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> > Great empires were built without interest. > Like which? I think part of the problem is that the GP is conflating debt leverage and interest. My understa
by KMag 6y ago
> > Great empires were built without interest.
> Like which?
I think part of the problem is that the GP is conflating debt leverage and interest. My understanding is that there have been societies essentially without debt leverage, and no societies without loan yield.
As far as interest, all non-altruistic loans have strictly positive yield. You can use contracts to shift payments around and nominally get rid of interest, but you can always calculate an equivalent interest rate from the loan's yield. In the middle ages, they discovered that an investment, an insurance contract, and a contract-for-difference (sale of profit) together (contractum trinius) could perfectly replicate the cash flows of an interest-bearing-loan.[0] Presumably the contractum trinius is what eventually lead to the Catholic Church allowing interest-bearing loans.
My understanding is that the joint ventures set up for Islamic finance end up having cash flows equivalent to interest-bearing loans, though perhaps with important differences regarding collateral and leverage.
The yield on these loans is always strictly positive, and an interest rate equivalent to that yield is easily calculated. You can shift payments around and structure things so that there's nominally no interest, but there's still yield on the loan.
Now, I think there is some healthy debate to be had over the role of leverage and collateral in the economy, and also non-dischargeable debt like student loans.
[0] https://en.wikipedia.org/wiki/Contractum_trinius https://en.wikipedia.org/wiki/Contractum_trinius
- rank0 6y agoWhat do you mean by debt leverage? I don't really see how you can have interest without allowing for borrowers to profit from that debt. Businesses use debt to finance their operations. I can get a mortgage and profit off the appreciation of my property. I had never heard of that contractum trinius thing! But it really doesn't seem any different. The borrow has to pay insurance premiums to the lender instead of interest premiums. Its only different in name. Additionally, the borrow has to pay for a separate contract that will allow them to profit off the debt! That's debt leverage for you!
- gher-shyu3i 6y agoYou're correct, they're just thinking they found loopholes around the issue. Islamic texts explicitly call out this behavior and prohibits it. You can't stitch together individual legal contracts to reach the goal of lending money with interest. You can't "kid" God.
- gher-shyu3i 6y ago> that the GP is conflating debt leverage and interest I'm not :) > The yield on these loans is always strictly positive, and an interest rate equivalent to that yield is easily calculated. You can shift payments around and structure things so that there's nominally no interest, but there's still yield on the loan. In Islam, any loan that contractually requires benefit to the lender is prohibited, and that benefit does not have to be cash either, it could be a service or something intangible. Any attempt to dance around the issue (e.g. by stitching together intermediate contracts) does not change the fact that it is still interest under the covers, nominally or not. Islam cares about the actual substance, not what people call it on paper. This is already established in the texts which anyone can look at. As such, contractum trinius is prohibited in Islam. Proper Islamic finance shares risk between the investor and investee, loans are strictly an act of charity since they cannot take interest. By looking at history, we know that it is possible to have societies that do not rely on interest, but on proper risk sharing. They don't teach that in the popular economic books though.
- ric2b 6y ago> loans are strictly an act of charity since they cannot take interest. Let me guess, this means that you either have good connections or you're not buying a house until very late in life?
- gher-shyu3i 6y agoBelieve it or not, real estate owners back in the day were willing to sell their house in installments without upping the price. So neither of your suggestions apply. Even with interest and predatory loans, people today are not buying properties until later anyway, so that's not really an argument. Secondly, in Islam the government has duties to perform, including providing good quality of life to its citizens, something we don't see done by so many governments today. Housing goes under this.