Comments on: The Cost of Doing Good http://fellowsblog.kiva.org/2009/06/18/the-cost-of-doing-good/ Kiva Fellows share their experiences from the field Mon, 23 Nov 2009 09:29:35 +0000 http://wordpress.com/ hourly 1 By: rhea http://fellowsblog.kiva.org/2009/06/18/the-cost-of-doing-good/#comment-15253 rhea Mon, 22 Jun 2009 16:04:29 +0000 http://fellowsblog.kiva.org/?p=5158#comment-15253 There is no price one can place on doing good, whether at home or across the globe.... you being there without compensation speaks volumes of what can and is being done to help others There is no price one can place on doing good, whether at home or across the globe….
you being there without compensation speaks volumes of what can and is being done to help others

]]> By: Nancy Tuller http://fellowsblog.kiva.org/2009/06/18/the-cost-of-doing-good/#comment-14788 Nancy Tuller Fri, 19 Jun 2009 08:05:51 +0000 http://fellowsblog.kiva.org/?p=5158#comment-14788 I somehow knew you would be the first to respond, Philip! I so enjoyed your response, and as ever, you give me much to think about! And I should have made clear in my blog that I was talking about flat (simple) interest, because that is generally the type of interest charged on microloans. Thank you for bringing that up. And as usually happens, I agree with your final assessment, that we have a challenge still ahead of us to re-create credit/issuance and exchange systems in general. You are doing great work in that direction, and I'm so happy to hear of your growing success in that work! I somehow knew you would be the first to respond, Philip! I so enjoyed your response, and as ever, you give me much to think about! And I should have made clear in my blog that I was talking about flat (simple) interest, because that is generally the type of interest charged on microloans. Thank you for bringing that up. And as usually happens, I agree with your final assessment, that we have a challenge still ahead of us to re-create credit/issuance and exchange systems in general. You are doing great work in that direction, and I’m so happy to hear of your growing success in that work!

]]> By: Unilove http://fellowsblog.kiva.org/2009/06/18/the-cost-of-doing-good/#comment-14773 Unilove Fri, 19 Jun 2009 07:16:02 +0000 http://fellowsblog.kiva.org/?p=5158#comment-14773 Wow. Wow.

