4 responses to “US throws social lenders out of its temple of economic doom”
-
I think you may be wrong on this.
The logic in the SEC’s letter published on Telecrunch seems pretty sound. Even if Prosper and other sites are simply debt exchanges then they should be regulated as other exchanges are – given what has happened in the last year, nobody is arguing for less regulation at the moment; better regulation yes, less no. In addition, the Fed’s, and by extension the SEC’s, current prime objective is to stabilise the existing banks – a key element of which is the recapitalisation of their balance sheets. It is therefore in the Fed’s interest to drive investors to put their cash into traditional institutions rather than to allow the growth of social lending sites that specifically disintermediate the banks.
It is also better for the US economy as a whole to recapitalise the banks rather than to allow the growth of social lending sites. Why? because social lending depresses the total potential volume of loans available to the economy as they are not capable of fractional reserve lending. As I understand it with social lending, lenders are matched to borrowers; $1 invested = $1 out in loans, less whatever fees are charged etc. By contrast, banks fractionally lend their reserves, therefore $1 invested will equate to a multiple of $1 of potential new loans. If you want to increase the amount of debt available to business and individuals, which the Fed does, then creating a situation where mainstream banks are in a position to lend is the best choice. Whether this is best for individual investors is a different matter.
Finally, I would guess that the actual figure for social lending is a small fraction of 1% rather than anywhere near 10%. If, however, the Fed believed that it could grow to anywhere near the 10% level by 2010 then they, through the SEC, would probably wish to act against social lenders both to retain control over the money supply and to stabilise the banks for the reasons outlined above.
-
I take your points, JG, but I don’t think that it’s a choice between the two. Perhaps it was distracting, and a bit glib, to contrast or lump together this decision with the SEC’s poor performance as a regulator in recent years.
My point is that SEC has shut down this whole area of innovation at time when I would think it would be very much to the benefit of the US economy to allow it to expand.
I’d agree with your assessment of the figure for social lending – Gartner’s estimate was for 2010. I thought it sounded optimistic, but it would appear to be out of the question now, certainly in the US.
-
More protectionism from the US, similar to the internet gambling clamp down. You can’t be an advocate for globalisation and free markets but then throttle it at home.
I expect in both cases they’ll be forced to yield to the march of progress before too long.
-
Any form of regulation based on restriction and control of information (the model currently used by almost financial regulators) won’t work in the information abundance economy of social media. Therefore, the actions of the SEC in this regard may impact the likes of Prosper in the short term – but will be overwhelmed in the long term.
All regulatory authorities need to wok out a way to regulate in the world of transparency and disintermediated information – and as I see it the only solution is to abandon an institutionalised model and develop a model based on process – because trust (which is what regulation is essentially all about) in the social media world is vested in processes not institutions.
The problem is that most regulators are confused as to their role – they tend to forget that they are there to create trust and believe that they are there to preserve institutions. Professions are obviously the worst in this respect because their method for creating trust is inextricably bound up in the preservation of institutions.
Leave a Reply
You must be logged in to post a comment.