House Rent Blues: On legal loansharks and crowdfunding

So I haven’t managed to get a blog post out for a couple weeks. That’s partly because I’ve been having some cash-flow management problems, due to some crap planning on my part and some unfortunate payment delays. This is an ongoing issue in freelance life, to smile through gritted teeth when someone at an organisation tells you the admin guy went on holiday and forgot to process your invoice. In a situation when one’s reserves are marginal, small frictions in the system can wipe you out.

Needless to say, when my landlord sent me an sms a few weeks ago saying ‘You haven’t paid your rent, and you have six months of bills to pay too,’ I got a deep down chill. My landlord is a cool guy. He only has one name, and our contract is informal at best, built on trust and belief in human nature rather than legal structures. That’s why he gave me some leeway, and that’s also why I didn’t want to abuse that trust. So I called up my friend George, and asked him what I should do. He wrote a song for me with some suggestions about how to deal with the house rent blues:

It’s an ancient blues, the house-rent blues, and financial services for people suffering from cash-flow irregularities are probably as old as the moon. Short-term loans attached to long-term shackles have long been the speciality of a certain class of societal demon called the Loan-Shark. I’ve been seeing the Loan-Shark in my dreams, under a bridge, at the crossroads of Highway 61 and Highway 49, right there in Clarksdale where John-Lee Hooker wrote the song. In that dream the Loan Shark says “35% interest per month, secured on your soul” and hands me a contract to sign. “That’s pretty steep” I say, “Are you regulated by the SEC?” He’s taken aback. “Hell no brother, but you can count on me.” I look at the small print on the contract. It says: “You can check out any time you like, but you can never leave.” Yes it’s true, the Devil uses clichés from the Eagles.

The dark desert highway of the Loan Shark extends around the world. You find them in Brazil, you find them in them in South Africa. In Bangladesh you’ve got the ‘5-6’: The guy that loans you 5 taka in the morning, and gets 6 taka back from you at night. That’s 20% interest in one day, which is about 7200% interest annually, uncompounded. That what you call raping the time value of money.

Anyway, in dealing with my cash-flow problem I decided to stay away from Brixton’s loan sharks and to take a look at the legal pay-day loan services. Payday loans are like advances on a salary. You show them proof that you will be getting paid at some point. They advance you the money. You pay the money back with interest when you salary comes through. It’s a way to tide you over liquidity crises.

There’s a big new payday loan outlet that recently opened up by the Brixton Academy, opposite the St. Barnados Charity Shop. I had to wait for a while to get served, and watched a women in her early 30s sort of plead with them for a two-day extention on a £200 loan that she couldn’t quite pay back yet. I’m not sure there was a pleasant story behind her situation, and the lady who served her was gently refusing. It can’t be an easy job dealing with people on the thin-edge of financial stability.

LO-FI FINANCE

When my turn came, I got served by a young guy who was quick to tell me that the company is actually American, and that they have six outlets in the UK, the Brixton branch being a flagship of sorts. As for the terms of their payday loan: 25% per month, which is 300% per year, more modest than the classic loan shark, but ridiculous costly nevertheless. In order to get a £625 pound advance on your paycheck, you’d have to pay them back £780. I asked what would happen if I didn’t pay back in time. He said the matter is then passed on to their payment delinquency service, who would organise an ‘alternative payment plan’.

I reckoned I might check out some of the online payday loan services instead. Payday UK comes top of the search results. Again, the terms of the loan are 25% interest per month. Yep, for a £400 advance, you pay back £500 in a month. Wonga is another one, only this time it has a deceptively cuddly name and even worse terms: For £400 loan, you pay back £525 within a month. This really does not seem like a sustainable business model and people looking for £400 advances aren’t really the kind of people who should be spending £125 on liquidity management. There must be social enterprise models waiting to emerge in this space…

Out of curiosity I visited the pawn shop. Pawn shops allow you to pledge gold or jewelry as collateral in exchange for a loan. I didn’t actually have anything valuable to pawn, but if I did, their deal was better, at 6% interest per month. 

WILL YOU ACCEPT MY AMULETS AS COLLATERAL?

The lower interest rate is a due to the fact the loan is secured on some valuable bounty, so if you don’t pay back, they just keep your stash. Collateral lowers your ‘cost of capital’ because it provides protection to the lender, and it’s one of those unfortunate realities that those who possess collateral tend to be wealthy individuals. Some might say that that’s a reason why wealth tends to concentrate around existing wealth… ahem, Mr. Marx.

