Why not ban usury?

[gotlucky]

You might want to take the time to reread Clayton’s posts more closely.

[Southern]

You might want to take the time to reread Clayton’s posts more closely.

Yea I dont feel like we are talking about the same thing.

[ClaytonB]

I didnt say that the principal amount is reduced by the accrued interest. You have two pots of money one is the principal owed the other is interest owed (accrued interest). Your payments are set up so that every month the balance in the accrued interest is paid in full with enough left over to pay a small amount of principal.

Re-read the sentence you quoted.

Ok I think I see where our disagreement is. Are you under the impression that you would be paying interest on interest in your second scenario? Because you are not. Compounding in this context has nothing to do with paying interest on interest. I only means how often is interest calculated.

No. Compound interest loans operate on precisely the same principle as compound interest in a savings account or other financial instrument. Interest is calculated on principal plus accrued interest. The fact that the calculation is done stepwise during each billing period is irrelevant.

The interest that you pay is based strickly on the outstanding princpal balance in both cases. The difference between your two scenarios is that your percentage rate is this: In your first example the 10% is per 10 years in your second example it is 10% per one year.

Nope. 10% simple interest calculated for one year would still be $110,000 - payments would be $9,166.66 per month. As for “10% per year”… well, that’s again compounding.

The extra $49,240 you pay has nothing to do with paying interest on interest. You pay more because you have agreed to pay 10% interest every year not just once.

Actually, my calculation was based on a monthly compounding period, over 10 years. Anyway, why don’t you give me an example of true compound interest so we can see an example of this elusive beast.

You are jumping from one issue to another. Fees are not interest… they are fees. So this has nothing to do with compound interest. If you are upset that when you borrow money that you are held to the terms of your agreement, I dont know what to tell you.

But what, exactly, is the agreement? That’s the point. Being “held to terms of agreement” is, as Rothbard notes in EoL, an anti-liberal conception of what a contract is. A contract is, at root, a conditional property title. “Terms of the agreement” is a squishy and ill-defined concept… and, ultimately, it leads to unlimited liability. Any agreement, however tiny - even if such an agreement was never actually made! - can balloon into astronomical liability.

As far as “millions of dollars in upaid parking tickets”, I highly doubt that this was a private entitiy… most likely a government entity.

But that’s my point… the private entities imitate the public entity… they are little models of the big tyrant. My point is moral, not political. They’re operating on the same corrupt moral principle as the government and this is what needs to be addressed. We need to question the validity of this kind of behavior, whether by small or large tyrants.

Clayton -

[Southern]

Re-read the sentence you quoted.

Yup, misread you. My appologies.

No. Compound interest loans operate on precisely the same principle as compound interest in a savings account or other financial instrument. Interest is calculated on principal plus accrued interest. The fact that the calculation is done stepwise during each billing period is irrelevant.

If that is the case then mortgages, consumer and commercial loans done the US are not compound interest loans. You do not pay interest on the accrued interest. Also, with savings accounts and CDs you do not earn interest on accrued interest. You earn it on the account balance. Its not until they pay you the interest and you deposit that amount that you begin to earn interest on it. It would be similar to having an open ended line of credit like a home equity line where you drew on your LOC in order to pay you payment.

Nope. 10% simple interest calculated for one year would still be $110,000 - payments would be $9,166.66 per month. As for “10% per year”… well, that’s again compounding

Once again if you mean you are paying interest on the interest that accrued during the first year in addition to the pricipal then you are incorrect. If you are simply saying that interest owed is calculated 120 times over the course of the loan instead of one then yup.

Actually, my calculation was based on a monthly compounding period, over 10 years. Anyway, why don’t you give me an example of true compound interest so we can see an example of this elusive beast.

“true compounding” as you put it. Is where you would take the interest that accrued during the first month add it to the principal and then calculate the interest due the second month and then add that to the principal then calculate the interest due the third month then add that to the principal then calculate the interest due… etc.

