Tomorrow’s Credit Bust

Chana Joffe-Walt’s main focus is on how Brazil tamed inflation, but read this lede and I think you’ll see Brazil next big financial problem:

I met a 19 year-old girl in a mall in São Paulo who had financed nearly every item she was wearing.

Célia de Resende paid for her red t-shirt in 3 monthly installments. Her sneakers were on a six-installment plan. She couldn’t remember how many more payments she owed on her black pants but she’s sure they were bought on credit.

This is the way Brazilians now shop. Consumer credit is a brand new concept and it’s wildly popular. Three Brazilian banks are among the world’s top 10 credit card issuers.


I can’t prove it, but dollars to doughnuts says Brazilians are taking advantage of their newfound creditworthiness to blow up a consumer debt bubble. This, rather than the allegation that it’s totally useless, strikes me as being the real problem with financial innovation. New products come in and blossom like invasive species with no natural predators. It’s an environment where unscrupulous sellers, thoughtless buyers, and all kinds of fraud and stupidity run amok. Once the cycle’s burned out it becomes very unlikely that the exact same problem will recur in the near future. But the problem is that the same kind of thing is extremely likely to happen again, just with some new instrument.