A while ago I was talking to a friend of mine about buying a car and as I was doing some research I came across this video don't say "I'm paying cash" at car dealerships. My first thoughts intuition as a businessman (and also just from the experience of my life) had made me think that a company should love a cash sale that's paid entirely up front because they would immediately have the money and the cashflow to be available to them. But increasingly this is not the case. That such a fundamental idea of business has changed shows that the system in which we are operating in has changed¹. I don't think this change is for the better either, as the following story will show.

Ever since the Great Financial Crisis started, and just like Yanis Varofaukis I'd strongly argue that the crisis never really ended and this current financial crisis is just the conclusion of the last crisis, many things have fundamentally changed with how people go about business and finance. We have this weird combination of low interest rates combined with a poor economy but yet a growing amount of debt. It seems that we have either reached the point of no return (or are close to it) where a lot of this new debt will never be paid back. You might have asked "with interest rates set so low and a high chance of defaults why would people want to offer loans?" and I asked myself the same question many times this last year. Just like the situation with commercial banks massively tightening their loaning standards people simply don't like offering loans for a low interest rate, there has to be some incentive in it for the lender, there's either got to be some sort of collateral or some sort of fees to make up for the chance of default.

Today I found an answer after talking to my family about solar panels. One of the companies that they got a quote from seemed to not be on the up-and-up. Specifically they had no website and only had a facebook page with a very small number of likes, "less likes than Trump tweeting about taking a shit" was the number I was told. On some further due diligence the address they were given was a pizza shop, calling them up to ask about it they got less patient with the queries and insisted that there was a warehouse at that location. As far as I know PV panels don't make for a good pizza topping so the whole thing was highly suspicious. Or maybe I'm just a clueless old fart and the new hotness is buying solar panels at pizza shops and "innovations in integrated supply chains". But by far the most striking thing was that the company didn't want to close a deal if they were paid cash, they only wanted a deal with finance. In my experiences of scammers someone turning down upfront cash is very surprising to me, so what's going on here? why would a suspicious company like that not want to take a full upfront payment for the solar panels?

The first, and largest, part of the answer is that they had massive hidden financing fees. I remember seeing fees of over $1000 on financing for solar panel installations that were less than $15000, this is not the interest mind you, this is just the fees. As a percentage the yield here is quite high on a short term loan due to all these hidden costs and fees. A bit like buying a car these loans are complicated, and this analysis shows how you can calculate the costs from interest. There's a lot of other details like hidden fees to contend with too, this deliberate complexity makes it harder to reason about the total costs. In practice this can add more profits to the financing company because many people don't do the calculations to see what the overall costs are. Bad actors deliberately leave this complexity in place. The idea is to get a big chunk of money out of the financing terms, in many cases this is more than they are making from the product itself.

You'd think that dodgy operators would love to get all of the cash immediately upfront in full then disappear once their obvious shell business goes under. Those intuitions turn out to be accurate but the mechanism by which they get the cash upfront before they slip away into the shadows of the night are slightly different. And this is the second part of the answer to why they don't have to get upfront payment, getting a cut of the usurious fees is obviously their main goal before they disappear. Because they can sell the debt on so easily they can still get the money forwarded to them upfront (and make the future someone elses problem²). In a world that now routinely packages up crap debt and sells it off as highly rated securities anything goes, and there's an insatiable appetite to get any debt to feed into this system. Given that interest rates are so low and yields on everything else is yielding so little a lot of investors get sucked in to any sort of promise that something will pay higher interest rates. So these fraudulent operators can still get the money upfront because the finance system allows them to sell bad debt on so easily. There's a lot of buyers for this bad debt too because a huge number of people have this misconception that if you have enough loans out there and you combine them all together you reduce risk and as a consequence they greatly underestimate the risks. The correlation of risks for any group of loans that have been combined is what led to the subprime mortgage crisis of 2007-2010 and could happen again anytime if there's risks that impact the entire pool of loans. This humourous tweet explains the risks of securitization of this kind:

This is the fallacy of securitization.. You package up all sorts of different looking dog turds... and because the dog turd exposure is spread all over different backyards sidewalks and tree lawns in the neighborhood, you believe you've minimized the risk of stepping in it.. When in reality, all you've done, is given tacit permission to the dog owners out there to let their pooches keep $hitting all over your neighborhood... until your community is one gigantic steaming pile of dog turds...and somebody has to clean it up..

