Insight: I used to think lending at interest was evil...

[molecular]

How I used to think about lending at interest:

Taking a systemic view (nodes of a graph containing money with edges representing debt), lending at interest must over time concentrate the currency in the hands of a few (essentially one node in the end). I deducted: The rich will get richer, the poor will get poorer and concluded: lending at interest is evil.

I deemed this view of mine validated by observing the rich actually becoming richer and the poor becoming ever poorer.

What I overlooked:

There's risk involved in lending, namely the risk of the borrower defaulting. Therefore above does not necessarily hold true, but why does it still seem to be true?

Why is it still true (that the rich get richer)?

Well, for other reasons: Mainly because these "rich" are able to lend out money they don't even have in the first place, and maybe more importantly because they are being bailed out every time a borrower has problems.

Also because at least some of them are in the business of just simply ripping people off and are able to get away with it somehow.

What I think now:

Fractional reserve lending with a lender of last resort that will bail lenders out at the expense of all other parties using the currency in question is evil.

And: stealing peoples money/assets is evil.

What I'm getting at:

Since fractional reserve lending is not possible with bitcoin and there is certainly no lender of last resort who can just print up more money, bitcoin-based lending/borrowing is not evil.

The lender is exposed to the risk: in case of default he is parted of his money, he can't be a cry-baby but has to take it like a man and just suck it up.

In a "good money"-based economy, the market will adjust the price of money (interest rate) such that lending is barely profitable and will reflect market participants needs.

any comments/corrections?

EDIT: added some strikethrough after realizing frb was possible with bitcoin.

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[benjamindees]

+1

[johnyj]

Although not evil to lend BTC, people will not borrow BTC if they expect the value of BTC will rise, they tends to borrow the thing that is dropping in value

[molecular]

Although not evil to lend BTC, people will not borrow BTC if they expect the value of BTC will rise, they tends to borrow the thing that is dropping in value

well, people borrow BTC for whatever reason, I don't know. See this thread for example https://bitcointalk.org/index.php?topic=66802.0

[lonelyminer (Peter Šurda)]

I just have a couple of small comments, molecular.

FRB with Bitcoin is technically possible, and there are examples where it occurred in the past (albeit unintentionally or as a result of fraud, and was very short lived). Merely, I argue, the empirical features of Bitcoin (form-invariance) make it less likely for FRB to be widespread and/or have an effect on the money supply.

Many Austrians argue that without credit expansion, the business of banking (intermediary between lenders and borrowers) would have the same profitability as any other business, which on average means the market rate of interest. Even if you hold the opinion that FRB does not necessarily violate property rights, bankers are still benefiting from a legal privilege. Normal people cannot perform credit expansion: the regulators would fine you (or worse). Even during the "freebanking era" in the USA in the 19th century, banks were regulated.

[finway]

Although not evil to lend BTC, people will not borrow BTC if they expect the value of BTC will rise, they tends to borrow the thing that is dropping in value

People won't lend USD if they expect the value of USD will shrink?  It's all about price.

[Realpra]

Although not evil to lend BTC, people will not borrow BTC if they expect the value of BTC will rise, they tends to borrow the thing that is dropping in value

People won't lend USD if they expect the value of USD will shrink?  It's all about price.

People will lend the decreasing currency as there payments on the loan will be of less and less value, while the things they may have bought with the loan might increase.

Above: They WOULD borrow dollars and they would NOT borrow BTC.


Op is correct in his observations BTC solves a slew of problems with the banking industry.

Another interesting thing is that giving a loan and buying a stock are very similar - risking your money for potential gain roughly equal to the risk.

Insuring loans against default is hence logically impossible: The fee the insurance company would HAVE to take to stay in business would be everything you could charge in interest by market rates.


If I was a gambling man I would loan a million fiat and put it all in BTC, my BTC would raise much faster than my loan would mature and I could then pay it off and come out with a profit - or go to jail!

[realnowhereman]

It's good you've changed your mind; to cement the idea I recommend a browse of Bastiat's Essays on Political Economy.

The important point he makes is that the borrower benefits from the loan; which is what pays the interest.  Lending of capital to someone without it benefits both parties; just like all free market mutually agreed trades.

[molecular]

Would tend to agree with your analysis with one exception:
you overlooked wealth creation. Another way to think about
this is that your graph grows over time, and therefore you
can't easily reason about its systemic properties.

You're correct, I didn't think of that, "wealth creation".

So you're talking maybe about something like a new market participant entering the market (kid gets his first wallet, filled with some money by dad). This in itself doesn't make much of a difference, though, since the new node that just popped up is receiving money from existing nodes spending. It would only change something if the new node received money from the "rich lenders" (possible: the kid can sell some service or maybe sell his newly hyped-up dotcom to "rich lender", for example). So it boils back down to "rich lender" spending enough (more than his interest profit) or not (doesn't make a difference wether he spends to newly created or to old nodes). In other words: no matter how many new nodes are created, if the money doesn't come from the group of "rich lenders", my reasoning is still valid, right?

