While Wall Street Burns

In my previous post I wondered whether Prosper might emerge as a much larger and more successful company and whether peer to peer lending in general might soon appear more attractive than some traditional Wall Street institutions. A while back Steve Landsburg wrote (The Atlantic):

Banks don’t lend their own money; they lend other people’s (their depositors’ and their stockholders’). Just because the banks disappear doesn’t mean the lenders will. Borrowers will still want to borrow and lenders will still want to lend. The only question is whether they’ll be able to find each other.

Alex Tabarrock concurs. A few days ago CNN ran a story about how small business owners are increasingly turning to nontraditional sources of financing (CNN):

Dubbed “social” or “peer-to-peer” lending, LendingClub and rivals like Prosper.com pair individuals willing to lend cash with borrowers who sign up with the site. Lenders flip through profiles of potential borrowers, who release their credit reports, to see descriptions of how they plan to use - and repay - the borrowed funds. If lenders see a listing they like, they chip in to help fund it, committing as little as $25 or as much as several thousand.

They didn’t point out that LendingClub is not currently accepting new lenders since they are in talks with the SEC, but once they get through all that they will be open for business again. Prosper is up and running, as I said above, but do check out prospers.org, since some allege that Prosper understates borrowers' true default rates. Buyer beware and all that.

Another alternative is Zopa, which is more socially oriented and provides a fixed rate of return, like a cd, just with a slightly higher rate of return. One of the themes we'll be touching on in upcoming posts is how successful, dynamic economies are able to deal with crises and shocks and divert investment into more profitable uses.