What occurs on your typical loan is that interest is calculated on the pricipal balance then added to accrued interest, next month interest is calculated on principal then added to accured interest, next month interest is calculated on principal… etc.

But what, exactly, is the agreement? That’s the point. Being “held to terms of agreement” is, as Rothbard notes in EoL, an anti-liberal conception of what a contract is. A contract is, at root, a conditional property title. “Terms of the agreement” is a squishy and ill-defined concept… and, ultimately, it leads to unlimited liability. Any agreement, however tiny - even if such an agreement was never actually made! - can balloon into astronomical liability.

I see what you are saying and maybe theoretically it could, but in practice it does not. Bank policy is this… When a loan is a certain period past due it is put on “nonaccrual” which means the bank stops charging interest. Late fees are a one time deal based on missed payments, if you agreed to make 120 payments and lates fees of $30 per payment then your liabiltiy for late payments is $3600 maximum. It would never happen though the bank would write the debt off long before that. So things are not quite as undefined and open ended as you are making them out to be.

But that’s my point… the private entities imitate the public entity… they are little models of the big tyrant.

I dont see that. Private entities make a cost analysis of collecting making loans collecting debt etc. Public entities do not. It doesnt matter to the government whether is spends $1,000,000 collecting $50,000 in back taxes. A private entity would write the $50,000 off report it to the credit bureau and move on.

I feel like we are focusing on two different things here.

[Southern]

But what, exactly, is the agreement? That’s the point. Being “held to terms of agreement” is, as Rothbard notes in EoL, an anti-liberal conception of what a contract is. A contract is, at root, a conditional property title. “Terms of the agreement” is a squishy and ill-defined concept… and, ultimately, it leads to unlimited liability. Any agreement, however tiny - even if such an agreement was never actually made! - can balloon into astronomical liability.

I think I missed your point in my previous post. I agree that the only property that should be at risk when agreeing to a loan is specific property put up by the borrower. All other unsecured debt is that should remain that. In reality this is how it works. There are cases where leins are filed against other property but relative to the volume of bad debt it is insignificant.

Overall I think we are moving in the right direction. After all it was not long ago you could be thrown in jail for bad debt.

[ClaytonB]

Overall I think we are moving in the right direction. After all it was not long ago you could be thrown in jail for bad debt.

I think this is the illusion we are being sold and I think it is precisely the opposite… we already have debtor’s prison again, did you know that? If you are a divroced father and you fall behind on your child support payments - perhaps due to debt, perhaps due to unemployment, doesn’t matter - you can go to jail, and many men do. That’s what all this “deadbeat dad” crap is about. Nevermind that, in most States, child support is directly garnished from the paycheck… that doesn’t matter… all that matters is that the State’s attorney can declare you in arrears of child support and you are on your way to prison. Please explain the logic behind that. “You’re not supporting your children… so we’re gonna make sure you can’t.” It’s like that meme: “We’re the government and we’re here to save your life even if we have to kill you to do it.”

Clayton -

[Southern]

http://www.mtgprofessor.com/a%20-%20simple%20interest%20mortgages/simple_interest_nomenclature.htm

http://www.washingtonpost.com/wp-dyn/content/article/2008/01/25/AR2008012501739.html

http://www.ehow.com/about_7407422_simple-vs_-compound-mortgage-interest.html

Just a couple of links might help clear up our understanding.

[Southern]

Overall I think we are moving in the right direction. After all it was not long ago you could be thrown in jail for bad debt.

I think this is the illusion we are being sold and I think it is precisely the opposite… we already have debtor’s prison again, did you know that? If you are a divroced father and you fall behind on your child support payments - perhaps due to debt, perhaps due to unemployment, doesn’t matter - you can go to jail, and many men do. That’s what all this “deadbeat dad” crap is about. Nevermind that, in most States, child support is directly garnished from the paycheck… that doesn’t matter… all that matters is that the State’s attorney can declare you in arrears of child support and you are on your way to prison. Please explain the logic behind that. “You’re not supporting your children… so we’re gonna make sure you can’t.” It’s like that meme: “We’re the government and we’re here to save your life even if we have to kill you to do it.”

