Interest naturally appears in an evenly rotating economy due to time preference. Islamic banking is no exception, but they pretend it is different by calling it something else such as mudarabah deposits.
You are right that there is a time preference, but currently it's very low, hence why rates have been slashed to nothing. There is also the risk which needs to be compensated. For this reason the person who takes a loan must pay more than what he originally borrowed. So far we agree.
But. And here is where it gets interesting. What happens when the unexpected happens? If you earn more money and want to pay back quicker, what should happen? Does it mean you pay less for paying quicker or not?
And if issues happen and you are not able to pay back on schedule what should happen? Should the debt keep accruing interest? Or is the total interest fixed when the loan is taken out? Can the creditor reposses your house to pay for the debt or not? When that happens does it clear the debt (even though the house has dropped in valued) or not?
There are many ways of making these decisions, and some may be better or worse. Because I find these questions interesting I do pay a little bit of attention to islamic banking.
I'm of the opinion that the growth of Western accounting and financing (along with Western political systems that frequently limited the power of rules) is what enabled Europeans to explore and profitably trade all over the world. It was the ability of merchants and small investors to risk money in exchange for a chance at a huge windfall that supported the explosive growth of private capital, entrepreneurs, and non-governmental society.
Having said that, Islamic finance is quite interesting. Today, there's very little EFFECTIVELY different between Islamic finance and Western finance. Take for example interest. Islam forbids interest. So agreements are structured with built-in fees, certain ownership claims or agreements, etc., but the end result is pretty much the same thing.
Much like how rabbis can certify something as kosher (and getting rabbinical approval in Israel is a BIG and highly corrupt business), transactions can get Islamic certification without really changing that much. You just need the stamp of approval.
Malaysia has profited hugely from becoming a center of Islamic banking.
Honestly, American accounting standards (GAP) seem to very rooted in what amounts to Austrian Economics. Everything is about that point of sale and you can't just go about re-valuing it without selling it.
Economic Liberalism really does seem to be the core of American prosperity, and you can see how IFERS (Europe's Accounting Standards) have been doing everything in the universe to completely fuck themselves up.
A lot of shariah compliant finance is just lawyer balling the whole interest thing. For example a shariah compliant mortgage is equivalent to a traditional fixed rate mortgage.
Why is lending a necessity? "Cash on the barrel" is pretty great, in my view; don't spend what you don't have, and that includes other people's money.
The only counter I've thought of is starting a business or factory. Contracts could be negotiated with employees to have their wages be a (small) % of profits instead (or in supplement) of hourly or salary. Harder initial investments like real estate and hardware can be pooled from the funds of cofounders - I'm not convinced that every business must be able to be founded by a single entrepeneur. The difference between this and borrowing money is that the cofounders might actually gain some skin in the game instead of just some rootless cosmopolitan watching numbers in his office. You could try to legislate lenders into becoming cofounders, but it's really not the same because they don't give a shit as long as they get their cut.
The only counter I've thought of is starting a business or factory.
You've fundamentally answered your own question.
You lend money to someone who has the capability of returning on your investment, but does not have the capitol assets to do it themselves. So, you calculate the profits they expect to make, and charge interest on a loan which is your return on your own money. They created wealth by their action, but they would have taken decades to accumulate the capital to even try. So, they give you money for having helped finance them.
It's pretty reasonable.
The difference between this and borrowing money is that the cofounders might actually gain some skin in the game instead of just some rootless cosmopolitan watching numbers in his office.
That's the difference between loaning your money, and loaning other people's money. Our Keynesian system is built to protect the banks from loss and to side against you whenever possible to keep the banks from ever actually suffering consequences. Not only that, they're funding the loans with your money, not theirs. In the end, they never lose anything because the game is intentionally rigged by people who thought that would stimulate economic growth.
Some banks really should go out of business, and really should be forced to gamble their money instead of someone else's.
That's not a problem with lending money & interest. That's a problem with Socialist Economic policies.
That's the difference between loaning your money, and loaning other people's money.
I was overlooking that part of it, for some reason.
I still am not comfortable with charging interest in general, but I'll admit that it can have a beneficial place and so shouldn't be banned altogether. It's just the whole 'making money with no work/risk' thing that bothers me. Perhaps it really would be sufficient to ban the reallocation ("investment") of funds that aren't your own.
It's just the whole 'making money with no work/risk' thing that bothers me.
No risk? Giving you my money and hoping you give it back is incredibly risky. But that's your point:
Perhaps it really would be sufficient to ban the reallocation ("investment") of funds that aren't your own.
