ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Tuesday, November 23, 2010

Anderson on the microfinance collapse

1908RandallCountyCourthouseCanyonTexas907TJnsn The situation in India's microfinance industry continues to deteriorate, appearing to replicate what went on in the U.S. with Fannie Mae and Freddie Mac and is still going on in the U.S. housing markets.

For years microfinance -- the lending of small amounts to would-be small-scale entrepreneurs in developing countries -- has been seen as a method of helping to lift people up from poverty.  But the original small-scale programs have proved very difficult to scale up.

Kenneth Anderson of the Volokh Conspiracy has been looking at microfinance issues for a long time.  He has some thoughts on the problems that come from "mixing motives" -- trying to "do well by doing good."  Here's a taste:

One can pile up important similarities and differences, in other words, between India’s microfinance bursting bubble and the subprime crisis.  But let me focus on one that is perhaps less noticed.  I notice it as a similarity because it’s something that (as someone who works out in the gym in Fannie Mae’s basement in Washington DC), I have heard a lot over the past dozen years: a tendency to play a self-deceptive bait and switch between doing good and doing well.  I.e., the many conversations with Fannie Mae senior staff who, when things were going well, thought (what they thought of as) their mixed social-profit model must be great, and as things weren’t going so well, took comfort in the idea that they were doing good and this was merely a cost of doing “good” business.  Something like that seems to have been present here — which hardly surprises me because I confess to having been tempted to it many times, working in or advising organizations with similarly mixed motives.

The invitation to self-deception is high, in other words.


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