Some commie online was upset that lenders charge interest, claiming that it is usury. He feels that loans should be interest free. Being that I have completed the finance and economics courses for my MBA, this is where I decided to help educate him. I shouldn’t have bothered.
Lenders have expenses.
They have fixed administrative costs like accounting, clerks, and other things that they must pay for. Those costs are the same for every loan.
Then there are the variable costs, the cost of defaults. About 1 percent of those who have a 750 or higher credit score default, but this rises to more than 15% of those with a score of less than 600. This default rate means that interest rates must be higher for those who have a higher chance of default. If interest rates are capped, then lenders will simply refuse to lend to those whose likelihood of default makes it uneconomically feasible. That tends to mean minorities, who historically have much higher default rates.
The commie went on to handwave that point away, saying it is a bad approach to paying for things.
In response to this, I posed a question:
So what’s the alternative? It takes about 14,000 hours of labor to build a house, plus materials. Where does the money come from?
Here are the alternatives that he proposed. I answer each in turn.
1) We could eliminate the usury/interest rates system altogether. If it’s too expensive, we have no business buying it yet. If a low cost bought huge portions of America, we can restore that same value.
Much of that was when each person was building their own house, growing their own food, etc. Have you built your own car? House? Can you? Most people cannot. Money is what makes specialization possible. Sometimes, a transaction takes more money than you have on hand. The cost of waiting to save and pay cash isn’t practical. Try living in a carboard box while you save to buy a house.
2) We could have a fixed flat member fee. Nothing too small, nothing too big. Something that keeps a company in business, especially when factoring in multiple customers. We could cap the compounded debt.
How large would the membership fee go to buy a house or a car? What would be the terms? Imagine walking to work for 5 years while you make payments on a car that you don’t yet have.
3) We could simply cap the profit of compounded debt.
What would happen then would be that no one with bad credit would get a loan.
4) We can focus on reducing the root costs of resources (wood, etc.) after eliminating interest rates.
The largest expense in almost any business is the cost of labor. To build that house, you still need to fund those thousands of hours of labor. Who pays for that, and how?
5) The sellers could get monthly payments directly while cutting out the middleman. Extra cost could be minimal.
So you want the sellers to also be the lenders. That’s inefficient and actually increases costs. Now the seller’s funds are tied up in the products that haven’t yet been paid for. The time between selling the inventory and receiving payment is called the cash conversion cycle. Without financing, this could mean years of a company waiting to be paid for things like appliances, homes, and cars. There will still be defaults, meaning that those costs will be passed on to consumers. Also, only wealthy people and those with good credit will receive goods. Minorities need not even apply.
6) Sellers can start by asking for a lump sum in the beginning to give them a buffer before monthly payments.
Again, with sellers asked to also be lenders. This disrupts the seller’s cash conversion cycle. Funds that are tied up in inventory that has already been sold are not available for the company to continue operations, causing losses and delays. This is expensive. The term here is called “The Time Value of Money.”
7) The seller of resource materials can drop their prices for the seller of products.
So now you want the suppliers to bear the costs? The electrician drops prices for the home builder. Now how does that work?
8) Financial aid (if spending isn’t going to the people, why is it so much better for government money to go to the usury sin of lenders?) To eventually pay off the government in a fixed fee of profit. No fee. Failure to cover is taxed — last resort.
So the government will pay interest instead of consumers? This results in unsustainable debt, or in runaway inflation.
9) A non-profit source of assistance to fill in a time of struggle.
Where does this non-profit get their funding? Money is a material, just like steel, wood, or labor. It has to be paid for. Someone, somehow, someway will bear the costs of money. It will be the consumer who has to wait until he can get a house or car on layaway, the business that has paid for labor and materials and now can’t use those funds for the next project because they are awaiting payment, or the taxpayers who have to fund the government. It’s a cost, and someone will pay for it. You are expecting the government, who has famously paid $600 for a hammer, to control costs.
10) Pay as we go. A product might need to be covered completely, but duration of services could be ongoing payment. Instead of a government paying a lump sum of a project, they only shell out service cost totals as the project goes on, that way if there’s a cancelation, it basically freezes the pay where it is at, instead of being trapped a lump sum covered by loans and then owing the initial cost and a potentially unending debt with immeasurable interest rates, the costs of services are already covered.
So you pay for the land to be cleared. Then save for a few months before you have the money to pay for the underslab work like plumbing to be done. Three more months for the outside walls, ad nauseum, ad infinitum. Twenty years of being homeless later, you finally are ready to move into your house. This is just a repeat of your first point- and still won’t work.
11) Lay Away. Pay First. Receive after. No middleman.
Again with the point of paying for it before you get it.
12) A combination of these things..
None of which will work, for the reasons above.
His answer to all of this? He focused on the “Time Value of Money” and the cost of money.
“That’s the cost of money” ignores everything I just said. I know that my wages don’t satisfy my time. Time is not an objective value. Too bad. Your explanation is some weak sauce.
The base issue here is that young people (who make up the majority of useful idiots) have no concept of money, value, or economics. My son once asked me (when he was 4 years old) for some expensive toy. I told him that we don’t have money for that, and his reply was to tell me to go get more from the ATM. Communists display all of the economic knowledge of a 4 year old who wants a new toy.