Clayton -

I agree specifically with the insanity of imprisoning people for being bad fathers and not supporting your children, or simply being someone who cant live up the dictates of the court.

But this is not “debtors prison” as you describe. They are not going to jail because they owe child support they are going to jail because they have dared to defy the court. I do draw a distinction between this issue and contractual debt, where generally the only thing at risk is your reputation or property you have specifically put up as collateral.

[ClaytonB]

Once again if you mean you are paying interest on the interest that accrued during the first year in addition to the pricipal then you are incorrect. If you are simply saying that interest owed is calculated 120 times over the course of the loan instead of one then yup.

I guess what I’m trying to say is that it’s mathematically identical. A mortgage is “an annuity in reverse.” You just take the same formula and instead of getting monthly checks drawn from the annuity account, you are making payments on the loan. As the length of a loan increases and the compounding time reduces (I understand many lending houses use a daily compounding rate), the closer it approximates a continually-compounded interest loan.

What you’re saying is that unless the payment is less than the accruing interest, then it’s not compounding but this is not true because the accrued interest is taken out of the payment and only the remainder of the payment is applied to the principal. The way to see my point is as follows. Imagine you have $100,000. You can invest it in an annuity for 20 years at 5% interest, or you can start a bank and loan it out for a mortgage at 5% interest. Either way, you will be receiving a montly check for $660 for 20 years, for a total profit of $58,400 (58.4%). You can’t deny that an annuity is earning interest on interest, it’s just that all the interest (plus a little more) is being drained from the account as it is being earned.

Also, to reiterate my earlier point, I also think it continues compounding through the late fees which are actually larger than the interest. And, furthermore, once the debt goes into default, the entire amount is calculated as principal+fees, not just the principal and will be refinanced as an interest-bearing loan (thus, interest on interest) and this can happen arbitrarily many times. In practice, it may not happen frequently, but it’s the fact that it can happen and does happen to some unfortunate people, that is really my point. It’s like the effect of the possibility of a cop can give you a ticket for not stopping a full three seconds at a stop sign. It forces everyone to comply with a certain order.

I understand that the mortgage market is heavily regulated and probably a lot of these regulations are actually good things as far as they go. But my point is more to the overal social/financial order, of which the loan market is just a piece.

I see what you are saying and maybe theoretically it could, but in practice it does not. Bank policy is this… When a loan is a certain period past due it is put on “nonaccrual” which means the bank stops charging interest. Late fees are a one time deal based on missed payments, if you agreed to make 120 payments and lates fees of $30 per payment then your liabiltiy for late payments is $3600 maximum. It would never happen though the bank would write the debt off long before that. So things are not quite as undefined and open ended as you are making them out to be.

No doubt the “government as creditor” is the worst of all possible worlds, far worse than private creditors who must at least stop when collection costs exceed the assets they are trying to recover. But I’m going more to the principle of the matter - it’s not just about car loans and mortgages, it’s about any kind of claim or obligation. For example, let’s say you get a letter in the mail. “You owe $1,500. Please contact xxx-xxxx immediately to avoid further legal action.” etc. Now, there’s no legal way to make this stop. Anyone can legally make a claim - and keep repeating that claim - indefinitely. There is no legal action whereby you can tell someone “put up or shut up.” But the reverse is not true… if you believe someone owes you money, you may file a legal action to force that person to prove they don’t owe you… it’s completely one-sided. And what have we gotten as a result? A collection culture.

Clayton -

[eliotn]

“No doubt the “government as creditor” is the worst of all possible worlds, far worse than private creditors who must at least stop when collection costs exceed the assets they are trying to recover. But I’m going more to the principle of the matter - it’s not just about car loans and mortgages, it’s about any kind of claim or obligation. For example, let’s say you get a letter in the mail. “You owe $1,500. Please contact xxx-xxxx immediately to avoid further legal action.” etc. Now, there’s no legal way to make this stop. Anyone can legally make a claim - and keep repeating that claim - indefinitely. There is no legal action whereby you can tell someone “put up or shut up.” But the reverse is not true… if you believe someone owes you money, you may file a legal action to force that person to prove they don’t owe you… it’s completely one-sided. And what have we gotten as a result? A collection culture.”

