Monday, April 6, 2009

Dubai as a giant bubble

The Toronto Star has an interesting article on Dubai called Dubai: How not to build a city. It's interesting throughout, but something that stuck out was this part:

It's Abu Dhabi, back down the road, that has the vast bulk of the U.A.E.'s oil reserves – 95 per cent. Dubai has less than five per cent, and it is not expected to last more than a decade. The economy relies on real estate, tourism and Abu Dhabi, the emirate that is reported to have invested upwards of $10 billion (U.S.) in Dubai's economy.

You always hear that Dubai's wealth is a sort of anti-Dutch disease (this idiot was saying it last year), whereby the oil ran out and the rulers had to get smart, and they turned their economy into a wealthy trading state. But is it possible that the entire city and economy of Dubai was just an Abu Dhabi-inflated bubble?

Friday, April 3, 2009

The myth of American guns in Mexico: debunked

Radley Balko at Reason's blog offers a corrective to the myth circulating recently that the vast majority of weapons used by drug cartels in Mexico come from America. Apparently not only is that not true, but it seems that a similar number of guns leak out of the Mexican police force itself (which is increasingly funded by...yep, you guessed it, the US government!).

From Hillary Clinton to Diane Feinstein to Bob Schieffer to the New York Times, gun control opponents keep repeating the claim that 90 percent of the guns recovered in Mexico's drug war were sold in the United States.

William La Jeunesse and Maxim Lott say it just isn't true. As it turns out, the 90 percent statistic actually concerns only those guns Mexican authorities sent to the U.S. for tracing. [...]

But that's not what gun control proponents have been saying. They've been saying nine of 10 guns used in all Mexican drug crimes came from the U.S. That number, La Jeunesse and Lott report, is closer to 17 percent. [...]

The report explains that most of the weapons used by Mexico's drug cartels are actually illegal in the U.S. Even if they weren't, it makes little sense to suggest drug cartels are going through the hassle of sending thousands of "straw buyers" across the border to legally purchase guns in America when more powerful black market weapons are available from Russia, South America, China, and Guatemala without the bureaucracy and risk of registration.

Wednesday, April 1, 2009

Regulatory capture in P2P lending

Via The Browser, this article from some Slate affiliate has an excellent example of regulatory capture in action in the peer-to-peer lending industry.

For those of you unfamiliar with the concept, essentially it's a broker who facilitates loans between regular people over the internet. There's also a sort of charity version of this – Kiva – but the difference between P2P lending and Kiva is that Kiva doesn't return a profit for lenders whereas P2P lending generally does, and also P2P lending is often from people in rich countries to people in rich countries, whereas Kiva has people in rich countries lending to those in poorer ones.

But anyway, it looks like these P2P sites like Prosper and Lending Club return relatively high profits to lenders (7-9% are the quoted figures) with very low (>1%) delinquency rates. One forward-looking company, Lending Club, realized that regulation was imminent, so they did what any prudent firm does faced with the incentives of imminent-yet-malleable regulation: they tried to co-opt them for their own benefit, and it looks like they succeeded:

With venture capital money behind it and a high-powered team of former executives from American Express, Goldman Sachs, MasterCard, and E*Trade, [Lending Company] decided to be proactive and hired lawyers who reached out to the SEC in early 2008. "We wanted to help define the space, to participate in the dialogue about how our industry would work, and how it would be regulated," CEO Renaud Laplanche says. "Because we really expect this business to grow huge in coming years, and we wanted to be sure everything was done right." [...]

In April of 2008, Lending Club registered with the SEC and accepted the somewhat daunting task of filing every single loan with the SEC as a security. Starting in October—just in time for the global economic meltdown—Lending Club went online with full federal approval and all paperwork duly filed. Laplanche told TBM that the process has now been mostly automated; the same technology that enables his company to replace a traditional bank or collection agency allows it to make regular automatic filings through the SEC's EDGAR filing system. While there was some initial pain and expense, he thinks they are far outweighed by the potential of the business.

So now Lending Club is quickly gaining ground on the hogtied Prosper and Loanio. While its main competitors twiddle their thumbs waiting to get back into business, the company has facilitated more than 3,000 loans for $30 million.

So basically, because they were the first ones to ask about the rules, they were the only ones not blind sighted by them, and so they get to do $30 million in competition-free business. Now, some could say that that's their reward for being good corporate citizens and proactively seeking out regulation, but then again, I don't think it's a coincidence that they also happen to have "venture capital money behind it and a high-powered team of former executives from American Express, Goldman Sachs, MasterCard, and E*Trade." I'm not sure that stacking the game in favor of incumbents with deep pockets is really the best way to encourage innovation.