Why not ban usury?

[gotlucky]

@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.

The fact remains that if you believe that bankruptcy is legitimate, then you believe that it is legimate to reneg on these so called contracts. If you believe these are legitimate contracts, then you believe that theft is legitimate. Let the cognitive dissonance commence!

[dude6935]

That has nothing to do with simple vs compound interest. Like I just said, the issue is ultimately about unlimited liability.

Weather or not defaulting on a loan is theft is neither here nor there. Even if it is theft, what are we to do, make the borrower a slave? Let the contract state these things. We have no business interfering in voluntary agreements (assuming there truly is agreement).

@Clayton

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.

Yes exactly. The issues in question are unlimited liability and weather or not people understand the agreement, not the mathematics behind the agreement. If X then Y. What takes place within the calculation is irrelevant once a defined value is agreed to.

So, if a “usurer” uses clear contracts with defined values, we should have no problem with that activity.

[ClaytonB]

The issues in question are unlimited liability and weather or not people understand the agreement, not the mathematics behind the agreement.

That was my point - I’m trying to underscore that the current system does accept compound interest in calculating liability in certain cases. Since mathematics really has nothing to do with the question of justice, I’m arguing that this should be dispensed with. And, as a prediction, I think that once this is dispensed with, it will have a massive impact on the nature of the loan market. I think the loan market would massively shrink in size, I think that simple interest, fixed-term loans would become more common and I think that interest rates would go up quite a bit, especially in the low-end lending market.

Clayton -

[eliotn]

Clayton, it looks like the key issue isn’t all about interest, its the fact that courts don’t enforce the tool of the performance bond, as described by Rothbard in Ethics of Liberty. So they have to use other vague measures, such as including interest.

And it looks like the issue is a problem with the “innocent until proven guilty”, that the debtor is “guilty until proven innocent”. Am I right?

[ClaytonB]

@eliotn: You can put it that way but I want to underscore that I think older moral/legal philosophers were well aware of these issues and the prohibitions on “usury” (that is, lending at interest, even simple interest) were actually based on these considerations. This is very clear from Sharia law regarding banking. It is permitted to effectively lend money, and it is even permitted to make money lending money, but the instruments are structured such that there are no open-ended obligations. It’s a gross and irresponsible over-simplification to simply say “Islam prohibits lending at interest”. Yes, it does, but it also effectively permits credit when the arrangement is properly structured. I guess what I’m trying to say is that I see a historical correlation between the rise of positive legal theory in the West and the explosion of credit-based, Western economies. When you throw “justice” out the window, it’s all just a big math equation.

Clayton -

[Johnny_Doe]

@Clayton

I’m actually coming to the view that contracts that are based on compound interest per se are ill-formed contractual arrangements in that there is not actually a single, agreed price.

Isn’t 5 % per annum a single, agreed price?

@Clayton

The cascading scale of defaulting prices upon non-payment implied in compound interest contracts are exploitative because a) they result in absurd sums very rapidly[1] and b) the terms of such instruments are invariably favorable to the wealthy, a sure sign that they are a symptom of the parasitic social order, not the natural social order.

It depends on the interest rate.

@Clayton

The underlying presumption of compound interest - that money is exponentially valuable in time - is actually false.

Is a commodity you can’t use, exponentially less valuable in time as you can’t use/invest it when someone else is borrowing it from you?

@Clayton

@Meistro: That’s beside the point. The point is that what began as a $100 obligation balloons into absurd numbers, not because “that’s what was agreed to” - of course people are free to negotiate any price they like between themselves - but because humans are extraordinarily bad at exponential arithmetic. Most people pay close to 2x the sticker price for an automobile because they buy it on credit… by the time you add up all the interest, the total purchase price comes out to nearly 2x.

But they do so in a society where the fiat-money is inflated, so if that car is an investment that enables them to be more productive immediately, that might not be so stupid, as the loan decreases relatively to their growing income as money is being inflated.

@Clayton

It may be true that people don’t grasp the math of compound interest. But that just means they are signing up for a Darwin Award when they voluntarily agree to a complicated contract without sitting down to figure out what it actually says,

But how does it happen that such stupidity is so common? I’m not asking a question about population traits (why are so many people stupid) but, rather, how is it that this trait is so often expressed? For example, the willingness to commit petty theft is appallingly common. Yet there is actually not a lot of petty theft in absolute terms, compared to what there could be.

How do you know?

@Clayton

This is because petty theft is punishable. So would-be petty thieves are induced to calculate - in their own terms - the costs of indulging the urge to commit a petty theft.

Yet, somehow, stupid people are not being induced to calculate the true costs of compound interest loans which they are taking out for literally everything from houses

…with enough regulation to curtail supply in a given area, real estate prices will increase in value, so borrowing to invest in real estate might be profitable in a fiat-monetary system.

@Clayton

to cars, to boats, to televisions, to dental work, to breast implants, etc. Let me put it this way and let you ponder it: the modern system of consumer credit is subtly redistributive.

Clayton -

[ToxicAssets]

@Clayton

@Meistro: That’s beside the point. The point is that what began as a $100 obligation balloons into absurd numbers, not because “that’s what was agreed to” - of course people are free to negotiate any price they like between themselves - but because humans are extraordinarily bad at exponential arithmetic. Most people pay close to 2x the sticker price for an automobile because they buy it on credit… by the time you add up all the interest, the total purchase price comes out to nearly 2x. But they don’t think it through, they just say “Oh, 8% isn’t that much”. But it isn’t just 8%… it’s 8% on 8% on 8% on 8% on 8% on $25,000 (annuitized over 5 years or however many years the loan is). Some States have laws to try to rectify this by giving the consumer the total package price, etc. but the fact is that that’s like putting your finger in the crack of a leaking dam… the point is that everybody buys cars for that price, so of course, that’s what the Joneses will pay to have a car. In other words, my view is that it’s not an accident that things like car loans are the way they are. It’s an interlocking, interconnected system. It’s pure evil.

Clayton -

But that’s why few debts are structured as zero coupons contracts.

Most real world contracts have a stream of coupons payed on pre-assigned intervals (usually of the same length) where the accrued interest since the previous coupon payment is payed, thus leaving only the principal. So you pay 8% over the principal every year and in the last year you pay the principal + 8%, and you have no exponential explosion. And this can go on for an infinite amount of time. Or you can structure so you pay the interest plus a part of the principal so that in a number of years all is payed.

This mode of payment seems to have worked well since the middle ages and perhaps contributed to the prosperity of the judeo-christian world, which lagged far behind the Islamic world before the Reinassance.

Even though this is a very complex process, the relative freedom to practice usury many relocated spanish jews encountered in the prostestant electorates of the Holy Roman Empire, as well as in the Habsbourg Netherlands and London, contributed to the advancement of these regions.