Can you elaborate on this please?

[ClaytonB]

@eliot: I wrote a really long post… then decided it was all muddled. So, here’s a cut-down version.

Jones can file suit, claiming that Smith owes him money… and if Smith doesn’t show up to court and answer Jones’ challenge, Jones wins by default. That’s the meaning of default. The party who shows up to court wins by default, supposing the other party is a no-show. But let’s say Smith really does owe Jones money. He cannot file a suit that says “I owe Jones no money” and then if Jones doesn’t show up to court, Smith is free of his obligation by default.

I think that shows the one-sidedness of it all. At any time, I can send you a “notice” in the mail that you owe me money. The threat implied in this notice, is that if you don’t respond to me, I will file a suit against you. And should I choose to do that, you must respond regardless of whether you can afford a lawyer, etc. or else I will win by default. The whole concept is intrinsically abusive and is rampantly abused by creditors and collectors.

But it doesn’t work the other way around. I can’t send a letter to my mortgage company: “I hereby declare I owe you no money.” They’ll just laugh and throw it in the garbage… because there’s no way I can follow up and file a suit along those lines… “Show up to court to defend yourself against my claim that I owe you no money.” There is no way to make such a lawsuit that I’m aware of, except as a counter-claim to a prior lawsuit, filed by a creditor.

Clayton -

[KingofthePaupers]

Jct: Yes, I’ve read Libertarians do not want to infringe the liberty of the rich to enslave the poor with unpayable debts. Oh, and interest is on cows, usury is on inert matter because when everyone borrows 10 chips and everyone owes 11 chips in the mort-gage death-gamble contract, someone gets morted, knocked out of the game into starvation by lack of life-support tickets. That’s one liberty I don’t think the Libertarians should been so quick to accept. I’m a Libertarian-Socred:
I want no cops in gambling, sex, or drugs, or rock&roll,
I want no usury on loans, pay cash or time, no dole.
Check out LETS timebanking community currencies for bottom-up solution or UNILETS or Argentine Solution for top-down (paying workers with small-denomination government bonds saved both Argentina and Russia during their bank crashes.

[abirkmanis]

because when everyone borrows 10 chips and everyone owes 11 chips in the mort-gage death-gamble contract, someone gets morted, knocked out of the game into starvation by lack of life-support tickets.

Care to elaborate what you meant?

Oh, and suggesting your own post as an answer is uncool, IMO.

[Southern]

I guess what I’m trying to say is that it’s mathematically identical.

Its not mathematically identical: Lets assume we have a 10 day loan of $100,000 at 1% per day. In the first example you have the interest compounded by adding it to the principal where the next days calculation for interest is based on the new principal balance. In example two the interest is not compounded and is only calculated based on only the original principal. There is a $462 difference in the amount of interest owed.

	Begin Principal	Interest	End Principal	Total Owed			Begin Principal	Interest	End Principal	Total Owed
Day 1	100000	1000	101000	101000		Day 1	100000	1000	100000	101000
Day 2	101000	1010	102010	102010		Day 2	100000	1000	100000	102000
Day 3	102010	1020	103030	103030		Day 3	100000	1000	100000	103000
Day 4	103030	1030	104060	104060		Day 4	100000	1000	100000	104000
Day 5	104060	1041	105101	105101		Day 5	100000	1000	100000	105000
Day 6	105101	1051	106152	106152		Day 6	100000	1000	100000	106000
Day 7	106152	1062	107214	107214		Day 7	100000	1000	100000	107000
Day 8	107214	1072	108286	108286		Day 8	100000	1000	100000	108000
Day 9	108286	1083	109369	109369		Day 9	100000	1000	100000	109000
Day 10	109369	1094	110462	110462		Day 10	100000	1000	100000	110000
Interest Accrued		10462				Interest Accrued		10000
Total Repayment		110462				Total Repayment		110000

There is no legal action whereby you can tell someone “put up or shut up.”