So what do you do when you don’t have collateral to base a loan off? You label yourself an entrepreneur, and you raise money against the fabulous future wealth that you claim you'll create. That’s what I was thinking when I went to a talk on crowd-funding, given by Theresa Burton from a company called BuzzBnk. The idea behind crowd-funding is that you attract small-scale (philanthropic) investors to contribute to your cause. You need a catchy story to get people to invest in you though, and ‘Can you guys give me £400 so that I can pay my landlord’ is not going to cut it. On the other hand, ‘Can you give me £3000 so I can finish my book’ just might…. Did I mention that I’m writing a book? (more on this topic later)

In the end, time constraints required that I turn to the most powerful and ancient financial service: Angel investors…. By which I mean friends, the great providers of flexible and low interest loans. Thanks guys.

The moral of the story then is that I continue to live an unsustainable life and have a great new idea for an unprofitable business: A freelancers’ co-operative to help London’s army of freelance workers deal with the ordeals of invoice delays. This sounds like a good idea, to sink my energy into something which will have… um …. marginal and sporadic cash flows attached to it, at best.

But who needs stability when you have one bourbon, one scotch, and one beer…

As for how I defeated the Loan-Shark, I had another dream last night: 

Suitpossum does Food Speculation: Farmers, Hedge Funds and the Ecologist

On Thursday I made my first appearance in the Ecologist, by all accounts one of the world’s leading environmental publications, founded in the 1970s. Yeah, airpunch!

The subject of the article was food speculation. It sounds obscure, but concerns around speculation on agricultural futures have been seeping into the mainstream agenda over the last few months in the context of rising global food prices. There is rising suspicion that the activities of financial players in commodity futures markets could have a distorting effect on futures prices, and thus that food price increases might be linked to computer algorithms running in some hedge fund in Mayfair.

WHEATBIX FUTURES

Having had experience in the world of derivatives, I’m always prepared to accommodate the idea that irrational behaviour in financial markets could distort prices. That said, I’ve remained cautious about populist arguments about why speculation must necessarily be a negative force. Thus, in late 2010, I attended a talk on agricultural speculation organised by the World Development Movement (WDM), who were one of the first to make a scene about this issue. I asked some difficult questions to the speakers and got thinking about the argument. Several months down the line, I ended up working with WDM on a report, and found myself joining a chorus of veritable shitstirrers raising awareness about the potential dangers of this issue.

The debate started a few years ago in the context of the 2008 commodity price spike. In the US, advocacy group BetterMarkets have been a leading critical voice advocating heightened regulation and position limits in agricultural futures markets. The US think-tank, IATP, has also been outspoken, recently releasing a compendium of useful articles they’ve published on the subject of excessive speculation. In the UK, WDM have been a trailblazer on the radical front for the last couple years, but more mainstream UK institutions have recently been catching onto this as well. Last month, Christian Aid added a bit of righteous anger in their report Hungry for Justice, and Oxfam is getting uneasy about it too. Then last week the UN global trade body, UNCTAD, added their stamp of disapproval towards ‘financialisation’ and poor transparency in commodity markets, with a hard-hitting technical report on the matter.

The UNCTAD report should hopefully add some more fire into the debate, which since 2010 has been somewhat stifled by an academically controversial, but politically safe report commission by the OECD. The OECD report’s authors, Scott Irwin and Dwight Sanders, claim to have found no connection between the increased participation of financial players in commodity markets and the crazy 2008 commodity spike. I’m all for healthy skepticism, but there’s something vaguely reminiscent of climate change denialism in the way that conservative pundits have latched onto this work as if it’s the final be-all-and-end-all of the matter. In real academic life, nothing can be settled with a single study, and the extensive critiques of this piece have been strangely ignored by the mainstream economic fraternity.

Certainly, this issue has the potential for highly polarised opinions. In January, Murray from WDM went head to head with Scott Irwin on CNBC, and to my mind, lays the smackdown on him. I mean, I’m sure Scott is a cool guy to hang out with at the pub, but he makes almost no attempt to engage here. 

A similar level of disinterest is found in Terry Duffy, the chairman of the CME group, in his debate against the UN's Olivier De Schutter on BBC’s HardTalk in March. Terry says there’s no problem. Olivier says there is. Terry behaves like a condescending dick. Olivier doesn’t. Who should I believe?

For my part, I took part in a wheat price debate on the Farmers Guardian website last week. I suggested that farmers concerned about wheat price volatility should lobby financial institutions to spend less time investing in food prices, and more time investing in agricultural innovation and productivity. Failing that, I suggested farmers should band together, form a hedge fund, and use their superior knowledge of agricultural realities to outclass the precocious pseudo-farmers sitting in Barclays Capital. I got some enthusiastic responses to that.

