Ride hailing is being blamed for taking down credit unions in New York City
It was always obvious that ride hailing (or ride sharing) apps such as Uber and Lyft were going to cause big problems for the cab companies. The traditional taxi operations (and their unions) were either going to have to up their game and offer better service or they would go the way of the dinosaur. But in New York City, the rise of this new business model is being blamed for the downfall of some lenders who specialize in catering to the cab industry. The Associated Press has the details.
Ride-hailing apps such as Uber and Lyft have been so disruptive to New York City’s taxi industry, they are causing lenders to fail.
Three New York-based credit unions that specialized in loaning money against taxi cab medallions, the hard-to-get licenses that allow the city’s traditional cab fleet to operate, have been placed into conservatorship as the value of those medallions has plummeted.
Just three years ago, cab owners and investors were paying as much as $1.3 million for a medallion. Now they are worth less than half that, and some medallion owners owe more on their loans than the medallions are worth.
“You’ve got borrowers who are under water. This is just like the subprime loan crisis,” said Keith Leggett, a credit union analyst and former senior economist at the American Bankers Association.
As with so many stories these days there’s a bit of truth buried in this report, but it’s mixed in with some false assumptions. The claim here is that Uber and Lyft have caused the value of taxi medallions to plummet and the cab drivers who borrowed vast sums of money against the value of their medallions are now unable to make their loan payments so the lenders are going under.
But it’s not Uber or Lyft causing this damage. It’s the existence of the extremely corrupt medallion system itself which set them up for failure. For those not familiar, the medallion system in the Big Apple is a toxic holdover of the Tammany Hall mentality which has infected urban politics for as long as anyone can remember. Here’s how this poisonous mess came about.
In a mythical world which supported an open, capitalist, democratic free market, becoming a cab driver would be relatively simple. Anyone who wished to get into the business could apply, demonstrating that they had the proper level of drivers license (most likely a chauffeur license, indicating the required amount of training), a properly operating vehicle which was safe for occupants and some form of background check to eliminate felons from the system. Then, perhaps after paying a reasonable fee to cover the background check and processing, the applicant could get to work.
But in New York City, officials who have always been in the pockets of the cab companies and their unions declared a limit on the number of cabs that could be in operation. In order to participate you would need to obtain a “medallion” from the municipal government. This was a horrid idea to begin with because in a true free market system the number of cabs would be limited to the amount which could profitably operate. Competition would keep prices at a minimum and service quality high as the individual drivers and companies strove for the biggest possible share of the market. But in New York, all of that was eliminated by the artificial cap. To make matters worse, they made the medallions transferable, immediately creating a marketplace for the buying and selling of this item which had zero intrinsic value except the “worth” artificially created by government mandate. (In that regard it’s pretty much identical to the massive scam currently going on with RIN credits under the Renewable Fuel Standard system.)
With only a finite “supply” of medallions, the price for them quickly became astronomical, sometimes exceeding a million dollars just for the “privilege” of operating a business. The artificial “value” of the medallions was then traded upon by owners with the credit unions (which were set up by the taxi industry to begin with) so when the market essentially collapsed after Uber came to town the entire house of cards began collapsing.
If you’re looking for someone to blame here, don’t point your finger at Uber and Lyft. This corrupt system was put in place by an unholy alliance between the municipal government, the cab companies who wanted to eliminate competition and their unions. Uber didn’t destroy the value of the medallions because they had no actual value to begin with. And if the credit unions were foolish enough to accept them as collateral in lending transactions, the blame for that should land a their own doorstep as well.