Grant Shapps: Idiot

Indeed the most startling thing about this industry is that if you look at the biggest 5 lenders they all offer precisely the same APR on £200 borrowed over 31 days. It cannot be a coincidence that they all quote a staggering, yet precise 1286.10% APR. This is a clear indication that the market is not operating openly here,

Jesus Bloody Christ.

Exactly the same price being charged by all players in a market can indeed be evidence of collusion. It can also be evidence of a perfectly competitive market. You know, that near mythical thing talked about in all the economics text books, the one where producers are price takers, where they have no individual influence over said prices?

If someone in a Tory Shadow Cabinet doesn\’t know this then we\’re right fucked, aren\’t we?


9 thoughts on “Grant Shapps: Idiot”

  1. Ayn Rand, I think it was, once pointed out that the absurdity of “perfect competition” theories that are used to justify US anti-trust laws: if all prices charged by firms are the same, it’s a cartel; if one firm charges much higher prices than the rest, then it’s gouging the customer, and if one firm charges a lot less than the rest, it is predatory pricing.

  2. Tim, Are you suggesting this is an example of a perfect market?

    Tim adds: Just that the example given is not evidence of collusion. It *could* be evidence of a perfectly competitive market.

    Goodwill (a chain of charity shops not dissimilar to Oxfam say in the US) set up a payday loan system on a non-profit basis. They had to charge 200% interest rates (APR that is) just to cover the costs.

    Part of the problem here is using APR to measure interest rates on a three or four week loan of course.

  3. There is nothing wrong with using the information to see IF there is a cartel forming. However, they need to stay their hand if no evidence is found. I doubt they will. Once the rock has been overturned, some bug is gonna die, so I expect it will be hyped up and used as an excuse to impose rate capping and then you will see illegal lending and legs broken.

  4. It’s crazy to talk about 1286% APR. If you follow Shapps’ report, it’s basically that you pay £250 back for a £200 loan after a month.

    One thing is that quite a lot of that is fees. You come in off the street as Mr Unknown, and the lender has to find out a lot about you, check your credit record etc. etc.

    Lending’s quite an interest area because there’s no difference with regards to what’s on offer, and so is bound to lead to competitors pricing at the same rate.

    Here’s a radical idea, rather than pissing about with lots more bureaucracy (which will do nothing but create more loan sharks). How about just taxing people less, so they have more money in their pockets so are less likely to need to borrow it?

  5. His argument appears to that there is a cartel because they all charge the same APR on a £200 loand. In the report he gives 5 examples of comapanies charging £50 on a £200 loan paid back inside 1 month.

    As others pointed out using APR for a 1 month loan is absurd.

    The fact that 5 out of the 6 examples charge £50 should be no surprise. They will all have similar costs and it should come as no surprise that they round up to something easy to collect. Interstingly the 6th company charges £60 interest or an APR of 2100.4%. This relects the idiocy of using APR nicely.

    He doesn’t say what a reasonable APR would be on a 1 month loan of £200, but if he was looking for something like 20% I would hazzard a guess nobody would lend the money.

  6. Can anyone help out an economics noob here?

    My first thought on hearing about this was that comparing APRs on short-term (i.e., a few weeks or months) to longer-term loans was ridiculous. It seemed like the equivalent of asking what the APR on a mortgage is over the course of a century.

    Does the APR on a short-term loan have any significant meaning?

  7. RobtE – well, the APR has some meaning. If you keep rolling a loan over on the same terms, then you pay the same as if you took a longer-term loan at the same APR. Alternatively, if you are offered two loans of the same size and term, the lower APR will cost you less, regardless of how it’s divided between fees and interest.

    But it’s not the most useful way of looking at how good a deal something is. There is a large fixed cost component to taking a small loan out for a short period, and the loan “really is” £45 fee + £5 interest, or something of that order

  8. A couple of years ago, there was a big scandal in F1 racing because Mclaren had copies of the Ferrari design. As part of the settlement, the FIA (motor racing governing body) would monitor future Mclaren designs to see if they had stolen any ideas from Ferrari. The wise heads immediately commented on the folly of this measure.

    In F1, all teams are trying to solve the same problems according to the same rule book and largely use the same tools. If they are designing a hub assembly, for example, the end product is going to be very similar, owing to use of off the shelf CAD and finite element software packages. Technology is as much an equaliser as shared information.

    There is also the case of the “perfect” design. Teapots are a good example, because they come in all shapes and designs. But if you want a teapot that is easy to pour and doesn’t drip from the spout, there are a couple of perfect designs available from many manufacturers. The teapot manufacturers did not collude, they merely acknowledged the best solution to the problems.

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