Giving you his money isn't really all that risky at all.
Now, I'm not saying we end banking (because what you just suggested kills banking), but it would be more proper to talk about making sure people gave consent to having their money lended out.
Now, I'm not saying we end banking (because what you just suggested kills banking), but it would be more proper to talk about making sure people gave consent to having their money lended out.
Well now I have to ask, what's the actual benefit of banking? From what I can parse from old media, a lot of the promise was that it's risky to secure your own wealth so you let the bank secure your wealth for you (for a fee, I guess, no details ever in these old things). That can't be all there is to it. Is it a natural extension of hiring mercenary guards for the transfer of physical wealth? Or is it more to do with the phasing out of physical wealth in exchange for receipts and the convenience of fast, remote transferral?
Somewhat ironically, I think interest could be used in fixing the non-consentual lending. Anyone who flips the "you may lend my money" switch for their account should get some interest on their deposit, if it isn't possible to get actual dividends like one of those broker things. But this is total nonsense as long as we have forced and planned inflation, because it's bordering on coercion for how we manage our savings.
Security is partly it, but another aspect is that it could function as a safe form of investment so that money you aren't doing anything with could be used to lend capital to businesses in your local community, which is what the Credit Unions try to do. Also, the concept of "checking", being able to wire money very quickly from one place to another is a very useful act in transactions. Imagine if you had to mail gold coins everywhere!
There's all still a bit of risk to it, but the Government's insurance for savings & checking accounts is basically preventing people from realizing that their money actually does have risk sitting in a bank. The lie that the bank is even safer than your home only exists to try and make banking a core feature of everyone's life.
For example, nobody actually realizes when a bank fails. When was the last time you saw that happen? In 2008 it was happening on a daily basis, but nobody was told about it, because the government didn't want anyone to run on the banks. Government agents will literally remove everyone in the bank, seize all their records, basically seize control of the bank, and then pretend like everything is normal. A bank that is being closed would be staffed by tellers that are federal agents and you'd have no idea. The first sign something would be amiss is when they tell you that this particular branch is closing and that your funds are completely safe in another branch. If it's a bank that doesn't have other branches, you'll get a bank check to re-deposit your money, but that's rare because other banks will just buy out what's left of the failing bank, and you'll get the 'this branch is closing' speech.
It just looks like nobody's bank ever fails because the banks & government need you to keep believing that your money is facing zero risk inside of a bank. But if we were being honest, it isn't.
Anyone who flips the "you may lend my money" switch for their account should get some interest on their deposit, if it isn't possible to get actual dividends like one of those broker things.
That's actually what credit unions are supposed to do. You can take out special savings accounts that promise greater than inflation interest rates at specific amounts of money in the bank. They can lend that shit out, and you get a cut of the profits. You'll notice, however, that the government might not insure those, and you can't take out more than a certain amount.
The reason this isn't the norm is because Keynsian policy promotes these massive centralized banks into lending out everyone's saving's accounts & insuring them. This also boosts profits in the stock market, effectively gambling money. It makes a 4% annual return savings account that requires you keep no less than $10,000 in it at all times, and isn't insured, look stupid by comparison. If the market weren't so fucked, you might actually be able to look at a more profitable saving's option.
The whole point here is that the Keynsian system explicitly rejects saving as a good thing. Think about that: the monetary system is designed to prevent you from saving money.
because it's bordering on coercion for how we manage our savings.
It is coercion. Inflation removes your purchasing power and is caused by the government basically printing money (or allowing the banks to lend more money than exists). This is why the libertarians keep saying that inflation is a tax.
Like almost everything it's a matter of degree, the question is where you draw the line. Almost every reasonable person who's grounded in reality can agree on the most egregious examples, things like outright scamming people or blatantly predatory actions like truck systems and high double digit (or triple digit) mafia style "payday" loans.
It's close to the normal side of things you start running into problems. Particularly where you have misleading but not outright fraudulent systems, like multi-layered student loans that to a non-accountant seem like you're paying off but in reality you're just paying interest and never any principal.
A lot of this could be solved by regulating the "informed consent" side of things rather than trying to regulate every new insane financial instrument people come up with. If you require lenders to make the terms clear in plain fucking english with clear examples of all contingencies then you'll see a lot less people getting ripped off or making stupid decisions. One of the founding principles of capitalism is that people are making informed decisions with full information. A system where you need a week with two lawyers and an accountant to understand what the fuck is going on for every freaking transaction isn't a healthy free market, it's one filled with rent seekers and deliberate distortions by bad actors.
