Tag Archives: Banking

Gambling Banking to Increase Savings?

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Gambling Banking

I just watched a YouTube video about gambling banking and how it might incentivize people to increase their savings. I’ve written about gambling addiction and predatory loans recently and this video brought both of those topics to my mind.

It’s highly likely that my research for those articles led the YouTube algorithm to send me this new video. In any case, I found the idea of gambling banking to be quite interesting and thought you might as well.

The Human Mind Prefers Gambling Banking

The basic idea behind gambling banking is the human mind’s propensity to prefer a low chance with a high reward more than a high chance with a low reward. Studies seem to show, and my own personal experience with people confirms, that people much prefer these types of gambles.

As a quick example. When offered a choice between a 100% chance to win five dollars and a 1% chance to win $500, people almost universally choose the later. Obviously, the math shows an equal return of investment but the allure of the high reward is much greater.

The studies cited in the video went into great depth to figure out exactly where the general cutoff point is in these mathematical models. At what reward point do people take the small amount over the large? If you’d like to learn more about those things, watch the video as I’m not going to focus on it any more. I think the results are accurate and that’s what’s important.

What is Gambling Banking?

Now, knowing that people much prefer the low chance, high reward model; a test case was setup at a banking institution. If people put a certain amount or more in their savings account, there was a small chance the bank would match that amount.

The result, according to the video, was startling. Many, many more people started putting money in at the minimum level, let’s say $5000, than the bank saw in the past. This makes sense to me.

Why is Saving so Important?

The amount of money you save is a tremendously important factor when it comes to predatory loans. People who have enough to pay for a financial emergency, a few thousand dollars, don’t have to take out high-interest loans. Thus, they don’t get into financial trouble that plagues them for the rest of the lives.

A common reason people take out such loans are car repairs. If they can’t get to work, they lose their job. A short-term loan of a few thousand dollars makes financial sense. Sadly, these are the sort of people who the bank generally will not give loans because of their poor credit rating.

Do we need Government?

This is the part of the gambling banking plan that really attracted this Libertarian. No government necessary. If the banking institution become aware of this model and realize it will result in people putting more money in the bank, they will implement it completely on their own. Banks don’t need the government to tell them how to make money.

Downside

It’s important to recognize there are very few scenarios without some downside. In this case, if people are putting more of their discretionary money into banks rather than buying luxury items, there is less spent overall.

Still, this isn’t a huge deal as the money people put into banks doesn’t just sit there. It is loaned out to others who use it.

Conclusion

Interesting study, great idea. Let’s go!

Tom Liberman

Predatory Loans in Utah

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Predatory Loans

I just read an interesting article about how a loosely regulated market allows for what can only be described as predatory loans in Utah. It’s an interesting question for me because the main rational behind allowing loans with an interest rate of up to 200% is aligned with a Libertarian ideology.

Basically, predatory loans in Utah are allowed because the legislature in that state doesn’t put a legal cap on the highest interest rate allowed. Most states do so and the Federal Government mandates active-duty service members, but no one else, cannot be charged more than 36%.

Are they Predatory Loans?

Let’s dispense with this question right away. The loans are structured in a way to trap low-income borrowers into paying back far more than they took out. The loans are absolutely predatory. Most of them come with a 90-day stipulation that if you pay it back in that amount of time the higher interest rate doesn’t apply.

They are largely taken by people in desperate situations, often an unexpected car repair. Without a car the borrower will lose their job. Without a job …. Anyway, the design is predatory, that much is certain.

The Service of the Loan

While the loans are certainly predatory, the people who take them are in desperate need and cannot get a loan legally any other way. They generally have poor credit ratings and cannot get a loan from a bank that doesn’t offer such a high interest rate. This because most states regulate an interest cap.

Banks know that such loans have a high default rate. In order to make up for that default rate, a crazy-high interest rate is charged for those that cannot repay immediately.

The people who take these loans are the same people who end up owing money to extra-legal lending sources and payday loan companies.

Different than Banks and the Government?

I’ve written about how the government itself operates like a loan-shark with ridiculous fees and escalating fines for late payments. I’ve also talked about how the government and private industry intentionally created the student loan situation in which we find ourselves.

