debt-driven economics

[lemur]

Imagine you have 20 people, of which 10 have a great deal of surplus money to invest. Now consider if 5 of the wealth lend money to 5 of the poor. Before, you had 10 poor people living meagerly because that was all they could afford. Now you have 5 living on borrowed money, raising the bar for the material standard of living. This in turn puts social pressure on the other 5 poor people to take loans from the other 5 rich people. If the rich ones don't see the value in increasing the material consumption of the poor, they'll be blamed for keeping the 5 poor ones poor, when in fact it was collusion between the other 5 rich and 5 poor ones to create a material standard of living that made the poorest 5 look pathetic. Is it more ethical to leave the poor unsaddled with debt and to work on building up wealth from poverty; or better to redistribute wealth through lending or otherwise to raise the material standards of the poorest people to levels that they may not be able to sustain without continued borrowing or other redistribution?

 

attn: please don't turn this thread into yet another soap-box for the need for redistribution and the problems of governments/economies that do not redistribute as much as you would like. I would like to focus purely on the ethics of debt and (predatory) lending.

Edited May 29, 2011 by lemur

[michel123456]

IMHO the ethic issue coming from the lending & debt procedure is about the relation of power of the wealthies against the poor. Not so long ago debt could throw you in prison or in slavery.

A terrible way to use of this power is to stop abruptly to lend and ask your money back. In this situation, there will be blood.

[Marat]

On the one hand loaning money to people is essentially abusive, since the creditors use their surplus wealth to control their debtors, which denies the human equality and autonomy which ethics affirms. People no longer interact as equals, but one person interacts with others via the augmented power of his wealth, while others become subservient since they depend on that wealth being loaned to them. Historically, many people sold themselves into serfdom or slavery in order to escape massive debt burdens, which suggests a functional equivalence between debt -- a usual social practice -- and slavery -- a universal abomination.

 

But on the other hand, without a social system which permits the loaning of money, you have a static world of defined roles, no scope for ambition, and no means to propel talent among those who lack the resources necessary for self-development. As long as the medieval world of defined roles by birth persisted, there was little or no loaning of money at interest, since no one was permitted to become other than what he was born to be. But with the decline of feudal bonds in the 13th century there came the expansion of commerce in the Italian Renaissance, and loaning again became possible as part of the opening up of human personhood to the voluntary adoption of new roles. So just as loaning could be seen as equivalent to slavery above, it can also be seen as equivalent to freedom.

[lemur]

IMHO the ethic issue coming from the lending & debt procedure is about the relation of power of the wealthies against the poor. Not so long ago debt could throw you in prison or in slavery.

A terrible way to use of this power is to stop abruptly to lend and ask your money back. In this situation, there will be blood.

People are always free to initiate violence as a response to unhappiness. The threat of it happening creates a certain amount of fear-driven social pressure but succumbing to such pressure creates a vicious cycle that encourages threat of violence as a means of inducing certain forms of social-economic cooperation.

 

On the one hand loaning money to people is essentially abusive, since the creditors use their surplus wealth to control their debtors, which denies the human equality and autonomy which ethics affirms. People no longer interact as equals, but one person interacts with others via the augmented power of his wealth, while others become subservient since they depend on that wealth being loaned to them. Historically, many people sold themselves into serfdom or slavery in order to escape massive debt burdens, which suggests a functional equivalence between debt -- a usual social practice -- and slavery -- a universal abomination.

I agree.

 

But on the other hand, without a social system which permits the loaning of money, you have a static world of defined roles, no scope for ambition, and no means to propel talent among those who lack the resources necessary for self-development. As long as the medieval world of defined roles by birth persisted, there was little or no loaning of money at interest, since no one was permitted to become other than what he was born to be. But with the decline of feudal bonds in the 13th century there came the expansion of commerce in the Italian Renaissance, and loaning again became possible as part of the opening up of human personhood to the voluntary adoption of new roles. So just as loaning could be seen as equivalent to slavery above, it can also be seen as equivalent to freedom.

