SoFi started by making student loans to Stanford MBAs, after figuring out that the default rate on such loans is basically zero. It
has since expanded to student loans more generally and added mortgages, personal loans and wealth management. Mr. Cagney says SoFi has done 150,000 loans totaling $10 billion and is currently at a $1 billion monthly loan-origination rate.
Where does the money come from?
SoFi doesn’t take deposits, so it’s FDIC-free. … Instead, SoFi raises money for its loans, most recently $1 billion from SoftBank and the hedge fund Third Point, in exchange for about a quarter of the company. SoFi uses this expanded balance sheet to make loans and then securitize many of them to sell them off to investors so it can make more loans
He quotes from a WSJ profile of the founder of SoFi. Cochrane sees this as a form of safe banking, because it relies entirely on long-term funds. But it could turn out otherwise. Suppose that an insurance company puts up the long-term funds for these loans, but the insurance company finances its investment with short-term commercial paper. Then this becomes shadow banking. The next step is for the commercial paper to be bought by too-big-to-fail banks.
My point is not that I think that this is how it will play out, or that SoFi ought to be regulated out of existence. My own guess is that it will not turn out to be sufficiently scalable and profitable for its investors, and it will die a natural death.
My point is that when it comes to financial intermediation, be careful what you wish for. What may appear to be a robust form of financing can be readily transformed into something else entirely.
While big banks are extremely politically unpopular, people are increasingly banking at large banks.
Pointer from Tyler Cowen. My comments:
1. I guess once Brookings is bought and paid for, they stay bought and paid for. Remember?
2. Don’t try to make it sound like people are switching out of small banks as a conscious preference. Big banks do not grow organically, like Wal-Mart or Costco. They grow through mergers and acquisitions. I did not choose to bank with Capital One. Capital One simply swallowed up Chevy Chase Bank, the community bank where I had my accounts.
3. Don’t try to make it sound like an international business cannot operate without a bank at its disposal with at least $1 trillion in assets. My guess is that $10 billion would be plenty big for a bank to be able to satisfy multinational businesses. Remember that if there were fewer ginormous banks, there would be many more large banks. Banks can syndicate deals, also.
4. Don’t try to make it sound like big banks are an American comparative advantage. On the contrary, if we have a comparative advantage in finance in the world, it is that historically we have had other large institutional sources of capital.
5. Don’t tell me that you have solved the too-big-to fail problem. See my tests for that in the link in (1).
Jason Bram and Andreas Fuster write.
many people who were pessimistic about the housing market simply stayed on the sidelines—which in turn meant that for a while, valuations in the market primarily reflected the beliefs of optimists.
Pointer from Mark Thoma. I found myself agreeing with most of what they wrote.
I think that the same thing happened with the Internet bubble. Some of us thought that the prices were ridiculous, but we just stood aside and watched. You have to be really greedy and risk-tolerant to try to go short during that kind of frenzy, and you have to be lucky in terms of timing.
banks should be made to pledge assets as collateral, in sufficient quantity to cover their deposits and other short-term liabilities. A rule to this effect could replace conventional deposit insurance (with premiums in effect collected upfront in the form of haircuts on the collateral).
Read the whole thing. Pointer from Mark Thoma. Crook is reviewing a book by Mervyn King. I will have to read the book, because I do not understand the concept.
I think of an ordinary bank as having loans as assets. Its liabilities consist of deposits and equity. You can think of the assets as already “pledged” to the depositors, and if the depositors can be paid off, then the shares in the bank have positive value. It sounds like what King is talking about is an intermediary (a government agency?) that manages the way that these assets are pledge in a way that better protects depositors. Again, I will have to read the book.
The Bernank applies statistical analysis to the way the stock market has reacted to oil prices. Pointer from Mark Thoma.
Amni Rusli points to a Merrill Lynch study of how markets watch central banks. Pointer from Tyler Cowen.
Am I the only one who thinks that the stock market should be watching the election season, and that it should be tanking even more than it already has? On the Democratic side, the defining issue of our time is rich people making too much money and not paying enough of it in taxes. And the government not providing enough freebies to everybody else.
On the Republican side, the defining issue of our time is immigration enforcement. I cannot get on board with that. Are immigration laws even the most important of all the laws that are loosely enforced? I don’t see speed limits being strictly enforced on the Beltway. I don’t see recreational drug laws being strictly enforced on college campuses.
