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Microlending: Some Missed Opportunities

|Includes: AEA, DCO, Rent-A-Center Inc. (RCII)

Stock markets have recovered most of this year’s losses. Where I live, spirits have risen too. Houses on my block have sold for more than they were purchased. The Friday afternoon rush hour drags into the evening as restaurants are filling their tables again.

If you don’t see the occasional empty storefront, you might even think Omaha hasn’t skipped a beat since 2007. But you’d be wrong.
Missed Opportunity #1: Inner City
Unemployment and the mortgage meltdown are combining to wreak havoc on the city’s most vulnerable populations. Bryan Cohen, at Omaha ’s free weekly alternative Reader, ran an investigative piece a few weeks ago on how the mortgage meltdown was affecting North Omaha . (“Evictions Up 50 Percent: Indicators of a Troubled Housing Market”
“Post-racial” presidential elections aside, many of us still live in towns divided by railroad tracks, so to speak, and Omaha is no exception. The 60’s social engineering projects effectively ghettoized our black neighborhoods by bordering them with freeways, building project housing in stigmatized neighborhoods, and excluding infrastructure as the middle class moved a few miles west.
Decades later, while living just two miles from our poorest neighborhoods, I can shop, commute and jog without seeing just how hard this downturn has hit North O.
For Omaha ’s poorest, evictions are soaring. Home prices in my neighborhood are stable or even rising; but just miles away, there may be no floor to the market as foreclosures and vacancies soar. The rental market in poor neighborhoods is sagging as nicer areas advertise more rentals.
But before I alienate any more readers with a social or political column, I’ll stop now. This is not about white man’s burden. This is about missed opportunities. What investments might we be missing right under our noses?
If you live in a sprawling city like mine, take a drive through its older, forgotten areas. Notice what’s dying from decades ago. In Omaha , the stockyards left a decade ago. ConAgra continues to close its food plants. Then take note of what the recent boom times added. You might have a few more Home Depots or Paneras near your house.
But in a place like North O, you’ll still be hard-pressed to find a chain restaurant fancier than McDonald’s. There is no home improvement store. The boom years of the 90’s brought only rent-to-own furniture, paycheck advance fronts and Jackson Hewitt tax stores.
Forget the subprime mortgage fiasco. Amidst the great tech boom, the best way we could improve the lives of our poorest residents was to give them furniture and two-bit loans at usury rates?
Okay, banks are lending again. But only to higher credit scores. For the folks in North O who just lost a job and are teetering on foreclosure (or eviction), banks aren’t going to help. Here’s where we come in. Read on:
Missed Opportunity #2: Peer-to-Peer Lending
Just as credit markets tightened, but before last fall’s Lehman disaster, my wife and I invested a small sum at for microlending. We made eighteen loans.  By now, fifteen accounts are still current, two are delinquent and one has been charged off.
The rates we offered are in line with those results – if you make loans at 20%, you expect to lose a couple.
But is no longer accepting new registrations. I’ll investigate for a future article – but for now, know that this change happened by last October. Hmm …
Just when the broader credit markets caved, when we could really have used some peer-to-peer lending mechanism, one of the more popular personal lending sites was disabled.
Missed Opportunity #3: Emerging Markets
Well, the IMF beat me to this one, with their prop-up-fiat-currencies-by-selling-gold-reserves scheme. The bottom line is that cell phones and computers are finding their ways into parts of the world where paved streets won’t be around for another fifty years. Places like Sudan and Kazakhstan are not just known for oil reserves and human rights violations.
But the problem is: how do we invest in emerging markets directly? Even if a place like Mongolia has a stock exchange, it’s not like we should trust the few companies who list on it. An emerging market mutual fund might invest in Brazilian telecom, when I really want Congolese hogs.
Capital requirements for the world’s biggest banks have them pulling their money out of these promising spots just when need and opportunity are greatest.
Three Opportunities, No Solutions
Microlending would help invigorate the inner city. Lots of other folks in America need nontraditional lending arrangements, now that the recession has whacked once-solid collateral and steady incomes. And it’s difficult or impossible to sensibly invest in third-world economies when our most ready instruments for doing so are run by first-world banks in the midst of getting bailed out.
Well, until we find solutions for these three opportunities, my advice to you is:
(1)   Don’t be fooled by the rising stock market tide. Even if the fortunes of the more fortunate rise, the un- and underemployed will be in dire straits for years to come. Avoid predatory businesses like Rent-a-Center (NASDAQ:RCII) or Advance America (NYSE:AEA).
(2)   Jam your congressman’s phone line. The only folks making money for the next few years in stock markets and lending will be traders. If we want broader wealth creation, we need more open markets. That means, stop molding the economic recovery around institutions “too big to fail” and start promoting smaller banks and more informal lending arrangements.
(3)   Get out of the markets entirely. Find a safe haven that governments don’t know is a safe haven. The G20 already attacked gold via the IMF emerging market, gold-funded bailout. If you could hold 10,000 barrels of oil in a safe-deposit box, you could probably retire on it – but volatility will kill a buy-and-hold commodity ETF like UCO in the meantime. What’s safe – silver? Readers?
Stock markets are lower still than at the end of last year, but we’ve got some big gains in the last few weeks. Take advantage. Cash out, and sit on it. Find nontraditional means to stash your wealth or lend. But the days of making money in mutual funds are over.

Disclosure: short commercial real estate