This is not true. When you file for bankruptcy arrangements are made where some creditors are paid and others legally have to eat the bad debt. Once the bankruptcy is discharged creditors have no legal recourse to recover money from you.

if you believe someone owes you money, you may file a legal action to force that person to prove they don’t owe you… it’s completely one-sided.

This is also not true. If someone takes you to court because they claim you owe them money… they are the ones who have to prove it. They have to provide evidence that they gave you money and you agreed to repay under certain terms. If a creditor decides to take you to court and they cannot produce evidence the case will simply be dismissed. To claim other wise is just untrue.

[Southern]

Jones can file suit, claiming that Smith owes him money… and if Smith doesn’t show up to court and answer Jones’ challenge, Jones wins by default. That’s the meaning of default. The party who shows up to court wins by default, supposing the other party is a no-show.

I’m not sure this is entirely accurate. If I sue you and you dont show the court is still going to ask me to make my case that you owe me money. If I have no evidence the court would certainly not award me a judgement.

At any time, I can send you a “notice” in the mail that you owe me money. The threat implied in this notice, is that if you don’t respond to me, I will file a suit against you. And should I choose to do that, you must respond regardless of whether you can afford a lawyer, etc. or else I will win by default.

You have to respond because the court commands you to. But you wont lose by default because you dont show up. You lose because evidence is presented that you do indeed owe the money and you are not present to dispute the evidence.

This sounds entirely resonable to me. If it was any other way I could avoid all legal action by simply refusing to show up for court.

I can’t send a letter to my mortgage company: “I hereby declare I owe you no money.” They’ll just laugh and throw it in the garbage… because there’s no way I can follow up and file a suit along those lines… “Show up to court to defend yourself against my claim that I owe you no money.”

This makes no sense. When I claim you own me money that you have refused to pay back, I am in essence claiming that you have stolen money from me. You are telling me that an individual who has not been allegedly stolen from should be the one to initiate the law suit?

Law suits are initiated by those who are claiming to have wronged in some way. Not the other way around.

[abirkmanis]

BTW, Clayton, I think that using the compound interest for contracts is far from being artificial - it is in fact the natural one.

By this I mean that two loan contracts for 1 month, when naturally combined, result in one contract for 2 months using compound interest, not simple one.

Insisting on limiting the loan contract liability is just asking for arbitrage - A can borrow $100 from B to be returned in 1 year as $110, with some additional fees if returned later, but never more than $120. Then A can lend these $100 for one year term indefinitely, first to C, then to D, then to E (let’s say, undercutting the going rate of 10%, so earning only 9% a year). After 3 years, A finally decides to return $120 to B, keeping the positive balance for himself. I do not see this model as sustainable.

[dude6935]

I understand that the mortgage market is heavily regulated and probably a lot of these regulations are actually good things as far as they go.

They say everyone (and every AnCap) has a blind spot. I guess this is Clayton’s. I could understand saying that laws against murder are good as far as they go, but the prevention of voluntary transactions, com’on man… If both parties know what they are agreeing to, I don’t see a problem. And bankruptcy is always an option if things get out of hand.

[gotlucky]

You are highly mistaken as to what Clayton is saying.

EDIT: Here is one of his statements from earlier:

@Clayton

But what, exactly, is the agreement? That’s the point. Being “held to terms of agreement” is, as Rothbard notes in EoL, an anti-liberal conception of what a contract is. A contract is, at root, a conditional property title. “Terms of the agreement” is a squishy and ill-defined concept… and, ultimately, it leads to unlimited liability. Any agreement, however tiny - even if such an agreement was never actually made! - can balloon into astronomical liability.

