only occur if there was a rush to move to P2P lending faster than the banks could economically account for.  P2P lending, however, if it does take off in a big way will have a direct impact on leverage based banking models as it will absorb more of the 'in existence' money on which they rely.

Just thinking about the implications of this tends to make my head hurt, so I thought perhaps there are other people out there who are wiser than me on such matters who could perhaps shed some light on the topic.

Anyway, thanks for all the posts in the forums concerning how to get your head around the finer details of P2P lending - you have all been great!

Lokifluff

Hi and welcome to the forum.

Thanks for your thought provoking first post.

You are right that if all lending went to a PtoP model of "you only lend what you have" the Banking industry and various other aspects of Financial Services money supply would dry up the  to an extent that it would seriously damage growth.

PtoP lending in the unsecured sector of the Market is what 2/3%? Nothing yet if ever in the secured sector which is massive. IMO it will be a long time before your concerns would if ever be realised.

For now we are just an annoying flea bite on the back of the banks and will maybe make them smarten their act up rather than destroy their business.

Lets be honest this is not a simple way to save money and needs a level on intellectual ability to make it work so it will never be for everyone who wants to make a better return on their savings.

[Lokifluff]

Deddington, on 23 June 2012 - 14:23, said:

Hi and welcome to the forum.

Thanks for your thought provoking first post.

You are right that if all lending went to a PtoP model of "you only lend what you have" the Banking industry and various other aspects of Financial Services money supply would dry up the  to an extent that it would seriously damage growth.

PtoP lending in the unsecured sector of the Market is what 2/3%? Nothing yet if ever in the secured sector which is massive. IMO it will be a long time before your concerns would if ever be realised.

For now we are just an annoying flea bite on the back of the banks and will maybe make them smarten their act up rather than destroy their business.

Lets be honest this is not a simple way to save money and needs a level on intellectual ability to make it work so it will never be for everyone who wants to make a better return on their savings.

Thanks for the warm welcome Deddington!

It was not that part of the equation which got me thinking to be honest - as it only covers one part of it.  It was the other side of the equation which I found of more interest.

If P2P lending is currently only 2/3% of the unsecured lending market at the moment as you say, then that could quite possibly also mean that the reserve or capital used by the banks to leverage has shrunk by 2/3% as well.  I for one, have taken out money deposited in a bank to place it into P2P lending.  The banks can no longer use my deposited money to leverage.  So the 2/3% needs to be times that by the 1:20 ratio of leverage (plucking a figure out of the air - as this varies a lot) to get a more accurate reflection of the effect on the market as a whole.  If more and more deposits are moved to P2P lending then that leveraged shrinkage on the money supply could start to look pretty hefty.

But yes, I most certainly take your point that that P2P lending will not be for everyone.

I can't help but wonder if Andy Haldene is already onto this given that this article shows his research on the topic, combined with his very vocal support of P2P back in March: http://www.independe...or-6270822.html

Fingers crossed it means that the government is therefore also aware of the possible impact!

[Deddington]

Lokifluff, on 23 June 2012 - 15:28, said:

It was not that part of the equation which got me thinking to be honest - as it only covers one part of it.  It was the other side of the equation which I found of more interest.

Sorry yes as you say any money we don’t give the banks has a magnified effect on what they can lend. It gives one a warm feeling to think that some banker might be worrying about it and one of the reasons I am happy to use PtoP lending.

I just feel it is a long way down the road before we give them sleepless nights.

Interesting article in the Independent. I hope they also look into where they get their money from and on what terms.  If my memory of the Northern Rock debacle is correct they were borrowing short on the money Markets, when money was cheap, and lending long in the Mortgage Market. When everyone stopped lending to anyone in 2008 they could not roll over their loans and could not pay back the loans and bingo went bust.

The greedy b*****ds running the show still went off with their bonuses and bolstered pensions.

[Lokifluff]

I most certainly agree concerning where they get their money from, and am horrified that not a single person to date has been charged, let alone convicted of any wrong doing.

I wonder if those sleepless nights you speak of would come sooner rather than later though.

For example, if you take the current figure of around £3,500,000 available to be lent on Zopa, leverage that at a 1:20 ratio (again, this is extremely conservative), then that means that with the money currently on deposit with Zopa alone to be lent out, the money supply could possibly have shrunk by around £70,000,000,000.  Seventy billion pounds worth of leveraging is a lot to lose in the overall money supply.

As that article says, the leverage ratio at Barclays was 37.8 just before the crash... apply that to the Zopa amount, and you are looking at over £132,000,000,000.

