Edmunds is a financial expert, a professor at Babson and world economist frequently contacted by media outlets including CNN, BBC, Business Week, Tech Republic, Barrons, Bankrate and America Economia to name a few. Edmunds comments on the newest small businesses, alternative ways for how they raised capital, IPOs, ICOs and how they will perform for the economy at large. He is also the author of Rogue Money - an encyclopedia of alternative and crypto currencies. His primary areas of interest are international finance, financial reform, cyber currencies, capital markets and emerging markets.
Outline of Chapter on Empowering the Unattended Market
Over 2 billion people unbanked. No formal contact with the financial system.
Most small account holders get overcharged or ripped off.
Loans usually too expensive, repayment terms too onerous. Traditional financial services are too expensive, too rigid.
Default is treated too harshly.
Informal financial services are inadequate.
Informal financial services offer only a few products.
Most national financial systems work for the upper strata but are intimidating and unhelpful to people born into the lower socioeconomic strata. National financial systems are one of many barriers to social mobility. Other barriers such as education, gender, and race, also impede social mobility.
Many people in the lower socioeconomic strata have had unpleasant experiences with traditional financial service providers, so they tell other people in their same socioeconomic strata to have nothing to do with formal financial services.
Until recently it was difficult to create organizations that can provide low-cost financial services.
Governments sometimes tried but ran afoul of the same high costs, and also were often hijacked by well-connected people, who dished out loans to friends and relatives, not to the people who were supposed to get the loans.
Micro-finance, pioneered by Yunis in Bangladesh, had some successes. Regrettably it was also pushed too far, particularly in parts of India, where poor people were persuaded to accept loans without having any profitable use for the loans. They were often unable to repay the loans, and the results were bad for those people.
Micro-finance is expensive to administer, because it uses traditional accounting and auditing. That makes micro-finance expensive for borrowers, because borrowers have to pay high enough interest rates to cover the cost of accounting for small loans, and also to compensate for the late payments and defaults. People who borrow from a micro-lender often have unforeseen
Innovations now make it feasible to offer low-cost financial services. Clients who need small accounts can be served.
The two innovations which together open up possibilities are blockchain and crowdfunding.
Blockchain accounting is drastically less costly than traditional accounting. It is nearly impossible to hack and very quick and easy to audit. A financial services provider can be trustworthy and can operate automatically, without human intervention in most cases. It can be set up so that it is relatively free of bias. The rich person does not have the same advantage that they would have in a traditional financial service interaction.
Crowdfunding allows individuals to cut out the middleman. Individuals have traditionally delegated their money to banks, which then lend the money to the bank’s choice of borrowers. This time-honored practice is expensive, wasteful, and often misallocates a scarce resource, I.e., loanable funds. Crowdfunding can give better results by taking advantage of the wisdom of the crowd.
Crowdfunding also can be less rigid in dealing with late payments. Crowdfunding can allow lenders to charge interest rates that are high enough to compensate for losses due to late payments or defaults. People from the lower socioeconomic strata can try to rise above the strata into which they were born by borrowing small amounts of money. If they are unable to pay, they do not have to bear the burden of a bad credit rating, as they would have to if they borrowed from a traditional lender and then could not pay.
To foster social mobility, empower latent entrepreneurs to achieve their potential, and to attract unbanked people into the financial system, a strategy is as follows.
Step one is to create crowdfunding platforms that offer “starter” loans to people who have never borrowed money before, or who have only borrowed money from informal “loan sharks” of the sort that prey on energetic, hard-working people in poorer neighborhoods.
The “starter” loan would be for an amount large enough so that the borrower would take it seriously and be conscientious about repaying it in monthly installments. A good amount for a “starter” loan would be US$ 100. (Check Dave) The purpose of the “starter” loan is to identify people who have the personal qualities necessary to manage money. The “starter” loan would not be large enough for the fledgling entrepreneur to launch a business. First the would-be entrepreneur would show self-discipline and would learn how lenders operate. The would-be entrepreneur would be told that lenders would take him seriously and lend him more money if he demonstrates the capability of treating the “starter” loan the way that lenders want.
The “starter” loan would be provided by investors on the crowdfunding platform. The entire US$ 100 would not come from one single investor. Instead, each lender would provide some portion of the US$ 100, perhaps US$ 10, or US$ 25, but not more than that. The lenders on the crowdfunding platform would each make a decision to support the “starter” loan because they saw some potential in the applicant, and chose to invest in hopes of making a profit on their correct judgement.
Economist weighs in on $10,000 student loan forgiveness impact on inflation
"I would first emphasize that people graduating from high school would be more willing to go to university. They would not fear graduating with a huge burden of student loans. They would see that they can have a better chance of a white-collar job and a middle-class life.
Conservatives worry about inflation, but should not. They see an immediate increase in demand for goods and services, with no immediate increase in supply of goods and services. But that is a short-term forecast only, and probably not the whole short-term effect. In the longer run, having a more productive labor force creates more goods and services, so the effect of loan cancellation would be to increase the supply of goods and services, which would reduce inflationary pressure."