I fully agree that people should be able to create voluntary agreements with each other, but not just any old agreement is considered a valid libertarian contract. The fact that you think bankruptcy is a legitimate method of reneging on these agreements should be a hint that they are not as legitimate as they might seem.

[dude6935]

I know all that. But if you engage in many separate simple interest contracts, you can just as easily run out of property to fulfill your contracts. You are bankrupt. Just because the numbers become large at some arbitrary point in time is irrelevant.

If we enter into a compound interest contract that matures to a maximum defined benefit, the objection falls away. Compound vs simple is not the question. The question is about unlimited liability.

[ClaytonB]

By this I mean that two loan contracts for 1 month, when naturally combined, result in one contract for 2 months using compound interest, not simple one.

I understand and accept that a professional creditor may combine contracts in this way, and do so to both the advantage of creditor and debtor. It is clear that interest is in some sense “exponential” with respect to time, just from looking at the market outcomes.

That said, this has nothing to do with the question of justice, which is really the question that law is seeking to answer. “What is the just outcome in this situation?” You can’t just reach for the first industry-standard calculation method you come across and declare that to be just. The word justice is as literal as it gets: justification. That is just what can be justified. Just saying “there are loan houses who combine and refinance loans using such-and-such equations” is no more relevant to a particular debt dispute than arguing over the true price of oranges in the case of a missed orange shipment. Contracts that are wide-open and refer to things like “going price” or what-not, are ill-formed contracts and lead to increased, not decreased conflict. This doesn’t mean that such contracts will not be made anyway, however, the idea is that in an unhampered market in law, we should expect the settlement of disputes over such messy contracts to be expensive vis-a-vis better-crafted contracts, thus, we should expect the market to impel people to write clearer, more cost-effective contracts. IOW, this isn’t about taking anyone’s “freedoms” away, it’s about understanding a) where does justice fit into this and b) what are the various cost impacts of structuring and enforcing contracts?

Insisting on limiting the loan contract liability is just asking for arbitrage - A can borrow $100 from B to be returned in 1 year as $110, with some additional fees if returned later, but never more than $120. Then A can lend these $100 for one year term indefinitely, first to C, then to D, then to E (let’s say, undercutting the going rate of 10%, so earning only 9% a year). After 3 years, A finally decides to return $120 to B, keeping the positive balance for himself. I do not see this model as sustainable.

The point is that the chain of contracts should always be in the form of a simple “if then” model, or perhaps a couple, clearly cascaded and precedented conditionals and should conform as closely as possible to the Rothbardian view of a contract as a conditional transfer-of-title… the more clearly the language corresponds to this view, the more cost-effectively disputes arising from violation or perceived-violation of the contract can be settled.

How loan terms are calculated should not be in view. For example, let’s say I go to the bank and ask for a 10 year loan of $100K. They come back and tell me they will loan me $100K in exchange for an IOU contract that I will pay $916.66 per month for 120 months; if I miss payment for 30 days, I agree to a $100 fee, if I miss payment for 60 days, I agree to a $250 fee, and if I miss payment for 90 days, I agree that double the outstanding balance is owed to the creditor, i.e. conditional title transfer. This is a perfectly enforceable contract, and the amount of interest on the loan is calculated using compounding (10% APR, compounded monthly). The fees act as a grace period, and the defaulting value acts as an incentive to meet the original terms. The instrument does not “accrue interest” over time once defaulted on, any more than a stolen bicycle “accrues interest”. The doubling also serves to take into account enforcement, collection, legal, etc. costs on the anticipation that arguments like “you cost me money by forcing me to have to secure my own property” are invalid.

In other words, all we have really done is reworded the contract. It is no different than an ordinary mortgage contract except that all the squishiness has been discarded - there is no room for the judge’s discretion, or for either party to argue about prevailing prices, abusive interest rates, and so on. The contract is just a simple marker of the terms of a conditional exchange of property. Nothing more. Rothbard quotes Hobbes in EoL who points out that, when it comes to law, words matter, so being nit-picky about contract wording is just part of the territory.

Clayton -