Burrito Now, Pay Later

I have a background in options trading and fixed income markets, basically the kind of professional education one gets while participating in the "financialization of everything".

I'm not sure it's great.

It's definitely useful for people to be able to unbundle risks. Or rather, it's useful to someone who knows what they are doing. Something like what's described in the article, for instance, where there's a mutual benefit to executing the financial transaction.

But what I really worry about is that where there's a game to be played, there are chips to be lost. Financializing everything creates a million little games, and the games favor people who know the rules.

If you're living in the old world, and someone offers you a university place, you just take it if you can afford it. What happens? Kids who can afford it will take it. If they do well, they make the surplus. If they can't afford it, that's tough, but they also aren't out of pocket. If you take a degree and things don't go as planned, you lost the capital, but you aren't in massive debt as well.

In the new world, what happens? Well, you can now take a loan. That's you taking a bet on your future income being sufficient to pay off the interest on your loan, and hopefully also the principal. You are basically mortgaging your education. More people can go in this model, but the extra people are also more likely to be the marginal people. They get a roll of the dice that they didn't have, but even though as a group they are going to roughly break even, some will end up in trouble that they could not ever have ended in without the loans. People who win in this game are still paying out part of their winnings: you're a doctor, but you still gotta pay your loans. People who lose are in deep trouble.

Both the winner and the loser are paying the financial market.

Now throw in a non-bankruptcy law for these loans and watch the whole market eat itself as lenders figure out that they can really be quite casual about who to lend the money to.

The same thing happens with actual mortgages. If you lived in a world where nobody lent money for a house, a house would cost a lot less. Instead, you get to compete with other borrowers to bid up prices. You're taking a bigger risk for the same house that someone a hundred years ago might have considered to be for the poorer people in the city. (Look at restrictions on building for an underlying reason why the market flies.)

The same happens with cars. The same is happening with BNPL.

Who wins with these games? Financial intermediaries. The vast economy of marketing the loans, turning them into derivatives, trading those derivatives, administrating them, all sorts of ancillary functions.

Also, deeper pockets. Much like insurance, if you can bag together a bunch of risks, some of them will offset each other. The individual who is taking a degree cannot normally derisk it by some portfolio effect, and he certainly can't just offload it with a phone call.

It's like everybody has to ante up to sit at the poker table of life. You can't just let the button come to you, you have to play all the time. You can't just be a doctor or a lawyer, everyone needs to be a trader.

Why do finance bros like to call allocating all the resources to the maximal-dollar extracting process "efficient". It's not. All they're doing is turning the economy's entropy into dollar bills now, which stunts future growth.

Speak for yourself. I've got $10mil riding on put options for Jane Doe's pizza that she bought for her child's birthday party last week. People like you spreading FUD is threatening my portfolio.

I'm happy someone else also had the same thoughts, and put it better than I could.

Incidentally, regarding Buffet's sensibilities, I once felt it worthwhile to write to Berkshire Hathaway's little office, about a new shady thing one of their holdings was rumored to be doing towards employees, and whether that fit BRK's standard of good management. My note almost certainly got tossed into the crazy-people round-file, but it'd be nice if Warren Buffet called up a CEO or Chair, and said, "Hi, Bob. This is Warren. What kind of shop are you running over there?"

I have an extremely difficult time imagining that these BNPL loans are being shoved into bonds and offloaded on to the market in a way that even resembles a result in which the buyers of those bonds are fully educated about the risks and making optimal choices. It sure looks to me like the BNPL companies have every motivation to shove off their liabilities into these bonds in a way that gets them artificially rated far higher than they should be, and turn other people not into refined, educated consumers selecting their financial investments through enlightened wisdom, but into bagholders for debt that they were basically lied to about.

The numbers coming out of these companies are simply implausible, especially their claimed delinquincy rates; unsecured debt agains subprime borrowers that up until recently wasn't reported to any credit agency, basically a perfect storm of debt that won't be paid off, but it was doing far, far better delinquincy numbers than credit card debt? Implausible. But the market, in its current mood, believes it enough for them to get away with it.