Interesting times.  I guess we will just have to wait and see!

Edited by Lokifluff, 24 June 2012 - 10:49.

[Deddington]

Lokifluff, on 24 June 2012 - 10:28, said:

I most certainly agree concerning where they get their money from, and am horrified that not a single person to date has been charged, let alone convicted of any wrong doing.

I wonder of those sleepless nights you speak of would come sooner rather than later though.

For example, if you take the current figure of around £3,500,000 available to be lent on Zopa, leverage that at a 1:20 ratio (again, this is extremely conservative), then that means that with the money currently on deposit with Zopa alone to be lent out, the money supply could possibly have shrunk by around £70,000,000,000.  Seventy billion pounds worth of leveraging is a lot to lose in the overall money supply.

As that article says, the leverage ratio at Barclays was 37.8 just before the crash... apply that to the Zopa amount, and you are looking at over £132,000,000,000.

Interesting times.  I guess we will just have to wait and see!

I think may you too many zeros in those estimates but still a lot of money.

[Lokifluff]

Deddington, on 24 June 2012 - 10:50, said:

I think may you too many zeros in those estimates but still a lot of money.

oops!  you are indeed right... they should read £70,000,000 and £132,000,000 respectively.  I blame the remnants of last night's vino causing me double vision...

Those bankers can indeed sleep easy for a few more months then... ;-)

[sl75]

Lokifluff, on 23 June 2012 - 13:41, said:

The problem in a nutshell, is that it is likely to potentially shrink the money supply.

Not at all.

Zopa and other P2P money lending services simply move money from one person's bank account to another. The money doesn't disappear, it stays within the banking system, just as for any other transaction.

If some measure of "the money supply" includes bank loans, but doesn't include the lent out balances of Zopa lenders' accounts, then it would certainly be possible that this measure of the money supply could report a reduced figure, but this doesn't change the underlying reality that a given unit of money can be lent and relent many times.

(e.g. first borrower gets a loan for a car, car dealer lends out this surplus cash via a P2P site as part of their cash management, so the same money gets lent to another borrower, etc.)

The "money multiplier" effect exists just as much if you're "honest" about the fact that most of your money has been lent to other specific individuals and/or organisations as if you pretend that all of it is always available on-demand.

Edited by sl75, 24 June 2012 - 21:01.

[being]

sl75, on 24 June 2012 - 21:00, said:

Not at all.

Hi all, back after quite a break. Readily Agree with sl75 on this one - lending money through Zopa is just a different way of lending the same money as would be lent by the banks. Actually would increase the money supply as less overheads and fatcat bonuses that would be spent on imported luxuries and hols abroad - whereas we individuals (speaking for myself here, of course) are much more likely to relend in order to 'compound the interest' and maximise the return on our savings.
Even if it were not so the Governmint could carry on with QE and/or the banks would have to lower their interest rates to maintain competitive lending and compete with us
- "market forces" my dear, much loved by Margaret T.

Of course we could all become immensely rich from Zopa
and then refuse to lend....that could do it !    

[propman]

I think the effect depends upon what limits the money supply, the deposits or the ability to lend. If we believe their grouching it is deposits at the moment and so taking away part of the unsecured lending market would merely increase the proportion of loans in other areas that can be made. My head hurts too, so I may well be wrong, but I would have thought that the retail deposits would be  reduced, as if the £100m of P2P lending had been through (i.e. both deposited with and then lent out by) the banks would have a greater deposit base to lend on, but I am not sure of the multiplier. I understood that the multiplier was to bank capital. This is only increased by equity in the banks or profits. So except for the reduced profits due to P2P competition, there shouldn't be an effect on bank capital.

To be pedantic, the above example is a perfect explanation of sl75's explanation however. The money in processing, holding accounts and in offers is actually deposited with RBS for them to lend (as is the equivalent at the other P2P companies with their banks including the Provision Fund at RS) as are the payments in transit or yet to be allocated, all in all a fair proportion of the amount lent out!

JMHO

- PM

[chilterncom1]

Lokifluff, on 24 June 2012 - 10:28, said:

For example, if you take the current figure of around £3,500,000 available to be lent on Zopa, ... ....

I agree with sl75, but am just clearing up one other error in your analysis:  it is not possible to see the amount available to be lent on Zopa.  I suspect you took the figures from the dashboard.  If so, that figure is merely the arithmetic sum of the amounts offered in each market at any given time, not the total amount available for lending.  Many people offer across several markets - in other words, their £100, £1,000 or whatever is on offer in several markets;  others have money in their Zopa holding accounts not yet placed on offer.

