Evil Diaries Addendum: Transaction Costs

As readers know, we last week featured Crispin Odey’s review of the prospects for Western economies and, quite possibly, others in the coming years. There is no obvious explanation as to how this despairing prospect has come to settle in. However, one feature stands out: we are grossly overgoverned by centre-left drivellers. These dreadfully silly and overpaid people have imposed layers and layers of what is fondly referred to as “regulation” in the public interest where in fact the cost and delay of the intrusion is ruinous and ineffectual.

I shall not detain you with individual examples since they would inevitably tend to be an argument from the specific to the general and that is rarely satisfactory. Instead I here take financing’s costs.

As is now well known, British banks have completely given up on financing. Their staff are brainless and terrified of doing anything outside the computer’s formulation of risk. There is no hope whatsoever since politicians imagine that their intervention in limiting HMG’s exposure to sensible lending procedures at banks assists despite the raft of evidence that it does not, cannot and never will.

As a result, alternative avenues are emerging despite the straightjacket of garbage by way of law that they face. I refer to money-lending, person to person lending and crowdfunding.

I do not propose here to cover payday loans other than to remark that I’ll bet all Lombard Street to a China orange that the FCA’s expensive intrusion this last year or so will achieve nothing. But I would say this of payday loans: only an idiot would take one out to start with and only someone right off the scale in self-control and understanding of human life would take out a second such loan. That being the case, the line is drawn: borrowing costs must be related to economic possibility and the judge of that desirable end must be the borrower. (Lest it be pointed out that I am advocating the ruination of the mentally subnormal I would just mention that a borrower to be judged against must be shown to be capax. That test knocks the spivs out in the first round.)

The beginning of wisdom in respect of many matters revolves round economic understanding of borrowing costs. Were lenders free to hawk their wares the public would tend to be better informed and to enjoy more choice. The lenders cannot since they are not allowed economically to gather their feed stock economically. The feed stock is of course the green stuff.

Take the average money-lender: he is not allowed to bid for deposits by the general public over the internet. Why? Because to do so he would need a banking licence. Make no mistake, granting such a licence would not protect depositors from the consequences of a money-lender’s default. Applying for and granting a licence merely costs a lot of money as applicants chase civil servants to review quixotic decisions: and no protection is afforded the public in practice. The result is utterly disproportionate transaction costs which in the post-Odey era we as a society cannot remotely afford. Even assuming we ever could – which I greatly doubt – just look at the current state of affairs here and on the Continent.

It does not remotely stop here. Person to person lending is an increasing fad where those engaged in it as an industry claim that they are FCA-authorised. They may be. But such authorisation does not lead to protection or improvement of the public’s position in the slightest. It merely imposes yet further transaction costs and, worst of all, delusion. We need an immediate review here by HM Treasury.

This silliness is frequently encountered: take crowdfunding, another recent fad. It is obvious that in practice the public is marching into a disaster since the public believes that FCA authorisation leads to the public’s protection. It does nothing of the sort. There is no guarantee against the public’s losses whether caused through incompetence or fraud. 

All this is obvious to anybody with half a brain. The key is to put the investor on notice that he is on his own. The prospectus rules are clear. Those who seek funds can do so either on their own representations or a prospectus should they seek so to label their efforts. With crowdfunding investors are invited to plunge off the deep end with the prospectus rules left to one side. How has this happened? Nobody seems to know and everybody is damaged in their assessment of matters since the economic route is not identified.