I thought I’d share with you something of which I’ve recently become aware. It’s not directly trading, per se, but definitely does fall into the category of potential ways to generate above normal ‘investment’ income.
A story that I don’t think anyone has missed in recent month has been the development of the so-called credit crunch. Basically, this is something which has come about as a counter move to the excessively easy lending which took place until relatively recently. It’s a natural reaction, of course. Lenders have been burned by high default rates on mortgages and other types of loans, so now they’ve drawn back and become more conservative.
Of course, when banks get cautious like this they make it harder for folks to get loans. Obviously, that’s a good thing in terms of helping right the ship, so to speak, but it often leads to problems. I can recall the early 1990′s when we went through this on the back of the last real estate bust when loads of thrifts and credit unions were closed. In my home state of Rhode Island the governor shut down all of the state’s credit unions for a while. Some never reopened. You can imagine the problems that caused.
We haven’t see that sort of thing come about this time – at least not yet. Even still, it definitely is harder to get loans, even for folks with good credit. Count on the ingenuity of the information age to find ways around the banks, though. There are developing what are known as peer-to-peer lending and borrowing networks. One of the biggest is Prosper.
The way these sites work is that they bring individual lenders and borrowers together. Basically, they take the banks out of the middle. I mean when you put your money in the bank they use it to lend to other folks. They pay you for using your money, but they charge a higher interest rate to on the loans they make, so they earn the difference (which is why a positively sloped yield curve is important).
These peer-to-peer lending networks allow us to do the lending and borrowing ourselves. That means as lenders we have the opportunity to earn more than we could have done just putting our money in savings accounts, money markets, or CDs. At the same time, as lenders we may be able to lower the interest rate at which we borrow. The networks all have their own specifics, but the basic idea is that it’s a competitive, auction-based process, which makes for some really interesting situations.
I have only just begun exploring this peer-to-peer lending/borrowing thing. It’s pretty obvious that as a borrower you would want to spread your risk out over multiple loans to thin out the default risk. Aside from that, I’m still learning. I would love to hear any experience you have had with this sort of thing.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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