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Subject:[socialcredit] Re: [chdouglas] Public-spirited Banking (was: Re: The Abolition of Interest on Loans)
Date:Monday, March 17, 2008  09:43:13 (-0700)
From:Peter Hogwood <p_t_hogwood @.....com>

There is a significant false premise to your argument,
Ardeshir.

"So what would be reasonable in your view, given that
it takes your people at most an hour to do the
paperwork, and after that, there's nothing more for
you to do but collect my monthly payments?"

The false premise here is that the administrative
expense in granting loans is the only expense incurred
in granting loans.  The components of interest are 1)
the insurance premium to cover loan defaults, which is
by far the largest component of interest received by
the banks; 2) the administrative expense, salaries and
wages paid by banks, etc. and other ordinary business
expenses; and the final and least component: 3) the
net profit from banking.

The default or risk premium varies by borrower risk
category.  In every risk category the borrowers pay to
compensate the banks for defaulted loans within the
risk category.  Therefore, higher credit risk
borrowers pay higher interest rates than lower risk
borrowers.

Peter Hogwood



> On Sun, 16 Mar 2008 13:58:25 -0400 Ardeshir Mehta
<ardeshir@mac. com> wrote:
>
>> On 16-Mar-08, at 8:31 AM, Claudette Konola wrote:
>>
>>> So, if nobody pays interest on loans, what is
going to motivate  those who have money to let
somebody who needs money use it?
>>
>> WHY WOULD BANKS LEND MONEY TO ANYONE IF THEY COULD
NOT CHARGE INTEREST?
>>
>> Well, I am not against banks making a reasonable
amount of money for taking the trouble to issue a loan
to us. Call it a "reasonable profit on a transaction"
, for example. If the bank that lends us $25,000 to
buy a car were to say: "We are willing to lend you
this money, but we would have to make a reasonable
amount of profit out of the transaction" , I'd say:
"Okay, fine. So what would be reasonable in your view,
given that it takes your people at most an hour to do
the paperwork, and after that, there's nothing more
for you to do but collect my monthly payments? A law
firm might charge me, let's say, $500 per hour at the
outside: so, does $500 seem reasonable to you?" 
>>
>> It sure does to me. Does it not to YOU? 
>>
>> But does TEN TIMES as much sound reasonable to you?
WHICH law firm, no matter how prestigious, will charge
you five GRAND an hour? And yet banks get away with
this, and more, every day of the week!
>>
>> However, there's another way banks can make money
on loans: they can look upon it as an investment, and
share in the profits of that investment. If a bank
issues a loan to a company, that company will, of
course, use that money to expand its operations, and
thereby make profits. The banks can stipulate, in the
loan contract, that they will get a share of the
profits. 
>>
>> The same thing can apply to a mortgage. If you buy
a house today for $200,000, and in order to buy it,
borrow $100,000 from the bank, and if after a year,
because of market forces, the value of your house
increases by, say, 3%, the bank can stipulate that it
will get a 3% increase on the next year's monthly
payments. That seems fair enough, because it isn't as
if you did something yourself to cause the value of
the house to rise. It was just your good luck.
>>
>> Of course if that's the way the bank wants to
structure the loan, then if the value of the house
FALLS by 3%, the bank must also agree to take a 3% CUT
in the next year's monthly payments. Sharing in
profits means also sharing in losses.
>>
>> But a bank could make MUCH bigger profits by
investing in really promising ideas than it would by
charging interest. For instance, had any bank invested
in Tesla's idea of alternating current at a time when
Edison was promoting direct current, that bank might
soon have become the biggest bank in the world! 
>>
>> Of course this idea would make it imperative for
the banks to make sure that the money they are loaning
(more correctly, investing) is not going to all go
down the drain: they would have to scrutinise every
application for a loan carefully, to see if the
activity the loan was going to be used for had a
chance to render a profit down the road. But what's
wrong with THAT?


     
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