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Nationalizing banking doesn't work either. If you lend money without penalty upon default, then you encourage defaults. If you encourage defaults, then people n

Nationalizing banking doesn't work either. If you lend money without penalty upon default, then you encourage defaults. If you encourage defaults, then people no longer pay attention to the price of things they buy, since they can borrow however much they need without consequence. The result is rapid inflation, which wipes out the wealth of the working classes. If you keep strict controls on the amount of fiat currency issued, and lend for reasons other than earning a good interest for financing risk, then you end up with a shortage of capital to lend. Then loans are issued for criteria that aren't publicized - in polite terms, politically motivated lending. Society stagnates as the engine of progress itself turns into a zero-sum game. There is a better way to ensure the delivery of socially-beneficial goods - to deliver them directly, taking care that public options provide only minimally sufficient goods and services, and only in response to the failure of the private market to provide alternatives.

wegs 7y ago
The key question is what the penalty is. The penalty is different if the goal is profit-maximization than it is to promote pro-social behavior, for a few reasons: * Very few people want to lose their homes or to go bankrupt. * Investors try to act optimally from a game-theoretic point of view. This usually means maximizing their own income (which isn't always the same as maximizing returns on the many they manage). * People aren't always rational. Let's look at the two systems for how we handle bankruptcies and defaults: 1) Money is bits / a game: We attempt to structure penalties to minimize structural damage to the system, while slapping you hard enough on the wrist to make defaults an undesirable outcome. 2) Money is real: We attempt to extract enough money out of you to balance interest. If we have harder penalties, with rational investors, interest rates go down, so keeping high penalties promotes a strong economy. And for how we decide to loan: 1) Money is bits / a game: I loan you if the loan is perceived to benefit society. E.g. if you are engaged in an activity with a lot of positive externalities (e.g. going to school, buying a home for your family, or making a new startup), I will give loans with lower interest. I discourage bad debt (e.g. credit card debt, or mortgages I know will fail. 2) Money is real: I expect returns. This might be due to good debt (e.g. business investment) or bad debt (e.g. you're buying a home you can't afford, but interest + sales price when you default results in net income for me when / if you do default, payday loans, etc.). Both of these systems are rational. Both, in practice, have politics we need to manage. The problem happens when e.g. monetary policy sets interest rates, in conflict with what the market wants. The risk is astronomical right now, and system #2 says don't loan, which is where the private sector wants to go. But without cheap credit, the economy goes down, which is where the fed steps in. And, of course, private investors can try to arbitrage the two forces.

wegs 7y ago

The key question is what the penalty is. The penalty is different if the goal is profit-maximization than it is to promote pro-social behavior, for a few reasons: * Very few people want to lose their homes or to go bankrupt. * Investors try to act optimally from a game-theoretic point of view. This usually means maximizing their own income (which isn't always the same as maximizing returns on the many they manage). * People aren't always rational. Let's look at the two systems for how we handle bankruptcies and defaults: 1) Money is bits / a game: We attempt to structure penalties to minimize structural damage to the system, while slapping you hard enough on the wrist to make defaults an undesirable outcome. 2) Money is real: We attempt to extract enough money out of you to balance interest. If we have harder penalties, with rational investors, interest rates go down, so keeping high penalties promotes a strong economy. And for how we decide to loan: 1) Money is bits / a game: I loan you if the loan is perceived to benefit society. E.g. if you are engaged in an activity with a lot of positive externalities (e.g. going to school, buying a home for your family, or making a new startup), I will give loans with lower interest. I discourage bad debt (e.g. credit card debt, or mortgages I know will fail. 2) Money is real: I expect returns. This might be due to good debt (e.g. business investment) or bad debt (e.g. you're buying a home you can't afford, but interest + sales price when you default results in net income for me when / if you do default, payday loans, etc.). Both of these systems are rational. Both, in practice, have politics we need to manage. The problem happens when e.g. monetary policy sets interest rates, in conflict with what the market wants. The risk is astronomical right now, and system #2 says don't loan, which is where the private sector wants to go. But without cheap credit, the economy goes down, which is where the fed steps in. And, of course, private investors can try to arbitrage the two forces.