Debt and Young Adults

It's been quiet over here on Utah Economist recently...  More activity over on the new Roadside MBA blog, so do have a look over there.  

I got a call yesterday from Jennifer Napier-Pearce, who's now covering the personal finance beat at the SL Trib.  (Raise your hand if you still miss her voice on KUER.)  Anyway, there's a Pew study about how debt levels among the young have fallen (mostly) since 2007.  Housing, auto, and credit card debt all down; student loan debt up.  Here's a link to the story, with ample economist commentary. 

Part of the reduction in debt is coming from changes in the mortgage market.  But there are also some interesting things going on in markets for automobiles.  Here's a quote from the Pew Study:

In 2007, 73% of households headed by an adult younger than 25 owned or leased at least one vehicle. By 2011, 66% of these young households had a vehicle. Among households younger than 35, outstanding vehicle debt declined from 2007 to 2010. In 2007, 44% of households younger than 35 had vehicle debt. By 2010, only 32% had vehicle debt. The typical outstanding amounts owed among young households with vehicle debt fell from $13,000 in 2007 to $10,000 in 2010.

Part of this is coming from changing attitudes toward debt, but there are also simply fewer new cars out there.  There was an article in the WSJ on Wednesday about how the low auto-industry production levels between 2009 and 2011 are impacting the used car market:  

The shortage of used cars stems from the deep plunge in new-car sales between 2008 and 2010, and the virtual disappearance of new-car leases during the financial crisis. As a result, three-year-old cars are now hard to find and even older models are holding their value.

These effects will probably continue to ripple through auto-related markets;  how do you think, for example, that the relative lack of 2009-2011 autos will impact revenues for auto repair shops (who probably prefer customers with older rather than newer cars...)?

And Speaking of Crowdfunding.....

Here's an interesting juxtaposition from today's Salt Lake Tribune.  On the front page, we have an article about an alleged Ponzi scheme that lifted $170 million from investors.  On the front of the Money section, we have an article about today's crowdfunding conference at the University of Utah, which unfortunately I'm not able to attend.  (You miss out on so much by having a job...)
Here's a quote in the crowdfunding article by Berkeley Geddes, head of a professional association:

"The crowd has a powerful ability and can say, ‘I know this person’s past and I can vouch for him, or I know his past and I have some concerns,’  Geddes said. "The crowd has a unique ability to help make sure that the entrepreneurs asking for the money" are legitimate.

I presume there were people vouching for alleged Ponzi schemers, too.   Potential crowdfunders should probably worry about the incentives of the people doing the vouching, which raises the question of who's going to vouch for the people doing the vouching.   And then who's going to vouch for the people vouching for the people doing the vouching.  And so on.

Crowdfunding and Financial Intermediation

City Weekly called a couple days ago with a few questions about the recently passed JOBS Act, and specifically about the new provisions for "crowdfunding" of small startups.  The article is here.

"Financial intermediaries" are institutions --- banks, venture capitalists, private equity, angel investors --- that make money by connecting investors with good investments.  If you have a deposit account at a bank, the bank is essentially borrowing money from you (paying you a low interest rate) and then lending it to someone else (and charging them a higher rate).  The bank makes a buck on the spread.

One question to ask with any sort of intermediary is why the parties on either side of the transaction can't simply go around the intermediary.  That is, if the bank is paying you one percent but charging a borrower three percent, then why can't you just call up the borrower and offer to lend at 2%?  You earn a higher interest rate on your money, and the borrower pays a lower rate.  This would cut out the middleman, and the banks would quickly go out of business.

This observation suggests that intermediaries can survive only if they're doing something better than you could do it yourself.  In the case of financial intermediation, one of the big possibilities is that banks/VCs/angels are better at distinguishing good investments from bad.  If borrowers know better than potential lenders whether their investment opportunities are likely to pay off, then you can easily get a market for lemons, which is a subject I blogged about in long-winded, four-part fashion back in 2009.

So I think the whole crowdfunding thing is a bit more complicated than just saying "Hey, let's use the internet to allow investors to connect directly with promising startups."  Banks and VCs do things that us regular people just aren't good at --- like reading financial statements and assessing future market growth --- and the internet isn't by itself going to make us a lot better at these tricky tasks.

Financial intermediaries are really interesting to economists, probably because the very fact that intermediaries exist tells us something about when markets work well and when they don't.  I'm attending the Financial Intermediation Research Society annual meeting next week, and you probably don't need me to tell you what a good time that is....