The government intentionally bankrupted the United States Postal service largely at the behest of banks in order to take out massive loans with the never-ending interest payments.

Financial Ruin of Unpaid Predatory Loans

One of the interesting things about loans is if a bank gives issues too many that default, the bank itself goes out of business. The bank doesn’t have a pile of cash sitting in the vault. They take the money you give them in interest payments and loan it to others. If enough others fail to pay, the bank gets into trouble. Some may remember the recent housing crisis. The student loan crisis we currently face. These are directly related to too many bad loans resulting in defaults.

This is why the Utah banks in question don’t do the majority of their business in such loans. It’s a dangerous game to play.

Is Utah in the Wrong?

Is Utah wrong to allow banks to charge up to 200% interest rates for these types of loans? If the banks do not provide this service, will extra-legal loan-sharks step in? The government, with their long record of predatory behavior, is hardly an institution I trust to rein in this practice.

There is real damage, of course. A certain percentage of those who take out the loans cannot pay them back in 90 days and end up with unsustainable payments. Even if people stop paying and incur some court-ordered lesser payment plan, they suffer financial difficulties for a long time if not the rest of their lives.

Conclusion

Ok, Tom. The loans are predatory and people will suffer. But you don’t think regulating them will help. Do you have anything useful to say or was this just an intellectual exercise?

Good question. I think some problems just don’t have solutions. As long as people are poor and need money, such loans will exist, legal or illegal. It’d be nice if we didn’t have poor people. If there was a way to provide for all people in need, whether they deserve it or not, whether they’ve earned it or not. There currently is not such a system in place.

I guess my only real point here is to beware of what appears to be a simple solution to a complex problem. It can make things worse rather than better.

Tom Liberman

Fired for 1963 Fake Dime Stunt – How Badly Worded Laws Endanger Freedom

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Bad WordingThere is an interesting little case in the news today that reminds me how important it is that legislators draft well-worded laws. A fellow by the name of Richard Eggers worked for Wells Fargo as a customer service representative. Way back in 1963 he used a fake dime to do some laundry. He was sentenced to two-days in jail for this crime and served his time.

There is federal legislation in the banking industry that forbids companies to employ anyone convicted of a crime involving dishonesty, breach of trust or money laundering. That’s pretty broad and without an exception for misdemeanors and a statute of limitations it can be used unfairly. One supposes that Mr. Eggers may have been fired for other reasons but let’s ignore that for the moment and focus on how badly worded legislation can easily be abused by aggressive employers and prosecutors.

The law is designed to prevent con-artist type people from gaining employment in the banking industry. The thinking being that such people will dupe investors out of large sums of money and shake the faith in the banking business. I’m just not sure that such a blanket law is useful.

While it seems to make sense that we don’t want such people at banks I think it runs counter to Libertarian ideals. If a person is competent at their job then they should keep it. If they excel at their job they should be promoted. If a person once committed a crime then that should be taken into account when hiring that person certainly, but to eliminate them from consideration because of previous acts, for which they’ve already been punished, seems unfair.

Many of the laws that came out of the financial crisis are intended to ease the minds of the public but do little to actually prevent the activities that led to the problems. Frankly, I’m in disagreement over laws that prevent hiring someone because of previous misdeeds for which they’ve already been punished but that’s really secondary to my main argument.

When laws are passed to try to prevent something they need to be carefully worded. In this law there is wording that allows for a waiver if the crime didn’t involve jail time. It seems to me that it could easily be modified to include misdemeanors even if they involved some minimal sentence.

I don’t think regulatory laws are all bad nor do I think the people who enacted this law meant for it to be enforced in this fashion.

People will always try to twist the exact wording of laws to their own benefit and careful consideration must be made while writing legislation. The problem is that changing badly worded laws becomes quite difficult when getting the law passed in the first place was contentious. As was the case here.

There is no easy answer to problems like this. Badly worded laws are dangerous to the freedom of all free people. They will be abused by zealous judges, prosecutors, employers, law enforcement officials, and others to try to bring about an unjust resolution.

Tom Liberman
Sword and Sorcery fantasy with a Libertarian Twist
New Release: The Hammer of Fire