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Microfinance hedge fund?

Microfinance? Why didn't Mohammad Yunus receive the Economics Nobel as well as the Peace Prize? Microfinance is a genuine theoretical and, more importantly, practical economic breakthrough. Like most good science, it went against conventional wisdom, took time to prove the naysayers wrong and has led to valuable extensions globally. The triple bottom line outperforms the single bottom line. Socially responsible investing is a win/win/win situation.

Collateral may not be necessary if you manage your risk well. Sometimes it is better engineering a culture of borrower due diligence and group responsibility. As Japanese banks found out and European/North American lenders WILL discover soon, collateral does not count for much against a loans when the value of that collateral evaporates and you don't know the customers.

Grameen Bank knows its clients which makes it a rarity among banks nowadays. Macrofinance, which is lending to governments and prestige "development projects" are unlikely to benefit the poor on a sustainable basis. Microfinance can turn people into entrepreneurs. It has spurred interest in numerous other countries, funding from philanthropists and interesting new ideas like Kiva and Trickle Up.

Microfinance has shown consistent returns and results whatever the economic backdrop. Mohammad Yunus and Grameen Bank certainly deserve the Nobel Prize. Instead of old-fashioned collateral, it hedges its risk based on peer group borrower default probabilities. It is consistently profitable, highly diversified and generates alpha independently of the Bangladesh stock market. Investors would have done much better lending and empowering the poor than in a Bangladesh index fund which remains far below the high set during the irrational exuberance of 1996.

The contrast between the Peace and Economics Nobels this year is stark. In typically dismal style, the award went to Edmund Phelps for "discovering" that there is not a nice stable link between unemployment and inflation. To those with double and triple digit IQs this was always obvious as the high inflation/high unemployment 1970s and the low inflation/low unemployment 1990s showed. But to academic economists it was a shock that governments were not able to ratchet employment rates up or down as a function of inflation along a neat Phillips curve. It is a bit like getting a Nobel for "proving" grass is green or that ice cream melts in the sun. Phelps' work was correct but it does not tell us something people didn't already know. With microlending, Mohammad Yunus showed us something we did NOT know.

Professor Phelps recently advocated TAXING the poor, giving the money to governments and then somehow subsidising companies to hire the poor. Never has worked, never could work, anywhere. Mohammad Yunus correctly showed the best way to assist the poor is to get capital directly to people to spur them into their own entrepreneurship. Is microlending a development panacea? No, but it is a better partial answer than macro "solutions" to poverty. If Phelps still has any honor or integrity (unlikely) he should revoke his useless "award".

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