If I had a farm and you needed food, I could allow you to eat and you could repay the loan by working the farm until your labor produced an amount of food equivalent to the loan. If I would require that you produce more than you consumed (interest), I could use that food to feed more hungry people and thus continue growing my farm, feeding more people, and by doing so training them to farm for themselves and feed themselves. The question is what ethical responsibility I have or do my workers/slaves have to develop independence and responsibility for themselves. Can they demand that I continue to provide them with food and jobs to repay the food-loans or can I ethically expect and even insist that they translate their skills into sustaining themselves without my direction?

 

What seems to happen in practice is that banks lend money to people to buy existing businesses or set up their own business by buying expensive equipment, and by doing so they become indebted to the lender for liberating their creditors. However, the amount of sales required to repay the high prices of business equipment, etc. are such that people who go into business are required to service many many clients to repay their debts. This, in turn, is like a form of enslavement except insofar as they have the ability to sell off their equipment and do something else. Freedom increases as the need to service others decreases, imo.

 

 

[michel123456]

(...) As long as the medieval world of defined roles by birth persisted, there was little or no loaning of money at interest, since no one was permitted to become other than what he was born to be.

 

Philippe "the Fair"

King of France, from 1285 to 1314, Philippe was ruling when the orders to crush the Knights Templars were given. Philippe's financial difficulties which may have led to the downfall of the Templars as Philippr owed them money, was caused by huge expenditure trying to expand his territory. Money was spent on rents, civil servants and military operations. To get some of the money back, Philippe first picked on the Jews and money lenders, whose assets he confiscated and paid to the crown. He then confiscated the assets of the Lombards, Italian bankers within France. The Templars, as the Kings's bankers were a good target, as by removing them, Philippe effectively removed his debt to them.

 

from here.

 

IIRC this scenario happened several times in History.*

The capitalistic system has a one way current going from the whole society into bankers pockets. There is no way back in the system itself: it is much like entropy.

The only way to redistribute wealth is outiside of the conventional system, through violence.

I wonder how it is possible for bankers not to have learned yet that as much their wealth increase as much they put themselves in increasing danger.

No need to be a divine to see that the western world reaches slowly but surely the edge of debt. One day will come when politicians (or people) will turn against the loaners and redistribute the money without asking for permission.

 

* Edward I of England settled his problems almost the same way. I am sure a good historian can find examples at 40-50 years interval.

Edited May 30, 2011 by michel123456

[Marat]

Of course monarchs could always get loans, such as those raised, again mainly from Jews, to pay the ransom required by the Duke of Austria for the release of King Richard. I was speaking more of the new availability of loans to private persons for personal liberation. Ironically, the rise of capitalism with its emphasis on borrowing money to finance economic expansion proved to be the downfall of the old landed nobility, since they held their land inalienably, so could not pledge it as security for debt, so if their capital tied up in land was less productive than an equal amount of capital invested in trade and commerce could be, they could not mobilize their land capital as money by borrowing against it.

 

The Bible's prohibition of usery for Christians used to be construed to deny Christians the right to loan money at interest, which is why Jews became money-lenders. It seems rather hypocritical that Christians could not participate in lending as providers of capital but they still felt it moral to participate as borrowers of it. Islam still recognizes all loaning at interest as immoral usery, though Islamic banks use a variety of legal contrivances to pretend that they are not really charging interest for loans.

[michel123456]

I was thinking about loans taken by countries.

[lemur]

One day will come when politicians (or people) will turn against the loaners and redistribute the money without asking for permission.

It would be better if they would turn against the lenders by refusing to borrow money in the first place. Borrowing first and then defaulting on the debt without making some attempt to rectify is just an elaborate form of theft.

[michel123456]

It would be better if they would turn against the lenders by refusing to borrow money in the first place. Borrowing first and then defaulting on the debt without making some attempt to rectify is just an elaborate form of theft.

 

Yes it is. And often worse: murder.