After all, "wealth" (or better "monetary wealth" or "richness") isn't just created out of thin air, it's always transferred from somewhere else (even in the case of money supply increase by printing)

It's even more interesting with a bitcoin-style currency:
if there is wealth creation and a finite amount of currency,
the risk the lender takes grows larger over time.

You're saying the risk grows larger over time because the remaining amount of available currency for the borrower to tap in order to pay back is decreasing over time and therefore the probability of a default increases? Interesting... can't find anything wrong with the reasoning. Actually, with a finite amount of money and interest having to be payed to - say - a single lender, who everyone borrowed all their money from, it's evident that the probability of default must reach 100% at some point. ("I want the earth plus 5 percent": http://www.relfe.com/plus_5_.html)

[doldgigger]

How I used to think about lending at interest:

Taking a systemic view (nodes of a graph containing money with edges representing debt), lending at interest must over time concentrate the currency in the hands of a few (essentially one node in the end). I deducted: The rich will get richer, the poor will get poorer and concluded: lending at interest is evil.

I deemed this view of mine validated by observing the rich actually becoming richer and the poor becoming ever poorer.

What I overlooked:

There's risk involved in lending, namely the risk of the borrower defaulting. Therefore above does not necessarily hold true, but why does it still seem to be true?

Why is it still true (that the rich get richer)?

Well, for other reasons: Mainly because these "rich" are able to lend out money they don't even have in the first place, and maybe more importantly because they are being bailed out every time a borrower has problems.

Also because at least some of them are in the business of just simply ripping people off and are able to get away with it somehow.

What I think now:

Fractional reserve lending with a lender of last resort that will bail lenders out at the expense of all other parties using the currency in question is evil.

And: stealing peoples money/assets is evil.

What I'm getting at:

Since fractional reserve lending is not possible with bitcoin and there is certainly no lender of last resort who can just print up more money, bitcoin-based lending/borrowing is not evil.

The lender is exposed to the risk: in case of default he is parted of his money, he can't be a cry-baby but has to take it like a man and just suck it up.

In a "good money"-based economy, the market will adjust the price of money (interest rate) such that lending is barely profitable and will reflect market participants needs.

any comments/corrections?

With respect to the risk of default, I agree that lending for free is inappropriate. However, I don't understand why the price for lending should grow over time as it does in an interest-based model. Wouldn't a fixed fee for lending be more appropriate?

[Vitalik Buterin]

Would tend to agree with your analysis with one exception:
you overlooked wealth creation. Another way to think about
this is that your graph grows over time, and therefore you
can't easily reason about its systemic properties.

It's even more interesting with a bitcoin-style currency:
if there is wealth creation and a finite amount of currency,
the risk the lender takes grows larger over time.

But even if real wealth creation grows, that doesn't mean the size of the currency pool grows. Since most debts are denominated in currency rather than something like multiples of the CPI, the systemic concentration theory still holds.

I agree that the correct interpretation for how to resolve it is to point to the fact that eventually there has to be a collapse. And that's why I point to what I think is the highest evil in the modern monetary system: unnatural collapse prevention financed on everyone else's backs.

[Meni Rosenfeld]

Taking a systemic view (nodes of a graph containing money with edges representing debt), lending at interest must over time concentrate the currency in the hands of a few (essentially one node in the end). I deducted: The rich will get richer, the poor will get poorer

Why must it be the rich that lend to the poor? Rich people borrow funds all the time for their ventures, which ultimately come from the public.

Also, even if the rich do lend to the poor, the net effect needn't be that money flows from the poor to the rich. Rich person lends to poor(er) person; poor person starts a business; business makes product; rich person buys product, moving funds from the rich to the poor, possibly more than the interest paid.

and concluded: lending at interest is evil.

Why would it be evil? For whatever reason, the borrower values X now more than X+e later. He willingly enters an agreement where he gets X now and gives X+e later. Both the borrower and the lender benefit from this. When borrowing for a business, presumably the borrower makes a net positive monetary gain from the loan.

It is only evil if the lender works to create harmful conditions for the borrower which cause him to need the loan, or deceive him into thinking he needs the loan. The same as any other business.

I deemed this view of mine validated by observing the rich actually becoming richer and the poor becoming ever poorer.

Logic fail, assuming you mean by "validated" anything more than very weak evidence.

Since fractional reserve lending is not possible with bitcoin

What do you mean by this? All the big lenders in this forum are fractional reserve, they take deposits, keep a small fraction in reserve, and lend out the rest to create a return on investment.

