An interest-free economy: feasible or ridiculous?

[rebeLemming]

Quote from trefoil:

Ways around this are always found, once commerce gets started in any serious way. In Renaissance Europe, one person would give money to another by way of contract with a clause stating that x+ some amount would be returned in a different place at a different time. It was really interest, but in the contract was put down as a fee.

I understand that it would be practically impossible to legally prevent lenders from charging interest.

But wouldn't it make for a more efficient economy as a whole? Doesn't the mechanism of compound interest increase the risk of debt defaulting, and thus amount to a deadweight loss overall?

In the case of mortgages, land is valued (when you're not in a stupid bubble, anyway) indirectly by the amount a person buying that land can make, which is why real estate in Manhattan is way more expensive than real estate in the middle of some county in Oklahoma with more coyotes than people.

But wouldn't it make for a more stable system, if the amount added on top of principal were tied to how much the person buying that land DOES make, rather than an expected value that is inevitably not realised in a sizable proportion of cases?

 

[Scataphagos]

Quote from rebeLemming:

"... I was just theorising that if banks or other lenders are dependent on the efficient use of the money they lend for a return on that loan, then they would be forced to be more responsible with regard to who they lend to and how much they lend.

Or is that not a logical conclusion to draw?

Even in a system like ours... where fiat is loaned and interest paid.... lenders and borrowers should be more responsible and have more "skin in the game".

You may not be old enough to remember or know... but that's how it USED to work... until greedy politicos and bankers decided they could get something for nothing by changing policies. Same old, same old.

 

[iprph90]

not to start a philosophical or religious debate here.........but, some scholars conclude that, although the concept of interest is prohibited by the mainstream islamic orthodoxy, the real intent is focused on banning usury: where the lender "doubles and quadruples" the initial loan amount.

here is a good article which delves into a historical context of interest dealings:

Riba today: Social equity, the economy, and doing business under Islamic law
BL Seniawski - Colum. J. Transnat'l L., 2000 - HeinOnline

i could not find the article directly from a google search, but if one has access to First Search through their local library, you may be able to access the article.

 

[trefoil]

Quote from rebeLemming:

I understand that it would be practically impossible to legally prevent lenders from charging interest.

But wouldn't it make for a more efficient economy as a whole? Doesn't the mechanism of compound interest increase the risk of debt defaulting, and thus amount to a deadweight loss overall?


But wouldn't it make for a more stable system, if the amount added on top of principal were tied to how much the person buying that land DOES make, rather than an expected value that is inevitably not realised in a sizable proportion of cases?

...only if banks don't do their homework. In normal times, most mortgages are paid in full. The late crisis was all about giving out mortgages to anyone who could draw a breath.
It is true, however, that mortgages, at least here in the US, are tied to the two big past crises: The Bank of United States failure in 1931 and Lehman in 2008 were both cases of portfolios of mortgages that blew up and made a bad situation a lot worse. Long term debt is always a lot riskier than short term debt, which is why home mortgages are so heavily subsidized: without the subsidy, very few people would be able to save up enough to get, say, a 5 year mortgage on a house and have 50% to put down for the down payment.
But how would you know what the profit on a house was? All you can do is look at the income of the buyer, make sure it can cover the loan with enough left over for everything else, and then hope they don't lose their jobs.

 

[Martinghoul]

Quote from rebeLemming:
But it is a return that is not directly linked to the return that the borrower recieves if the loan leads to him increasing his income, for example if his or her new business takes off.

I was just theorising that if banks or other lenders are dependent on the efficient use of the money they lend for a return on that loan, then they would be forced to be more responsible with regard to who they lend to and how much they lend.

Or is that not a logical conclusion to draw?

That's called equity.

Point is that, if I am a lender, I want to lend in one of two ways: a) extremely riskily and uncertainly, but with upside related to the expectation of the project's performance; or b) safely and conservatively, where I have a claim on the project's assets in case I don't get my interest. Together, these two types of capital, debt and equity (and their various combinations), offer all the flexibility investors and firms need.

 

[antitrust]

all the way through antiquity up until roman times a debt jubilee happened every 20 years or so. They understood math better than modern day economists.They understood that compound interest grew exponentially and the economy grew linearly thus making it in impossible to pay off debt in the aggregate. Today all money is created as debt, meaning that someone has to collateral an asset to the banking system in order to have a money in the economy. However modern day economists fail to grasp this requires the economy to grow exponentially as well. You can never have a sustainable economy when you have to borrow the medium of exchange at compound interest.




“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”

Kenneth Boulding, economist


"If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is."

Robert Hemphill. Credit Manager, Federal Reserve Bank of Atlanta




“That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.”


Marriner S. Eccles, Chairman and Governor of the Federal Reserve Board

 

[the1]

There is nothing inherently bad about interest. It's been a by-product of mankind, in one form or another, since the beginning of time. The problems occur when the risks of extending funding, and thereby collecting a sum of interest, are removed. When the government started backing debt with taxpayer funds and Wall Street start packaging debt and lying about the risks of such packages problems arose. Lenders took risks they otherwise wouldn't have taken. Lehman would not have "risked its own equity" as Alan Greenspan was so "shocked" to learn about if the company didn't believe it would be backed by the Government. To Lehman's surprise (and demise), the Government had closer friends it chose to bail out first and some blood had to be shed.

If I am requested to lend you a dollar and bear all of the risk of losing that dollar if you can't pay it back then I will think twice about lending you that dollar.

Quote from rebeLemming:

In any case, isn't interest an extremely inefficient aspect of the market in a capitalist economy? Shouldn't all lending and borrowing be based on a system of profit returns? Interest provides basically no incentive for the lender to contribute to overall economic development, whereas lending based on profit returns would encourage the financing of only potentially successful businesses.