It isn't as much of a degree as people think. I'm perfectly fine with a triple digit payday loan. (Operation Choke Point is evil)
For example. If you NEED my $10 right the fuck now, but I also need my $10 right now, but slightly less. I might ask you for $20 back because of how much I need the money right now. If you need $10 to make $50 additional dollars, then this is perfectly reasonable. Whatever I need my $10 for, I can stall and then spend it with the extra $10 I made from loaning you money as part of my needs getting filled.
If you want $10 from me just because you want to fuck off with it, and you still promise $20 back right now, I'm going to be pissed at you, and rightfully.
There is nothing immoral about charging even 100% interest. The issue is whether or not the borrower actually understands that. And that's where you get into the 'informed consent' side of things.
There's plenty immoral with that when you've got a rigged system where people are trapped relying on payday loan places because their paychecks and bills don't line up.
Just like there's plenty immoral with situations like when McDonalds was paying people on cards that charged them outrageous fees just to check the balance, or when the only way someone can cash their paycheck (since they're too poor to open a bank account) is from someplace that takes some exorbitant percentage.
Yes, informed consent is a big thing. I'm still struggling to imagine how it could be corrected, because I believe a lot of the obfuscation is directly tied to beaurocratic bloat.
I've been thinking recently, that even for the libertarian ideal, it's essential to maximise 'informed consent'. The ideal of the contract, I'd say, is founded upon maximal understanding of the terms/conditions by all concerned parties. If no one understands the terms, the contract is useless. If only one person understands the contract, it's likely a scam. If all but one person understands the contract, it's predatory.
Having a system set up to demand translators (lawyers) is a big warning sign. Needing professionals to translate jargon is the same.
The tipping point for me here was EULAs. What a load of shit these are. "By clicking agree, you agree to this 40 page document of fine print", with the subtext always being that you may not use the product without clicking agree. We could do without this, at the least. It should not be possible to sign away your rights without understanding that you're doing so AND it should not be a respected contract when you're effectively coerced into it.
I'm still struggling to imagine how it could be corrected, because I believe a lot of the obfuscation is directly tied to beaurocratic bloat.
"Fuck you, I'm not paying until you make it clear."
Part of the beauty of a voluntary system is to make sure the consumer is maximally empowered to save and spend their money only at their choosing. It's actually why protectionism is harmful for the consumer. The consumer must be skeptical, and maybe even downright confrontational with their money and time.
The tipping point for me here was EULAs. What a load of shit these are.
Agreed, but remember that the reason they are there is because the government is expansive enough to use it's bureaucratic bloat to protect these companies in every conceivable way that only a team of lawyers can possibly understand.
Strip them of that protection and make them rely only on the consumer's kindness, and you'll see an entirely different business.
Interest naturally appears in an evenly rotating economy due to time preference. Islamic banking is no exception, but they pretend it is different by calling it something else such as mudarabah deposits.
You are right that there is a time preference, but currently it's very low, hence why rates have been slashed to nothing. There is also the risk which needs to be compensated. For this reason the person who takes a loan must pay more than what he originally borrowed. So far we agree.
But. And here is where it gets interesting. What happens when the unexpected happens? If you earn more money and want to pay back quicker, what should happen? Does it mean you pay less for paying quicker or not?
And if issues happen and you are not able to pay back on schedule what should happen? Should the debt keep accruing interest? Or is the total interest fixed when the loan is taken out? Can the creditor reposses your house to pay for the debt or not? When that happens does it clear the debt (even though the house has dropped in valued) or not?
There are many ways of making these decisions, and some may be better or worse. Because I find these questions interesting I do pay a little bit of attention to islamic banking.
I'm of the opinion that the growth of Western accounting and financing (along with Western political systems that frequently limited the power of rules) is what enabled Europeans to explore and profitably trade all over the world. It was the ability of merchants and small investors to risk money in exchange for a chance at a huge windfall that supported the explosive growth of private capital, entrepreneurs, and non-governmental society.
Having said that, Islamic finance is quite interesting. Today, there's very little EFFECTIVELY different between Islamic finance and Western finance. Take for example interest. Islam forbids interest. So agreements are structured with built-in fees, certain ownership claims or agreements, etc., but the end result is pretty much the same thing.
Much like how rabbis can certify something as kosher (and getting rabbinical approval in Israel is a BIG and highly corrupt business), transactions can get Islamic certification without really changing that much. You just need the stamp of approval.
Malaysia has profited hugely from becoming a center of Islamic banking.
Honestly, American accounting standards (GAP) seem to very rooted in what amounts to Austrian Economics. Everything is about that point of sale and you can't just go about re-valuing it without selling it.