Fractional reserve banking, where people deposit funds for reasons other than receiving interest, and the bank does not keep it in full reserve, is obviously also possible with Bitcoin. It's just less likely to be common, because with Bitcoin there's not much need for a bank anyway.

[DeathAndTaxes]

I like where you are going with it OP.

The ying to interest's yang is the risk of loss from default, inflation, etc.

Without that risk interest rates should approach US treasury rates (technically not 0 risk but prices as very close to 0 risk).  Ranging from ~0% on credit cards to ~2% on mortgages.  Banks which suffer no risk of default (though ability to regain solvency through borrowing at the FED discount window, taxpayer subsidized bailouts, etc) but charging rates at higher than 0-risk are immoral and unethical. 

[Meni Rosenfeld]

Banks which suffer no risk of default (though ability to regain solvency through borrowing at the FED discount window, taxpayer subsidized bailouts, etc) but charging rates at higher than 0-risk are immoral and unethical.

Lending is like any other product or service, and the interest is the payment for it. It's not unethical to charge what the market will pay.

[terrytibbs]

Lending is like any other product or service, and the interest is the payment for it. It's not unethical to charge what the market will pay.

/thread

[DeathAndTaxes]

Banks which suffer no risk of default (though ability to regain solvency through borrowing at the FED discount window, taxpayer subsidized bailouts, etc) but charging rates at higher than 0-risk are immoral and unethical.

Lending is like any other product or service, and the interest is the payment for it. It's not unethical to charge what the market will pay.

Of course it is when you steal from the taxpayers.

The banks are certainly free to charge what they want and when they made bad bets they should have gone out of business.  If that had happened this thread wouldn't exist.  Did you even read the OP.

To charge interest to consumers and then to take bailout money from the same consumers is unethical. 

If their bets win, they win.  If their bets lose, they still win.  In the former wealth flows to the top via interest, in the wallet wealth flows to the top via govt bailouts (which is a nice way of saying $10T in free cash paid for by every single taxpayer for decades).  

You can't do that, I can't do that.  

Only banks with the monopoly on the issuance of legal tender can pull off that heist.  They are exploiting their monopoly given to them by the people for the public good to confiscate wealth that was neither theirs nor earned.  To call it ethical is insane.

[DeathAndTaxes]

Lending is like any other product or service, and the interest is the payment for it. It's not unethical to charge what the market will pay.

/thread

Hardly.  That pretends the banks are operating a fair game. 

It would be like saying a casino which accepts wagers and keeps the losing bets but fails to payout winning bets it ethical.  Worse in this case the casino is required and only members of the banking cartel can operate one and even if you minimize your involvement in the casino, the actions of the casino continually devalue your chips through no fault of your own and those chips are the only form of legal tender in the country.

Saying /thread is just stupid. 

[Meni Rosenfeld]

Banks which suffer no risk of default (though ability to regain solvency through borrowing at the FED discount window, taxpayer subsidized bailouts, etc) but charging rates at higher than 0-risk are immoral and unethical.

Lending is like any other product or service, and the interest is the payment for it. It's not unethical to charge what the market will pay.

Of course it is when you steal from the taxpayers.

The banks are certainly free to charge what they want and when they made bad bets they should have gone out of business.  If that had happened this thread wouldn't exist.  Did you even read the OP.

To charge interest to consumers and then to take bailout money from the same consumers is unethical. 

If their bets win, they win.  If their bets lose, they still win.  In the former wealth flows to the top via interest, in the wallet wealth flows to the top via govt bailouts (which is a nice way of saying $10T in free cash paid for by every single taxpayer for decades).  

You can't do that, I can't do that.  

Only banks with the monopoly on the issuance of legal tender can pull off that heist.  They are exploiting their monopoly given to them by the people for the public good to confiscate wealth that was neither theirs nor earned.  To call it ethical is insane.

I'd say it's a problem with the other aspects of the system, rather than the lending itself.

Anyway, the main thing I took issue with is the implication that the US treasury rates are somehow the "true" interest rates. Even without risk there are many things that go into pricing. e.g., the banks borrow funds at some rate, but they also need to pay for marketing, clerks etc., so they will need to lend out at a higher rate to make a profit - even if there is no default risk.

[terrytibbs]

Hardly.  That pretends the banks are operating a fair game.

Right. The banks are bad. Fuck the banks.
Can we go back to talking about lending at interest now? Pretty please with a cherry on top?

It would be like saying a casino which accepts wagers and keeps the losing bets but fails to payout winning bets it ethical.  Worse in this case the casino is required and only members of the banking cartel can operate one and even if you minimize your involvement in the casino, the actions of the casino continually devalue your chips through no fault of your own and those chips are the only form of legal tender in the country.

Still talking about banks? Shit, man, you really have a penchant for banks.

Saying /thread is just stupid. 

[DeathAndTaxes]

The OP was about banks.  Maybe you should read it?