That is why the procedure is always preceded by other means in order to get excuses. Like antisemitism for example.

[lemur]

Yes it is. And often worse: murder.

That is why the procedure is always preceded by other means in order to get excuses. Like antisemitism for example.

The really odd thing about debt, imo, is that all it really does is establish a relationship between buyers and sellers by providing a means of exchange. All that's going to happen in the long run is, for example, someone is going to build a house for someone else and then the person who gets the house is going to work in an office for 30 years in exchange for living in the house. Yet that relationship can somehow not be established or exist without a bank or other lending institution and the money changing hands, etc. Why can't people just say, "here's a house for you to live in and now you have to come to work for me for the next 30 years?" Instead, they do it through a bank and then instead of just not showing up for work, they kill the banker?

[michel123456]

Instead, they do it through a bank and then instead of just not showing up for work, they kill the banker?

 

I didn't want to say they are doing that all the time. But when you push people (or entire countries) too far, when after 30 years people lose everything they worked for, they get angry.

When it happens to you & me, as individuals, there are no many ways to escape. Some suicide, some disappear and die quietly on a bench in a park, others steal a bank. When you are driven into bankruptcy, not because you didn't go to work but because nobody buy your products, working hard won't save you.

When entire countries encounter the same problem, what do they do?

Imagine the U.S. not being able to sell anything nowhere because of a surevaluate dollar . Imagine the U.S. not being able to borrow money from nowhere. Imagine someone asking for the U.S. to pay its debt cash, right now. Imagine entire industries not being able to produce anything because they cannot pay their raw material.

And all that with bankers somewhere in the world, full of money (U.S. money). What would the U.S. do?

 

Well, history tells that the U.S., as any other country, after turning against his own people asking to work harder and to pay pay pay, would then turn against the bankers.

Edited May 31, 2011 by michel123456

[lemur]

I didn't want to say they are doing that all the time. But when you push people (or entire countries) too far, when after 30 years people lose everything they worked for, they get angry.

People get pushed too far all the time. Look at all the migrants who get harassed in Europe and North America, the lower class people, and all the people who get bullied or shunned into abandoning their jobs just because they don't 'fit in' with their colleagues in some way or other. All, or at least some, of these people get angry too - and the irony is that the stronger economic growth is occurring, the more empowerment there is for the successful people to bully and shun these marginalized people and/or exploit/abuse them economically. As bas as I feel for people who overborrow and then discover the means to repay the debt have abandoned them, I wonder if any of those people were being nice to the poor and disenfranchized when they were the ones qualifying for a hyper-balloon mortgage to pay for a nice big house in an exclusive suburb.

 

When it happens to you & me, as individuals, there are no many ways to escape. Some suicide, some disappear and die quietly on a bench in a park, others steal a bank. When you are driven into bankruptcy, not because you didn't go to work but because nobody buy your products, working hard won't save you.

Some people survive homeless too or seek public housing and assistance. The other ironic thing about it is that there are people who currently know that they could be next in line to lose everything, yet they only advocate economic recovery instead of considering what might make their life easier if/when they are at ground zero.

 

 

When entire countries encounter the same problem, what do they do?

Imagine the U.S. not being able to sell anything nowhere because of a surevaluate dollar . Imagine the U.S. not being able to borrow money from nowhere. Imagine someone asking for the U.S. to pay its debt cash, right now. Imagine entire industries not being able to produce anything because they cannot pay their raw material.

And all that with bankers somewhere in the world, full of money (U.S. money). What would the U.S. do?

Every individual would have their own means of dealing with the resulting problems. Some would do business directly with the global business class and maintain a wealthy standard of living as people have always done everywhere on Earth. Others would have to figure out ways of living without fuel or other energy. People would have to live near farms and hope to be able to use their labor to feed themselves.

 

Well, history tells that the U.S., as any other country, after turning against his own people asking to work harder and to pay pay pay, would then turn against the bankers.