]]> By: Philip Beard http://fellowsblog.kiva.org/2009/06/18/the-cost-of-doing-good/#comment-14685 Philip Beard Fri, 19 Jun 2009 00:46:42 +0000 http://fellowsblog.kiva.org/?p=5158#comment-14685 Dear Nancy, Thank you immensely for this detailed, spirited defense of standard MFI interest charges. You have made a convincing case (and a very welcome one -- it's always wonderful to learn of personal and institutional success stories in the realm of poverty alleviation!) for the RELATIVELY low interest charged by SAT and its sisters. And your account has led me to ponder anew, for the how-many-thousandth time, the nature of interest and the role it plays in different financial venues. What occurs to me to emphasize this time is the fundamental difference between simple and compound interest. As you point out, the repayment rate for MFI loans is very high compared to the performance of standard commercial loans. I take this to mean that the loans are not only repaid "someday" with greater certainty than are commercial loans, but that they are also more frequently repaid ON TIME. This means that the interest typically paid is limited to that applied to the original loan principal -- i.e. that the interest-on-interest compounding mechanism is far less frequently invoked than is the case with commercial loans. This keeps the lending-earning-repaying cycle relatively transparent, simple, and from the borrower's viewpoint affordable. I am also assuming that the micro-loans that MFI's make do not have compound interest built into their repayment structure as do, say, standard mortgages and other long-term loans. What makes the MFI system so much more humane and sustainable than conventional banking practice, it seems to me, is precisely this non-reliance on compound interest as part and parcel of the loan process. Just look at what's happened to American credit card debt, as a dramatically contrasting case study: People miss payments because they've been encouraged to overextend themselves, and via compound interest at around 25% they end up so deep in the hole that no matter how hard they work, they can't climb out of it anymore. To say nothing of the massively failed macro-financial picture: Interest-bearing loans of hundreds of TRILLIONS of dollars have been made to finance the purchase of high-risk derivative "instruments" like debt swaps and subprime mortgage packages which ultimately fail because they're essentially Ponzi schemes -- and the composite debt for those derivatives is more than three times the GLOBAL GDP! That means they can never be repaid, even if all our resources were committed to repaying them. I remain as committed as ever to the designing and implementing of credit regimes based on concrete value rather than speculative value, and that do not charge interest unless they create the money to pay the interest with, separately from the principal that they lend. The functional mechanism here, as we've talked about many times, is SPENDING rather than lending money into existence. And I am learning from various sources that such responsible, non-scarcity-producing spend-and-lend regimes have a history -- sort of a parallel banking universe that nowadays few people are aware of. Perhaps the currently most relevant example is the Bank of North Dakota, a publicly owned state bank that has been spending money into existence and making low-interest loans available to large numbers of people ever since 1919, when it was founded to save farmers from foreclosure by the railroad-owned big banks. Good heavens, if North Dakota can do it, surely other states, counties, countries can do it as well -- if only we can surmount the dominant mythology that tells us that the only responsible way to issue money is via private banks charging whatever interest (and demanding whatever collateral) the market will bear. Thanks in large part to your direct experience of working as a micro-lender, and the insight into MFI practices that you are gaining, my cautions and suspicions regarding microlending are much allayed. What you describe is a credit system that extends services to people otherwise ineligible, and as such it is definitely a major step in the right direction. But still, to reach its goals it avails itself of a corrupted, unsustainable tool, i.e. national legal tender issued by private banks at compound interest. Our remaining challenge is to create credit systems that reclaim all aspects of the process, first and foremost the issuance mechanisms, for the "commons" sphere alongside the private sphere. Only once we have broken the private banks' monopoly on credit issuance will we be able to look towards a genuinely sustainable financial future. Have you had a chance yet to read Tom Greco's new book, "The End of Money and the Future of Civilization"? Do it as soon as you can, and keep imagining how we can take a Good Thing -- Kiva-style microfinance -- and keep moving it toward ever better manifestations. As ever, your good friend Philip Dear Nancy,
Thank you immensely for this detailed, spirited defense of standard MFI interest charges. You have made a convincing case (and a very welcome one — it’s always wonderful to learn of personal and institutional success stories in the realm of poverty alleviation!) for the RELATIVELY low interest charged by SAT and its sisters. And your account has led me to ponder anew, for the how-many-thousandth time, the nature of interest and the role it plays in different financial venues.
What occurs to me to emphasize this time is the fundamental difference between simple and compound interest. As you point out, the repayment rate for MFI loans is very high compared to the performance of standard commercial loans. I take this to mean that the loans are not only repaid “someday” with greater certainty than are commercial loans, but that they are also more frequently repaid ON TIME. This means that the interest typically paid is limited to that applied to the original loan principal — i.e. that the interest-on-interest compounding mechanism is far less frequently invoked than is the case with commercial loans. This keeps the lending-earning-repaying cycle relatively transparent, simple, and from the borrower’s viewpoint affordable.
I am also assuming that the micro-loans that MFI’s make do not have compound interest built into their repayment structure as do, say, standard mortgages and other long-term loans.
What makes the MFI system so much more humane and sustainable than conventional banking practice, it seems to me, is precisely this non-reliance on compound interest as part and parcel of the loan process. Just look at what’s happened to American credit card debt, as a dramatically contrasting case study: People miss payments because they’ve been encouraged to overextend themselves, and via compound interest at around 25% they end up so deep in the hole that no matter how hard they work, they can’t climb out of it anymore. To say nothing of the massively failed macro-financial picture: Interest-bearing loans of hundreds of TRILLIONS of dollars have been made to finance the purchase of high-risk derivative “instruments” like debt swaps and subprime mortgage packages which ultimately fail because they’re essentially Ponzi schemes — and the composite debt for those derivatives is more than three times the GLOBAL GDP! That means they can never be repaid, even if all our resources were committed to repaying them.
I remain as committed as ever to the designing and implementing of credit regimes based on concrete value rather than speculative value, and that do not charge interest unless they create the money to pay the interest with, separately from the principal that they lend. The functional mechanism here, as we’ve talked about many times, is SPENDING rather than lending money into existence. And I am learning from various sources that such responsible, non-scarcity-producing spend-and-lend regimes have a history — sort of a parallel banking universe that nowadays few people are aware of. Perhaps the currently most relevant example is the Bank of North Dakota, a publicly owned state bank that has been spending money into existence and making low-interest loans available to large numbers of people ever since 1919, when it was founded to save farmers from foreclosure by the railroad-owned big banks. Good heavens, if North Dakota can do it, surely other states, counties, countries can do it as well — if only we can surmount the dominant mythology that tells us that the only responsible way to issue money is via private banks charging whatever interest (and demanding whatever collateral) the market will bear.
Thanks in large part to your direct experience of working as a micro-lender, and the insight into MFI practices that you are gaining, my cautions and suspicions regarding microlending are much allayed. What you describe is a credit system that extends services to people otherwise ineligible, and as such it is definitely a major step in the right direction. But still, to reach its goals it avails itself of a corrupted, unsustainable tool, i.e. national legal tender issued by private banks at compound interest. Our remaining challenge is to create credit systems that reclaim all aspects of the process, first and foremost the issuance mechanisms, for the “commons” sphere alongside the private sphere. Only once we have broken the private banks’ monopoly on credit issuance will we be able to look towards a genuinely sustainable financial future.
Have you had a chance yet to read Tom Greco’s new book, “The End of Money and the Future of Civilization”? Do it as soon as you can, and keep imagining how we can take a Good Thing — Kiva-style microfinance — and keep moving it toward ever better manifestations.

As ever, your good friend
Philip

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