I’d love to see that happen. What I don’t want to see happen is for this issue to go unscrutinised, only to lead to seriously serious fallout five years down the line. We've got to get the precautionary principle into action, so please do take a read of my Ecologist article, join the debate, and feel free to leave comments.

Environmental Finance: A Roadmap beyond the Dirty Dark Spread

Do you know what a dirty dark spread is? To work it out you take the price of wholesale electricity, and you subtract from that the price of coal multiplied by an efficiency factor. What you’re left with is an indication of the profitability of a coal-fired power station. And we call that the dirty dark spread.

HOW DO YOU LIKE YOUR DARK SPREADS?

But why ‘dirty’? We call it dirty because there’s a clean version of the dark spread, called the Clean Dark Spread. It's basically the same as the dirty one, except it adds the price of carbon dioxide to the equation. What you’re left with is an indication of the profitability of a coal-fired power station within a system that explicitly puts a price on carbon. It's lower, but the key question is 'how much lower?'

The only reason we can make these distinctions is due to the existence of the carbon markets, brought into the fold through the Kyoto Protocol and the European Emissions Trading Scheme, perhaps the world’s most controversial market. 2010 though, saw the carbon markets tank amidst uncertainty over the future of global climate agreements, and last week’s Carbon Expo, held in Barcelona, undoubtedly saw carbon market participants doing some soul-searching. For quite some time, environmental finance has been associated with carbon markets, but the search for more holistic systems is leading to a shift away from pure carbon finance, to a broader focus on climate finance.

So tomorrow, the UNFCCC convenes in Bonn to talk climate in the run-up to December's COP 17 in Durban. The key question for passage-way conversations: How are we going to finance not only climate change mitigation efforts, which has been the focus of the carbon markets to date, but also climate change adaption? Another hotly controversial area is forestry finance. Two weeks ago, the Indonesian government finally signed a two year deal with Norway, in which Norway pays them $1 billion to limit licenses for forest logging. It’s the first major bilateral public climate finance deal, and a big step forward for the so-called REDD programme – Reducing Emissions from Deforestation and Forest Degradation. Nobody really knows how it’s supposed to work yet, but REDD is seen as a key pillar in any future climate finance systems.

The last few weeks have also seen some interesting progress in the UK, with the government launching the Green Investment Bank. The GIB will be in the business of project financing renewable energy and energy efficiency programmes, under the broader prerogative of moving Britain to a low carbon economy. Last week also saw the UK government releasing the National Ecosystem Assessment, an attempt at valuing the ecosystems of the British Isles. I have a vague feeling that, despite being at the cutting edge of economic research, trying to price an abstract concept like 'nature' will one day be looked upon in kind of the same way as we look upon eugenics, astrology, or other past pseudosciences. In the mean time though, it will, for better or worse, become part of the broader debate on ‘payment for ecosystems services’.

Outside of the arcane discussions about whether you can use financial options-pricing theory to value biodiversity, the real entrepreneurs are concerned with more practical matters. In the last month, I’ve been lucky enough to meet two guys separately working in the area of green bonds, credit instruments through which investors can lend money to environmental projects. These things are on the verge of going mainstream, with the IFC recently issuing green bonds to raise money for renewable energy. And that brings me to Luke, who I met whilst sitting in the Café at Foyles book store. Luke used to design algorithms for financial trading systems. Now he’s got a moleskine notebook with sketches for a new type of solar thermal tower which would use the sun’s energy to heat water to drive electricity-generation turbines. No mainstream bank is going to finance it – He needs renewable energy venture capital, an exciting and growing area of environmental finance aimed at the technology innovation market. “What I need,” he says, “is an old guy with too much money, and not enough time to spend it.” Maybe what he needs a government subsidy – like the feed-in tariffs – but the regulatory environment is getting pretty uncertain.

The most amazing thing about this all though, is that literally nobody has a clue on how it will all work out. We’re creating it right here, right now, ocean blueprints and forest greenprints. Will Luke’s solar project revolutionise the world? Will someone get venture funding to figure out how to harvest electricity from lightning? Will the green bond concept turn out to be a non-starting buzzword magnet? Will the carbon market exist in 10 years time? What innovation will emerge that we cannot yet conceptualise? Will Suitpossum be successful in designing a trans-generational environmental risk management system with almost no budget and a failing Wifi connection?

For more on all these topics, tune into the Suitpossum EnviroFinance series, starting tonight, and unfolding over the next several weeks on a computer screen near you.