You say this almost as if something constructive results from it. People can get angry and turn against anyone they want. They can kill, torture, harass, threaten, and otherwise terrorize their way to the level of social submission that they think will provide for them the things that they can't produce for themselves. But, ultimately the people you lose in the process are just lost human capital. Obviously, this is why xenophobia grows during economic recession - i.e. people hope that when people start getting liquidated, it will be people other than themselves elsewhere. Nevertheless, it was bad economic politics in the 1930s and it would be bad economic politics if it happened again. People could organize their economies without violence if they would stop struggling to maintain standards of living and start focussing on ensuring basic necessities get produced and distributed to everyone.

 

 

[michel123456]

I agree on all.

Maybe that is the answer to you opening post. I don't think there is much ethics in the economy of debt and (predatory) lending.

[Edtharan]

Isn't this the same question as in you other thread?

http://www.scienceforums.net/topic/57021-responding-to-income-deficiency/

 

My answer there was that you are focused on money as the fundamental unit of an economy. However, money is not the fundamental unit, but "Value" is.

 

Think of it this way: Goods, Services and Money have value (thus value is a property of goods services and money). But Value doesn't have Goods, Services or Money.

 

In other words, Value is a property that they all share.

 

When you perform a trade, it doesn't matter if you are exchanging goods for good, or goods for services, or good for money. What you are actually doing is exchanging the value these have between the people involved in the exchange.

 

And a loan is an exchange.

 

Money is an abstract potential for value. That is it can represents a value (the abstract) and it can be exchanged easily for things of value (the potential). So lending someone money is lending them the potential to increase their value.

 

Now, if someone uses what they got from a loan badly, say buying a luxury yacht, then this use of the value has not been used to increase their ability to generate value (it still has value, but it doesn't generate it).

 

Using loans so as to increase your ability to generate value is called investment. To use a loan for non-investment purposes is a bad idea.

 

However, most people don't think this way. They see money as the fundamental unit of the economy, and thus think that having money is enough, even if it is borrowed and tied up in non-investment uses (They think that your total worth is the sum of all the stuff you have).

 

Borrowing money to increase your ability to generate value is good and non exploitative, however, not all lending institutions screen for this (and they shouldn't have to), and thus people borrow money to use in non-investment purposes (it is a matter of education, not restriction that solves this problem).

 

Predatory lending is lending that is geared to encouraging people to take out a bigger loan than they need (and that need might be $0), or to use it in non-investment ways.

 

In the long run, this is a self destructive act by the lenders as when the people can't increase their ability to create value (enough), they can't repay their debt and the lender looses the money the borrower can't pay back.

 

However, many lending institutions cover the potential loss by taking out insurance against this, and having in place laws that allow them to try and recover their losses from the borrowers some other way. With institutions and laws like that in place, lenders don't have to worry so much as it mitigates the effects of bad debts. they have protection.

 

The borrowers, on the other hand, don't have such protections, and this makes predatory lending profitable for the lenders as they have reduced, or eliminated their risks, without doing anything to alleviate the risks to the borrowers. As it is the risks to the lenders that is supposed to regulate the lender/borrower problem, this lopsided deal means that it is no longer self-destructive to the lenders and this cases a drain on the economy (as value gets wiped out - and it is the value the money represents that gets wiped out, but the money stays, so the value of the money goes down and you get economic crashes).

 

If you look at the current financial crisis, this is exactly what happened. The Banks lent money, but because they had in place deals that prevented them from suffering the consequences of a bad loan, they had no real incentive to not make bad loans. When those loans went bad, the value represented by the money in those loans disappeared and the value of the american dollar crashed along with the value of many other currencies that were tied into the value of the american dollar.

 

IF you analyse it in terms of money, it is hard to see what happened as the same amount of money was still there. But, when you analyse it using "Value" as the fundamental unit of the economy, it make sense and should have been clear long before the trouble occurred.

 

It is why I pointed out in the last thread, and in this one, that you can't use money as the fundamental unit of the economy, but must instead use "Value" as it really is the fundamental unit and thus cuts through a lot of the complications that money causes.