Economic Liberalism really does seem to be the core of American prosperity, and you can see how IFERS (Europe's Accounting Standards) have been doing everything in the universe to completely fuck themselves up.
A lot of shariah compliant finance is just lawyer balling the whole interest thing. For example a shariah compliant mortgage is equivalent to a traditional fixed rate mortgage.
It would also kill all lending, and not allowing interest is simply retarded.
Why is lending a necessity? "Cash on the barrel" is pretty great, in my view; don't spend what you don't have, and that includes other people's money.
The only counter I've thought of is starting a business or factory. Contracts could be negotiated with employees to have their wages be a (small) % of profits instead (or in supplement) of hourly or salary. Harder initial investments like real estate and hardware can be pooled from the funds of cofounders - I'm not convinced that every business must be able to be founded by a single entrepeneur. The difference between this and borrowing money is that the cofounders might actually gain some skin in the game instead of just some rootless cosmopolitan watching numbers in his office. You could try to legislate lenders into becoming cofounders, but it's really not the same because they don't give a shit as long as they get their cut.
You've fundamentally answered your own question.
You lend money to someone who has the capability of returning on your investment, but does not have the capitol assets to do it themselves. So, you calculate the profits they expect to make, and charge interest on a loan which is your return on your own money. They created wealth by their action, but they would have taken decades to accumulate the capital to even try. So, they give you money for having helped finance them.
It's pretty reasonable.
That's the difference between loaning your money, and loaning other people's money. Our Keynesian system is built to protect the banks from loss and to side against you whenever possible to keep the banks from ever actually suffering consequences. Not only that, they're funding the loans with your money, not theirs. In the end, they never lose anything because the game is intentionally rigged by people who thought that would stimulate economic growth.
Some banks really should go out of business, and really should be forced to gamble their money instead of someone else's.
That's not a problem with lending money & interest. That's a problem with Socialist Economic policies.
I was overlooking that part of it, for some reason.
I still am not comfortable with charging interest in general, but I'll admit that it can have a beneficial place and so shouldn't be banned altogether. It's just the whole 'making money with no work/risk' thing that bothers me. Perhaps it really would be sufficient to ban the reallocation ("investment") of funds that aren't your own.
No risk? Giving you my money and hoping you give it back is incredibly risky. But that's your point:
Giving you his money isn't really all that risky at all.
Now, I'm not saying we end banking (because what you just suggested kills banking), but it would be more proper to talk about making sure people gave consent to having their money lended out.
Well now I have to ask, what's the actual benefit of banking? From what I can parse from old media, a lot of the promise was that it's risky to secure your own wealth so you let the bank secure your wealth for you (for a fee, I guess, no details ever in these old things). That can't be all there is to it. Is it a natural extension of hiring mercenary guards for the transfer of physical wealth? Or is it more to do with the phasing out of physical wealth in exchange for receipts and the convenience of fast, remote transferral?
Somewhat ironically, I think interest could be used in fixing the non-consentual lending. Anyone who flips the "you may lend my money" switch for their account should get some interest on their deposit, if it isn't possible to get actual dividends like one of those broker things. But this is total nonsense as long as we have forced and planned inflation, because it's bordering on coercion for how we manage our savings.
Security is partly it, but another aspect is that it could function as a safe form of investment so that money you aren't doing anything with could be used to lend capital to businesses in your local community, which is what the Credit Unions try to do. Also, the concept of "checking", being able to wire money very quickly from one place to another is a very useful act in transactions. Imagine if you had to mail gold coins everywhere!
There's all still a bit of risk to it, but the Government's insurance for savings & checking accounts is basically preventing people from realizing that their money actually does have risk sitting in a bank. The lie that the bank is even safer than your home only exists to try and make banking a core feature of everyone's life.
For example, nobody actually realizes when a bank fails. When was the last time you saw that happen? In 2008 it was happening on a daily basis, but nobody was told about it, because the government didn't want anyone to run on the banks. Government agents will literally remove everyone in the bank, seize all their records, basically seize control of the bank, and then pretend like everything is normal. A bank that is being closed would be staffed by tellers that are federal agents and you'd have no idea. The first sign something would be amiss is when they tell you that this particular branch is closing and that your funds are completely safe in another branch. If it's a bank that doesn't have other branches, you'll get a bank check to re-deposit your money, but that's rare because other banks will just buy out what's left of the failing bank, and you'll get the 'this branch is closing' speech.