[Deddington]

Lokifluff, on 24 June 2012 - 11:43, said:

Those bankers can indeed sleep easy for a few more months then... ;-)

Prophetic words. It would appear the Bankers are more than capable of giving themselves sleepless nights rather than anything we can do.

What a bunch of spivs and shisters they are!

[elljay]

Is that why the collective noun is a "wunch"?  

[PoohBah]

Well, the news suggests that a few of the RBS ones are weeping into their G&Ts now; one does at least have to admire the swift response once the news broke.  No doubt some employees of the other banks will also be quietly soiling their undergarments in anticipation.

[propman]

Just to return to the initial topic (sorry   ) We have added £325B through QE and expect to add another £50B or more over the next few months, so why should any reduction in the multiplier cause any problems? Personally I see it as a virtue of P2P. With lending controlled by banks, unless stopped by the regulators (and history shows that their memories are not a lot longer than the bankers when it comes to remembering the problems of the past), the multiplier increases as we move into the boom phase of the cycle (now you see why length of memory matters, this is some way off and probably a new generation of CEOs for banks and regulators!). Increasing the money supply leads to inflation just as the economy is limited by its productive capacity and so would have inflationary pressure anyway. This leads to acceleration into the boom and compounds the resulting crash.

Just to reiterate what I touched on in the RS thread. There is a possibility of extending the RS model to effectively increase the money supply through P2P. The creation of money occurs when extra parties all consider the same money their's. Arguably the monthly rolling loans gets close as these are considered liquid funds. Particularly for anyone ustilising the interest free period on credit cards (i.e. can spend that money freely on credit cards knowing that the money will be available before the bill needs to be settled). Certainly if the monthly loans were reduced this would be the case.

Please feel free to get  back to banker bashing if you are still awake after my economics musings

- PM

Edited by propman, 06 July 2012 - 08:46.

[Oldnick]

propman, on 06 July 2012 - 08:45, said:

Please feel free to get  back to banker bashing if you are still awake after my economics musings

- PM

I really want to bash a banker, but I keep getting this image of good old Captain Mainwaring before my eyes and it just doesn't seem right.
Just as there is a move afoot to divide bank operations into on the one hand; deposit taking from, and lending to, us ordinary folk, and on the other hand; international smoke and mirrors and general ducking and diving (it couldn't have been me: I was counting my bonus at the time), isn't it time we had separate names for the operatives in each?
Any ideas for separate and instantly identifiable monickers for Uncle Arthur and the Emperor Ming? keep it clean please

[rudry2677]

Oldnick, on 06 July 2012 - 18:53, said:

isn't it time we had separate names for the operatives in each?
Any ideas for separate and instantly identifiable monickers for Uncle Arthur and the Emperor Ming? keep it clean please

I and, I suspect, most of us know from personal experience that bank managers, the like of Uncle Arthur would look at a customer , talk to a customer and have some conscience when making a decision.   The modern bankers have been described perfectly by elljay ,a couple of entries ago.  Keep it clean?   Yes, as clean as the wunches.

[Deddington]

Having listened to the recent Reith lectures by Professor Niall Ferguson I am very impressed by him.

There was also a Hardtalk session with him recently were he gives an alternative view on what has gone wrong with British Banking System, what the solution should be and the risks we face. Thought provoking.

I recommend it if you haven't seen this guy in action. Click here

[Oldnick]

rudry2677, on 06 July 2012 - 20:16, said:

I and, I suspect, most of us know from personal experience that bank managers, the like of Uncle Arthur would look at a customer , talk to a customer and have some conscience when making a decision.   The modern bankers have been described perfectly by elljay ,a couple of entries ago.  Keep it clean?   Yes, as clean as the wunches.

My mind is drawn back to a traumatic time in my own dealings with retail banking a quarter of a century ago, when my business was only weeks old and the manager of my high street bank wrote to me, without so much as a cup of tea and a biscuit type chat, giving me two weeks to find alternative banking arrangements.
He had apparently taken fright because he came back from his summer holidays to find that his "uncle arthur" assistant manager had allowed a money launderer to open an account (I had a Jersey based deposit account, where tax was not deducted from the interest at source, as I had no income and no tax liability).

You're right, Uncle Arthur had had his day some time before the first episode of Dad's Army.

These days I have warm and regular contact with a faceless numpty in another city (I'm not sure where),and neither expect nor seek support for my business other than routine money processing.

[pfpessex]

........
..............pssst..... ???

Wanna buy some insurance ?  If you lose your job or get sick, we just take your home off your hands..... One less thing to worry about eh?