[vlovich123]

My impression is that usury actually inhibits economic development because you’re stuck paying the interest instead of investing in your future. Lower interest rates encourages more risk taking economic activities. Sometimes those risks don’t pan out, but, if you believe that overall your economy will prosper, lower interest rates ensure that proceeds from risks stay more with those generating the activity rather than the lenders themselves. Liquidity is important but not as much value creating (if everyone loans the other person $5, there’s a lot of “economic activity”, but nothing of value has been created in that fake scenario). That’s simplistic of course and liquidity itself can be value-generating if there’s intention behind it (ie vetting that the liquidity generated is going to an enterprise that will likely yield net returns overall for some reason).

That’s also why there’s bankruptcy protection. Sucks for the lenders that their gamble didn’t pay off but generally they’re able to take a loss and their other investments can balance them out. Plus bankruptcy protections apply to them to if they overextended themselves or didn’t manage the investments.

The point is that anyone can suffer an economic hardship but that doesn’t mean society should strive to create punishing conditions if you are unlucky (or, in most payday scenarios, just start off poor). Of course some people will abuse the system. There are abuses happening by lenders too. Economic policies around this though can only work at the macro scale, so you find other ways to mitigate the problems through legal structures.

I think there’s this unhealthy association between lendees not paying and it somehow being a moral failing on their part. No. It’s the fault of the lender for not vetting their investment properly. Sure they should be allowed some attempt at recollection but there need to be strong usury protections too (if you want to allow high interest rates in your economic region, then high usury rates should be pared with much easier ability to limit recovery after some limit is collected. If you think about it, in payday scenarios, the successful “investments” on the part of the lenders (ie the people actually making good on the payments) are subsidizing the lenders loans to those that can’t pay. It’s a vicious cycle frequently for those involved because the loans aren’t actually generating economic value and are really being used just to help people get by. High interest loans really need to be restricted to risky economic investments (starting a business of some kind) or those with the resources that they could pay it back and just have a short liquidity issue. This $500 @ 30% interest to fix your car that’s your only mode of transportation to/from work or $1000 to go to the doctor seems seems like not a useful application. It’s a non-economic need that person has and there’s not really any likely realistic scenario where those loans would have a net positive impact on the economy. Forcing the area to invest in useful public transportation solutions and safety net for medical care would return far more value to the economic prosperity and social stability/welfare of the area.

[inshadows]

Thanks for long reply. But you mostly just summarized what I felt about the first 2 chapters in your own words.

You say

> I think there’s this unhealthy association between lendees not paying and it somehow being a moral failing on their part. No. It’s the fault of the lender for not vetting their investment properly.

You know what? If that's how I'm going to be treated as money lender then screw it, I'm not lending anybody. They need money to jump start their economy? Screw them. If I'm supposed to invest in detailed research with zero return, I'll be at loss in the end even if the huge risk turns out in my favor. I'm keeping my money safe, let them starve! Now obviously I'm not seriously that evil, but you get the point. When there's no protection for money lenders, when society treats them as evil (as this book does), they're not going to lend anybody, and poor economy won't have the capital to build from in first place. And then money owners will be vilified for hoarding money! You can't really win this game unless you give away money for free, can you?

EIDT: I agree that usury is evil. Obviously investor protection should go only so far, but shifting all blame for failed projects on money lenders is just wrong. Contracts should be obeyed.

[vlovich123]

Then don’t lend? I’m not sure why you’re getting so triggered. Why are you treating it as a moral obligation that you have to lend? Sure there can be positive social results to certain kinds of lending. If you’re investing for that purpose though (to improve someone’s situation), why are you looking to be punitive and enforce that you get a return? Now maybe you’re not seeing efficacy or maybe you’re primarily motivated by your personal returns. Then invest accordingly. It seems though like you want to hold power over people as a result of lending out money & that to me seems like an unhealthy motivation for everyone involved.

And as for contracts being obeyed, I’m not sure where you ever got that. Contracts can be broken for all sorts of reasons.

