If you have to play your masterâs game, by all means play to the best of your ability. If you need to borrow, go for cheaper money.
The structure of debt has been altered from its of original form, to the advantage of the finance industry. The natural state of things is for a lender to make a loan based on his understanding of the likelihood that a borrow will pay it back. If they made a loan to someone who couldnât make the payments, it was a bad loan. Default ensued and it was the bankâs loss. There was a risk to both sides of the contract. The natural rate of interest that covered such default risk was around 6%.
But now, loans are a one-sided risk. 1. Because 90% of loans are made on real assets (property) and are no longer made for business ventures, there is always an asset for the bank to redeem.
2. Debtors prisons are a real thing, and the possibility of imprisonment alters the mathematics of a potential debtor who cannot pay a loanâperhaps heâll sell his child into slavery instead of defaulting on a bad loan.
3. Banks have written their own laws to make default impossible for some loans. If a graduate cannot pay 7% on her student loans, too bad. A 200k loan for a cooking degree would have been considered a bad loan in any other generation. The banks know it cannot be paid back. But now default is impossible.
4. Large default is no longer absorbed by the banks who are responsible for their poor business decision. Obama made it clear in â08 that losses would be passed on to taxpayers.
Even low interest rates are far higher than are needed to cover a loan that has no counterparty risk. 3% seems like a deal only because 18% credit card loans exist. A reversion to fair lending practices must happen, but will never happen so long as the banks write their own anti-default laws.
Most important is the success that the finance industry has had in convincing the populous that prompt debt repayment is next to Godliness. Never before was virtue tied up with debt repayment. But now, people are expected to impoverish themselves, eat twinkies, live in boxes, and sell kidneys to repay debts. A debt that canât be repaid, historically wonât. And it shouldnât. Excessive interest is usury, and excessive charges from monopolies that corner people into participating with a one-sided loan, are unjust.
If you default on a loan, perhaps youâre a creep. But perhaps you canât repay it. And if you canât repay it, it was a bad loan and a bad business move by the bank.
âCheap borrowing advantages the borrower.â
Not really. The fact that money is cheap means that everybody has already borrowed on the real assets that you desire. Prices are inflated on houses not as a virtue of their productiveness, but because of available money. Paying 6% interest to borrow on a house that was worth 2 years of your income in 1950, has now transitioned into borrowing at 3% on a house that is worth 12 years of income. Youâre paying far far more in interest because youâre playing with an asset class that is massively inflated because of those aggressive loans, because of the myth of necessary home ownership, because of the impossibility of bank default due to bailouts, and because of the belief that prices will always rise.
So what would be an acceptable interest rate in your view? That wouldnât be considered usury
I think you start with a return to traditional lending models, and the natural interest rate will reappear.
1. Encourage lending for productive purposes instead of just on real estate
2. No loans that cannot follow you after bankruptcy
3. No debtor prisons
4. Remove the belief that repayment is virtuous
5. Hold banks accountable for loans they make
6. Let banks fail if they make bad loans
7. Hold executive boards responsible for targeted lending
8. Reenact anti-usury laws
9. Donât have a money system that inflates perpetually
With these things in place, good loans will be repaid, and bad loans will now. Banks who act antisocially will suffer for it. Asset classes that people need (houses) will return to more accessible pricing.
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