So the next time you happen to step on a solar panel left out in the street somewhere you know what happened!

The third part of the answer is that in this age of rapidly growing wealth inequality being able to offer a zero percent upfront payment option greatly increases the number of people you can sell to. Since the 2020 pandemic a huge number of people have had their savings destroyed. This might mean that you can create a loan for someone to buy your product and they pay that loan with another loan that they get. Basically this gigantic debt bubble that we have right now is made up of an enormous amount of smaller debts, as soon as new debts can't be issued this bubble might pop.

The process of selling solar panels, just like selling cars has had a rather large change now that information about product pricing is more available. The salesperson who dupes their customer into paying $20000 for a $5000 lemon will likely accumulate a number of bad reviews, and may also lead to anti-lemon law litigation. What's less obvious is financing pricing, and the informational asymmetry in this space means it's still ripe for abusive practices, so it comes as little surprise that unscrupulous people have put more focus on the financing rather than the product they are moving. People seem to do a lot more research into the product than the financing, perhaps because they aren't entirely sure what to look for with financing whereas with the product they know exactly what they are looking for. Clearly from the perspective of the crooked sales team being held accountable by reviews is something they want to avoid. Building trust over time greatly aids your abilities to sell things, especially if the product being sold is typically considered to be a low trust area. If you are selling bad product and have no plans of sticking around to do the servicing then you'll accumulate bad reviews over time, so throwing away the business name every now and then is all part of the plan.

How abusive financing hurts the community and the broader economy are fairly clear here. You attempt to get the clients to sign up for abusive financing terms, this allows you to get an extra margin in areas where the products themselves are low-margin commodities, which solar is increasingly becoming over time. This serves a few purposes, the first is that it allows the shell company to get the cash immediately because they sell the crap loans off to some other financing company, who in turn probably "wraps the dog shit loans in cat shit then gives the turd a nice polish by selling them off as CDOs" which then means the crap loans eventually ends up in the broader bond market without it being as obvious that the loans are backed by crap. The beauty of all this is that now these loans are out in the bond market if they don't sell via lack of a buyer we now have central bankers backstopping the bond market and propping up the banks who hold these assets via QE. In effect this creates a whole chain from the business selling the product to get paid for by the general populace/tax payer in the case where anything goes wrong. Because bonds not selling is apparently not acceptable anymore and the official narrative is that this is a lack of "liquidity" in the markets that requires "stimulus" to resolve. In my naive mind there really shouldn't be a lot of liquidity in a market for utter garbage or fraud but what would I know.

This chain of offloading responsibility onto 3rd parties is something that many of these schemes have in common. You bring forward the cashflow and you offload the risk onto other groups who have to pay at some time "in the future". You can magically get immediate cashflow from people who don't even have the money on hand to pay you up front, extracting even more money from the future into the present. To make sure you don't have to make good on your obligations for maintenance you wind down the shell company before any of your customers has a problem, spreads bad reviews or takes you to court. This is part of why you might see a hardened scammer walk away from the deal if you offer to pay all cash upfront, if you have the cash to pay upfront you might also be able to litigate more effectively. But even without the litigation angle the deal might only make the scammer money if they get a piece of the huge fees from the financing. Unfortunately this type of situation isn't confined to scammers anymore as more and more businesses are falling into this trap of relying on financial games to make any sort of profit at all.

The disaster of financialization is that the cars and the solar panels are actually a distraction for some sellers, what these people really want is to sell you a financial product. Because too many people fixate on the products the miss the financialization aspect and say comments like "products are just crap these days" without realizing the forces that are making the products worse in an age where products can be made better than ever if just the will, and the incentives, were there to do so.

Stories like this show the real ways in which financialization hurts the real economy, instead of people focusing on being good at providing or selling products like cars and electrical systems what you get are people who are just selling dubious financial instruments because those financial instruments make them more money than selling something tangible that actually helps people. By bringing the focus back to the products we could have a much better world and people could be a lot better.