As a counter to your “bitch better have my money” perspective. I invest money in startups and they fail. Is it a moral failing on their part or mine that that happened? Sometimes they don’t fail. Is that due to our morals? It’s a bet on an outcome and people. Sometimes the bet doesn’t go my way. Sometimes it does. Why read morals into what is in a lot of ways a game of chance? I’ve also been a landlord & had people try to screw me out of rent checks. Sure that’s shitty of them to do and it frustrates me but everyone has their struggles.

EDIT: And I didn’t shift all blame on lenders. I just said that usury like payday loans should be way more regulated than it is in the US.

[inshadows]

I'm not triggered. Sorry, that's just my (bad) habit of employing ridicule and irony in discussions. I didn't try to imply that it's my obligation to lend. I'm very risk averse in fact. I'm also not 100% evil, but I'm not very charitable (yet). I donated several times and that's it.

> Sure there can be positive social results to certain kinds of lending. If you’re investing for that purpose though (to improve someone’s situation), why are you looking to be punitive and enforce that you get a return?

Certainly there are people and organization that invest with aim to help the other party. But aren't most people investing to make profit? And isn't this kind of investing (for profit) beneficial for society as well? You provide capital early to others, and since you can't use it now for your consumption you get interest in return.

I don't think why you imply that I want to hold power over people. All I'm saying is that if I don't get any protection, then likely I won't invest at all. And who would if there's no protection?

> Is it a moral failing on their part or mine that that happened? Sometimes they don’t fail. Is that due to our morals?

If a company defaults on obligations then by the law it's going to be liquidated, and both bond holders and stock owners will be paid from that. That's the risk I'm willing to bear. But if the company would have the choice to renege on its obligations and keep on existing, would you invest? Would anybody?

[vlovich123]

> But if the company would have the choice to renege on its obligations and keep on existing, would you invest? Would anybody?

Yes. Chapter 11 bankruptcy

[inshadows]

OK. I'm not US citizen, but I'll check that out. Anyway, I see your point and I'll have to think about it more. Maybe I'll even give the book a 2nd try. :-)

[vlovich123]

Most large economies have some kinds of bankruptcy protection which is a suite of laws that cover various things from restructuring to debt relief. Chapter 11 is just a very well known law because American bankruptcy law showed the way forward for modern bankruptcy (fun fact in Ancient Greece failure to pay your debtor put you and your family into slavery and in the Middle Ages you’d be thrown into debtors prison). From a purely economic perspective it should be obvious why debtor’s person is a terrible idea - the person is taken out of any possibility for economic activity, which hurts economy and society. Slavery is similarly a problem because the debtor now is directing economic activity of another individual which introduces skew into what would actually be an efficient use of that person’s skills.

I’m not saying the book is good or bad as I haven’t read it. I’ve just read up on the history of bankruptcy and why it was introduced, how it helped form the modern economy, and why morally and ethically it’s problematic. Additional research into modern times of the problems with payday loans and their ilk. Money is a tool but it’s also used as a kudgle by the wealthy and powerful when deployed at scale. often has to be because otherwise the overhead of managing the wealth becomes too great (but that’s an externality they push onto society).

[discreteevent]

In "The Economics of Belonging" Martin Sandbu makes the argument that it should be more like venture capitalism. You provide a loan and get some of the upside if it works out but if it doesn't then you share the loss. It would at least keep people more honest.

[vlovich123]

I don’t think one approach or the other works. Interest-based loans are the equivalent of hedging your risk in a financial investment. That’s like saying you should remove financial instruments that allow for that when you make stock investments. That is a position one could take, but I feel like allowing for hedging is smart (& besides there’s all sorts of ways people can create contracts to hedge risks that are impossible to regulate anyway).

For many investments, interest-based investments seem to make more sense to me. For example, investing in a restaurant is not an investment that works out in favor of the VC model unless you want to be inundated with low-cost generic options that can scale to every market even more than we are today. That’s also why you have collateral in such investments so that the lender has ways to recoup their investment even with uncooperative lendees. I think the world is complex & we have different investment models to account for that complexity. I’m skeptical that any one hammer will somehow solve all problems. It’s all trade offs in the end, no?