Life Is Risky; But Lending Isn't!

Thanks goes to Bill whose comment to credit ratings evoked in me a new mental picture of interest.

Here's how it happened.

Billfaster (aka Anonymous) said:

"I simply don't follow the logic behind your argument...How would a non-interest based economy work? If the banks are unwilling to asses interest charges, then where is the incentive to lend the money - through equity participation?

How long do you think it would take for the money supply to dry up if each lender had to take an equity stake in your car or home, for example. Their capital would be indefinitely tied up.

Where does the new liquidity come from? Obviously not you or me as what incentive would we have to put money in the bank if they are not paying us interest to do so.

Where do the risk averse investors turn? What about the elderly and retirees who feel comfortable with CD, money market and Treasury returns? The democratic platform against private social security accounts runs contrary to your very argument as they claim that equity participation is much too risky..."

My reply:

Thanks, Bill, for your thoughtful comment.

Your concerns are valid. Circulation is the whole point of introducing currency into an economy.

"Where is the incentive to lend the money?" The only wholesome place it can be, from the profits of equity investing.

"How long...would [it] take for the money supply to dry up if each lender had to take an equity stake in your car or home... Their capital would be indefinitely tied up." By definition, capital is invariably "tied up" once it’s invested in an asset like a home or a car. The only thing interest accomplishes is it transfers an excess portion of the borrower's earned income (which is not "tied up") to the lender, and so on and so forth, to infinity.

And, what do you think the lender does with all the interest that's collected? Most of it the lender can't even spend! It is just too much money!!! So, he lends it to others and others, etc., etc...

Where does the new liquidity come from? Where it’s supposed to come from when there is an increase in a nation's productive capacity--the government press! That's why it's created. The government need only make sure it does not print too much, which is easier to do when there’s no interest than when you have to keep track of principal AND interest.

Where do the risk averse investors turn? I know it is difficult to imagine now because we live in an interest laden society. But, risk averse lenders will invest their money in the ways that are available to them, just as they do now. Only interest bearing loans won't be one of them. Margrit Kennedy presents some creative suggestions to give people incentive to circulate their cash.

Finally, of course equity participation is very risky!!! That which is taken must come from somewhere.

Interest based lending has evolved into a little to NO RISK activity. Simply, it is unnatural.

Risk is inherent in life. You cannot eliminate risk, you can only transfer it--from lenders to equity investors!

Restore the balance and equity investing will no longer be as risky as it is now.

Thanks a lot, Bill! I didn't think about it this way until you asked me!

Thank God for the internet, and thank God for people like you who are ready to talk!