responding to income deficiency

[lemur]

What are the ethics of dealing with income deficiency? Does it harm people to lend them money and thus lure them into debt obligations so that they may avoid losing possessions and privileges during periods of reduced income? Does lending facilitate spending, which sustains income for many people thus promoting the idea that unemployment is a choice? What would happen if governments prohibited money-lending and/or any other forms of income to unemployed people? Would economies crash completely, with all jobs and businesses being lost or would certain businesses and workers be able to maintain income? What would everyone else do to "pull themselves up by their bootstraps?" Would it actually be possible to rescue yourself economically if there was no such thing as student loans or other personal finance possible? Are there any other means to dealing with income deficiency except either borrowing money or working for those who borrow and spend money?

[Marat]

In primitive Christian and Islamic culture all lending at interest was forbidden as usery. Islamic culture still recognizes it as such, but uses various devices to allow lending despite this by various legal subterfuges. However, without a credit system, the necessary fluidity for capitalism to function smoothly would be lacking, and neither business ventures nor consumer purchases would be very easy. Essentially the only people who could either make large expenditures or start new businesses would be people who already had a large amount of liquid capital. Even those with huge agricultural holdings, which pre-existed modern capitalism, would be unable to generate a capitalist economy, since they could not translate the value of their land into liquidity by taking out a loan against it. The inability to pledge land holdings as collateral (by feudal land title obligations) was part of the reason why the European nobility fell into the decline with the rise of capitalism, since they could not mobilize their land assets by taking out loans against them to invest in the new opportunities. A good illustration of the importance of credit is the great expansion of the European economy when the first banking houses got underway in Renaissance Italy, and then afterward in Amsterdam and with the Fuggers in Germany.

[lemur]

In primitive Christian and Islamic culture all lending at interest was forbidden as usery. Islamic culture still recognizes it as such, but uses various devices to allow lending despite this by various legal subterfuges. However, without a credit system, the necessary fluidity for capitalism to function smoothly would be lacking, and neither business ventures nor consumer purchases would be very easy. Essentially the only people who could either make large expenditures or start new businesses would be people who already had a large amount of liquid capital. Even those with huge agricultural holdings, which pre-existed modern capitalism, would be unable to generate a capitalist economy, since they could not translate the value of their land into liquidity by taking out a loan against it. The inability to pledge land holdings as collateral (by feudal land title obligations) was part of the reason why the European nobility fell into the decline with the rise of capitalism, since they could not mobilize their land assets by taking out loans against them to invest in the new opportunities. A good illustration of the importance of credit is the great expansion of the European economy when the first banking houses got underway in Renaissance Italy, and then afterward in Amsterdam and with the Fuggers in Germany.

So without lending and borrowing, capitalism collapses? If that happened, could it be replaced by an economy in which surpluses would be allotted to preferred projects? E.g. could farms maximize food production and then ship food in order of preference for other projects the farmers wished to see done, such as tractor-production for example? This way, basic necessities wouldn't disappear leaving people to suffer and possibly even die of want.

 

 

 

[Edtharan]

There is the saying that "it takes money to make money". In financial terms, this is called "Leverage".

 

Take, for example: The case where you want to build and then sell houses. If you only had a small amount of money, you could never afford to do this. However, if you borrow some money, enough to build the house, then you can make back the money when you sell it.

 

Another is student loans. When a student takes out a loan for education, they are investing in an activity that will allow them to increase their wages. If they didn't get the education, they might never be able to land a high paying job. It is an investment in your future income level.

 

However, if you borrow money for non investment reasons (to get the latest TV, to pay of another debt, etc), then this does not get you more money and thus you are not using money to make money. Sadly, a lot of lending ends up being like this, and this is the problem with lending money.

 

If lending is used sensibly, then it can be used to enable people who otherwise wouldn't be able to get out of poverty to be able to increase their wealth. But, this is not the way that the majority of people end up using borrowed money.

 

Actually, in the house example, I should have used "if" the house is sold. This is where even sensible use of borrowed money can turn bad. Any investment is a risk, and what it amounts to is like borrowing money to play a game of poker. If you win, you could win biger than if you just used the money you had on hand, but if you loose the game, then you better look out for the loan sharks .

 

However, contrary to many conspiracy theories, if you loose in your investments, both you and the lender suffer because you can't pay back what you borrowed. But, because of laws put into place, the lending institutions can be covered by taking out insurance, and being able to force you to pay back the debt despite the success or failure of your investments.

 

So, lending does facilitate spending, but the problem is that the people who borrow the money don't always spending it the best way. If all borrowings were spent on investments, and these investments succeeded, then there would be no problem with lending money.

[Marat]

It is important to keep in mind that the higher the demand for money to borrow the higher the interest rates that those with surplus cash to lend can charge, so the general indebtedness of society helps the rich. When the government pursues policies which lead to the stagnation of middle-class wages at the same time as the wealth of the richest Americans increases so as to set the perceived 'normal' standard of living higher and higher, the middle-class demand for loans to buy more consumer goods will increase, making the rich even richer. When government reduces its support for higher education, again more loans have to be taken out for individuals to pay for it, and again those with cash to loan out benefit. There is a double gain to the wealthy when government decides to keep taxes low on the rich and to finance government expenditures by loans instead, since then not only do the rich have more cash to loan, but they also enjoy higher interest levels as a result of the ballooning government deficit. Finally, when the government refuses to fund potentially huge, non-optional requirements for consumer spending on healthcare, this again boosts the demand for loans and helps the rich. The fact that 2/3 of all personal bankruptcies in the U.S. are the result of medical expenses, so a family desperately struggling with a child dying of cancer also has to endure the profound disruption of being evicted from its home and having its car repossessed, is evidently regarded by the government as an insignificant price to pay for inflating the demand for loans this way.