The Perils of Low Interest Rates and Subprime Auto Loans

Our editors reveal their favourite reading and viewing recommendations this week.

This week, our editors have contributed a selection of their favourite articles discussing a range of topics from subprime auto loans, the after-effects of the mortgage meltdown of several years ago, and the perils of low interest rates which appear to be becoming the latest trend.

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We start with Victor Golovtchenko, who shares with us his favourite video of the week…

First Subprime Mortgages, Now this…

A rare chance to look at economics from a comic perspective, the video below illustrates the perils of modern economics and how quickly market participants are forgetting the past. In his Last Week Tonight show, John Oliver exposes one of the looming problems over the U.S. economy – subprime auto loans.

Victor Golovtchenko Senior Editor
Victor Golovtchenko
Senior Editor

If it all sounds too familiar to you, don’t be surprised.

After the 2008 subprime mortgage meltdown, we are very likely to see a similar picture unfolding with auto loans.

The satiric approach of John Oliver onto the subject is amusing, but the subject is almost not funny at all….

Next, Avi Mizrahi looks at what Facebook really is…

What is Facebook Really About?

This week I suggest you read “Facebook Is Not a Technology Company” by Ian Bogost over at the Atlantic. Now, if you are anything like me the title will mislead you as to the topic.

Avi Mizrahi Finance Magnates
Avi Mizrahi

I was expecting the writer to rant about how Facebook is really a front for the CIA to collect all of our most private information, or a cult Zuckerberg created in the image of North Korea to take over the world, or just an evil scheme to destroy the notion of friendship in order to make money somehow.

But this article actually brings something new to the conversation about the hated social network. It asks and seeks to answer why Facebook, and other Silicon Valley firms for that matter, is considered to be in the technology sector of the economy when it produces no revenues from selling technology.

Like Google, it makes its living almost exclusively by selling ads and yet we don’t call it a media company. At the same time, a company like GE which produces everything from fMRI machines to jet engines is traded as an energy stock.

Finally, Michael Pearl looks at the impact of low interest rates…

The Perils of Low Interest Rates

Low interest rates have become the hottest trend among the majority of central banks in recent years. Ever since the economic crisis of 2008, interest rates have dropped to the point of flirting with the flat line of the zero.

Michael Pearl Head Of Business Intelligence
Michael Pearl
Head Of Business Intelligence

The European Central Bank (ECB) led the way, when it introduced a negative deposit facility interest rate in mid 2014. Japan’s central bank followed and joined the club in the beginning of this year. This trend has also swept some central banks of European countries, such as Switzerland, Sweden and Denmark, that began charging banks for storing money.

In the end of 2015, the chair of the fed Janet Yellen, has also mentioned negative interest rates as a viable option in some cases.

According to an article in the Financial Times, this trend is becoming quite costly for the private banks in Europe. Apparently, they pay a “tax” of 0.4 percent on most of the funds they keep in the central banks. This fee amounts to €2.64 billion since the ECB’s 2014 decision.

So, what do the banks do to dodge this fine? They begin storing actual physical banknotes in safes and storages. Apparently, some of the leading private banks in Europe, such as Germany’s Commerzbank, are considering turning their virtual assets to banknotes.

The writers have even assessed the amount of cash that you can store in various storages and compared it to the cost of keeping it in the systems of the central banks.

For instance, you can pack some $7.8 billion in a 26 foot removal van. And if you want to fit all the cash that the banks hold in circulation, you will need almost a million briefcases.

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So, should the bold gang of bank robbers from the Ocean films trilogy reunite and start planning their next hit on the safes? It’s hard to say at this point.

We conclude another week of stories that our editors are reading. Feel free to share your views in the comment section and any recommendations of your own. We look forward to hearing your opinions!

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