An email I received in response to an article I wrote:
Hi
I have built delinquency models for a leading bank in the sub-prime market. I was really shocked about the high interest rates and the profits generated in the sub-prime market. This was before it collapsed.
Hi
I have built delinquency models for a leading bank in the sub-prime market. I was really shocked about the high interest rates and the profits generated in the sub-prime market. This was before it collapsed.
Your article "Micro-credit Bubble?" of August 2009 makes interesting reading.
I am one of the many Indians “doing well” in Canada. Today, my house value is $500K. In 5 years it grew from $350K. My wife and I have two cars and an outstanding mortgage of $200K and a car loan of $10K.
In reality if I look back, I have been brain washed to:
1. Have a good house, all appliances, latest gadgets, cars and keep increasing my wealth.
2. On getting a good job, I was brain washed to buy a house and build equity. The price of the first house was $200K, which was more that what its actual economic price must be. Having a good job and good credit score never made me think it was highly priced. The first time I learnt about high price was recently – when the housing market collapsed in the US. Housing prices kept on rising and within 5 years of buying my first home, its market price was $280K. At the same time, my salary and my wife’s salary had grown but not at 40% over 5 years.
3. I and my wife were made to feel we could go for a house worth $350K. We sold our first house bought the second at $350K and new furniture and new appliances. Now 5 years later it is $500K
What did I achieve?
1. A significant portion of my earnings have gone to repay interests on mortgages and house taxes and insurances. My real purpose of earning was not for paying mortgages and house taxes.
2. I have a loan of $210K. I had no loans when I stepped into Canada.
3. We have a very luxurious house. I and my wife come from very simple families. We now feel all this is a waste. It does not serve any economic purpose. We are stuck in the system. In reality we do not have economic freedom.
4. The market price of my house is $500K when its economic value is around $200K or less.
I see "economic growth" in India or is it an opportunity for the rich to become richer? I have been talking to those “benefited” by financial help. Unknown to the person who earns and pays his or her loans - there are many in the system who keep on "benefiting" by this financial help. These FI’s keep on making people go into higher and higher loans every time they clear their earlier loans. The interest rates in India are much more than in Canada. Anyone like me can borrow at 3.25% or less and give at 12.5% or more as a micro-finance loan. In the process, rather than helping the needy, the MFI is helping the rich become richer.
I want you to think about it. Build economic values and not capitalistic values. Ensure the women who the targets of MFIs, do not end up financially exploited by MFIs. Reduce greed.
I look forward to your views.
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8 comments:
This is the horrible story of so many people - but they must also take some of the blame & not complain only about the system.
Can you email me your article also?
Adi, the guy should just sell his house and get out.
@Anon - mail where?
agree with you veena, the guy should stop cribbing, companies advertise and incentivize that's their job. its his job to determine what he chooses to consume.
I don't think the guy is doing bad at all, or that he should just sell it and get out - I just think he doesn't understand the investment or doesn't want to, i.e. he's risk-averse - which actually might just be a good reason to get out of your debt and put your money into a safer investment.
His house is an investment - simple as that. I don't know what he means by economic value being $200k if the market value is $500k. If he has reasons to believe it's price is going to drop, then yeah, he should sell it immediately. If what he means is that the utility derives from the house is the same as what he would get form a $200k house, then maybe he should buy a cheaper house and put the rest of the money somewhere that he believes is appropriate (with regards to of his overall investment portfolio - diversity, risk, expected return, etc).
At any point of time, your net wealth is the your assets minus your debt; and in future, it will be the expected value of the assets minus the expected value of debt, converted to its equivalent today at the "risk free" rate. If you do the math and find your future wealth lower, then yeah, maybe get rid of the debt now - which in this case, would mean sell the house.
Re: interest rates in Canada vs in India - inflation and risk-free rate is also higher in India - so he might actually be paying greater "real interest" rate in Canada. Ideally, the currency exchange rate should follow the difference of the risk-free rates - if you think it won't, then you have an arbitrage opportunity, which might or might not be exploitable, depending on investment rules in the two countries.
Well, the guy seems to be blaming the system for "tempting" him.seems really dismayed to see his debt now and doesnt value his luxurious house. Therefore, I thought it makes sense for him to sell it and get out of the mess.
But how conveniently people blame the system !!! Never once think that they too could be responsible.
Even in MFI circles, it is always over-lending and is never over-borrowing.
I agree with Roy. he is educated and can choose wot to consume. he shud stop crying.
I have sent you a mail. Pls send your article as reply
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