It just looks like nobody's bank ever fails because the banks & government need you to keep believing that your money is facing zero risk inside of a bank. But if we were being honest, it isn't.
That's actually what credit unions are supposed to do. You can take out special savings accounts that promise greater than inflation interest rates at specific amounts of money in the bank. They can lend that shit out, and you get a cut of the profits. You'll notice, however, that the government might not insure those, and you can't take out more than a certain amount.
The reason this isn't the norm is because Keynsian policy promotes these massive centralized banks into lending out everyone's saving's accounts & insuring them. This also boosts profits in the stock market, effectively gambling money. It makes a 4% annual return savings account that requires you keep no less than $10,000 in it at all times, and isn't insured, look stupid by comparison. If the market weren't so fucked, you might actually be able to look at a more profitable saving's option.
The whole point here is that the Keynsian system explicitly rejects saving as a good thing. Think about that: the monetary system is designed to prevent you from saving money.
It is coercion. Inflation removes your purchasing power and is caused by the government basically printing money (or allowing the banks to lend more money than exists). This is why the libertarians keep saying that inflation is a tax.
Like almost everything it's a matter of degree, the question is where you draw the line. Almost every reasonable person who's grounded in reality can agree on the most egregious examples, things like outright scamming people or blatantly predatory actions like truck systems and high double digit (or triple digit) mafia style "payday" loans.
It's close to the normal side of things you start running into problems. Particularly where you have misleading but not outright fraudulent systems, like multi-layered student loans that to a non-accountant seem like you're paying off but in reality you're just paying interest and never any principal.
A lot of this could be solved by regulating the "informed consent" side of things rather than trying to regulate every new insane financial instrument people come up with. If you require lenders to make the terms clear in plain fucking english with clear examples of all contingencies then you'll see a lot less people getting ripped off or making stupid decisions. One of the founding principles of capitalism is that people are making informed decisions with full information. A system where you need a week with two lawyers and an accountant to understand what the fuck is going on for every freaking transaction isn't a healthy free market, it's one filled with rent seekers and deliberate distortions by bad actors.
It isn't as much of a degree as people think. I'm perfectly fine with a triple digit payday loan. (Operation Choke Point is evil)
For example. If you NEED my $10 right the fuck now, but I also need my $10 right now, but slightly less. I might ask you for $20 back because of how much I need the money right now. If you need $10 to make $50 additional dollars, then this is perfectly reasonable. Whatever I need my $10 for, I can stall and then spend it with the extra $10 I made from loaning you money as part of my needs getting filled.
If you want $10 from me just because you want to fuck off with it, and you still promise $20 back right now, I'm going to be pissed at you, and rightfully.
There is nothing immoral about charging even 100% interest. The issue is whether or not the borrower actually understands that. And that's where you get into the 'informed consent' side of things.
There's plenty immoral with that when you've got a rigged system where people are trapped relying on payday loan places because their paychecks and bills don't line up.
Just like there's plenty immoral with situations like when McDonalds was paying people on cards that charged them outrageous fees just to check the balance, or when the only way someone can cash their paycheck (since they're too poor to open a bank account) is from someplace that takes some exorbitant percentage.
Yes, informed consent is a big thing. I'm still struggling to imagine how it could be corrected, because I believe a lot of the obfuscation is directly tied to beaurocratic bloat.
I've been thinking recently, that even for the libertarian ideal, it's essential to maximise 'informed consent'. The ideal of the contract, I'd say, is founded upon maximal understanding of the terms/conditions by all concerned parties. If no one understands the terms, the contract is useless. If only one person understands the contract, it's likely a scam. If all but one person understands the contract, it's predatory.
Having a system set up to demand translators (lawyers) is a big warning sign. Needing professionals to translate jargon is the same.
The tipping point for me here was EULAs. What a load of shit these are. "By clicking agree, you agree to this 40 page document of fine print", with the subtext always being that you may not use the product without clicking agree. We could do without this, at the least. It should not be possible to sign away your rights without understanding that you're doing so AND it should not be a respected contract when you're effectively coerced into it.
"Fuck you, I'm not paying until you make it clear."
Part of the beauty of a voluntary system is to make sure the consumer is maximally empowered to save and spend their money only at their choosing. It's actually why protectionism is harmful for the consumer. The consumer must be skeptical, and maybe even downright confrontational with their money and time.
Agreed, but remember that the reason they are there is because the government is expansive enough to use it's bureaucratic bloat to protect these companies in every conceivable way that only a team of lawyers can possibly understand.
Strip them of that protection and make them rely only on the consumer's kindness, and you'll see an entirely different business.