My point is not that I think we should be moving toward strict enforcement of speed limits and drug laws. My point is that “But it’s illegal!” isn’t the argument-clincher on immigration enforcement that a lot of people think it is.
I am not the type of person who is going to say, “inequality and immigration must be important, because so many people think so.” Instead, I am just going to say that the people who are voting to express themselves on those issues are, in my opinion, flat-out wrong.
I don’t think of myself as a defender of the political establishment. But when see where Sanders supporters and Trump supporters are taking this campaign, it’s enough to make me want to send valentines to Mitch McConnell and John Boehner.
What are the issues I worry about? Our country is sleepwalking toward a fiscal meltdown, as the past debts and future unfunded liabilities get larger every year. We have piles and piles of regulations, without knowing whether they are aligned with or working against their intended objectives–but I strongly suspect it’s the latter. We have a substantial share of the population that is poorly integrated into the productive economy and having most of its children out of wedlock. Our response to Islamic terrorism consists of random flailing overseas and massive inconvenience to innocent people at home, so as not to appear to be engaged in the dreaded “profiling.”
But those issues have been crowded out by inequality and immigration. If other investors shared my view of the political environment–and some day they might–stock prices would be less than half of what they are today.
Timothy Taylor reads a semi-annual update from the Fed, and is struck that
A divergence has emerged in the interest rates of advanced market economies, between the US and UK on one hand and the euro-zone and Japan on the other.
He produces a chart showing that the ten-year bond rate is about 150 basis points higher in the U.S. and the UK than it is in Germany or Japan. Years ago, Jeff Frankel adapted the Dornbusch overshooting model to say that this sort of thing would imply that the dollar and the pound are expected to fall about 1.5 percent per year for those ten years. This would make those currencies about 15 percent overvalued relative to the “long-run equilibrium,” it that is what we can call the exchange rate expected 10 years from now.
Note that in the short run, interest rate differentials and expected currency movements are tied together by covered interest parity. If I can earn 1.5 percent more on U.S. one-year securities than on one-year German securities, and the futures market were to offer me a one-year dollar/euro contract that assumes no depreciation of the dollar, then I have an arbitrage play of shorting German one-year securities and buying American ones, while buying euros in the futures market to eliminate currency risk.
On a ten-year basis, it tends to be harder to cover your currency risk. So there is, at best, uncovered interest parity.
In August 2008, Olivier Blanchard came out with a working paper saying that “The state of macro is good.”
His upbeat view of the stock market was posted on February 1st. In less than two weeks since then, the S&P is down about 5 percent.
I can forgive him for having poor timing on the stock market. My own view is that the stock market is not rational, and in fact this very irrationality makes the market difficult to beat.
But I find his smugness about MIT macroeconomics much more difficult to swallow. He would now say that there were problems with the consensus of a decade ago, but he still champions the MIT mystique.
the deviations of the P/E from its historical average are in fact quite modest. But suppose that we see them as significant, that we believe they indicate the expected return on stocks is unusually low relative to history. Is it low with respect to the expected return on other assets? A central aspect of the crisis has been the decrease in the interest rate on bonds, short and long. According to the yield curve, interest rates are expected to remain quite low for the foreseeable future. The expected return on stocks may be lower than it used to be, but so is the expected return on bonds.
Pointer from Mark Thoma.
Their point is that when interest rates are low, you can justify exceeding historical norms for the price-earnings ratio on stocks. I made a similar point about the price-earnings ratio for real estate relative to interest rates during the housing bubble.
Timothy Taylor points to a report by a new bureaucracy, the Office of Financial Research. Taylor writes,
The report emphasizes three main risks facing the US economy: 1) credit risks for US nonfinancial businesses and emerging markets; 2) the behaviors encouraged by the ongoing environment of low interest rates; and 3) situations in which financial markets are not resilient, as manifested in shortages of liquidity, run and fire-sale risks, and other areas.
There is a difference between actionable intelligence and bureaucratic CYA. If somebody says, “we are seeing a lot of chatter laately among these four terror cells. We had better watch these individuals closely,” that is actionable. If somebody says, “there is a risk that in the current climate terrorists will attempt a major attack,” that is not actionable, it is just CYA.
Reading Taylor’s post, I doubt that there is anything actionable in the OFR report. If the OFR had existed in 2006, we would have been told that the high level of house prices posed a potential risk. Which everyone already knew. They just did not have actionable intelligence about the state of the portfolios of key players, like Merrill Lynch, Citigroup, and Freddie and Fannie.