I'm going to split the one about money banks and cronieism - sorry capitalism off into it's own thread if thats ok.
QUOTE
interest exists for two fold reasons:
First, to counteract the negative effects of inflation.
And second, to counteract loans that default, or are otherwise unpaid.
In the 60s, about £5000 per year was a GOOD wage. A comparable wage nowadays would be ten times as much. So if I leant you £5000 in 1960, I would expect £50,000 back in 2012 (these numbers are estimates, I'm not looking up inflation statistics for an example.)
If I only asked for £5000 back, then I would be at a HUGE loss.
Remember, the true value of money is what you can do with it. Money is a go between for transactions. If items change value, or the amount of wealth a country has changes, then the value of the money MUST change as well to compensate.
However, there's also the possibility that I will never get my money back.
Say I lend £5000 to 10 people in 1960.
One of them never returns the money.
In 2012 I'll get £45000 back, but I'd actually be at a loss.
So I have to ask each of the 9 for roughly £556 extra to cover that loss.
Then there's profit to consider. If I'm going to be lending money, I want to be rewarded for my services.
However, I also want to reward people I KNOW will pay me back.
So if you have a good history, I can make the interest rate lower, so that I just break even with a small profit.
If you have a bad history, then I'm taking a gamble, and when you gamble, you expect a return equal to or greater than your possible loss, so the interest rate is much higher.
Of course, you KNOW this before I lend you the money. There'll be a contract that dictates the interest rate.
The contract we enter together is not some kind of theft. I don't need to lend you the money, and you don't need to accept. If you really have no way of making your money and need a loan, then I can draft whatever terms I want.
I repeat, it's a service, and they charge for that service.
In a perfect world, bankers do not ask for interest, and chefs wouldn't charge for meals, and every company and business would go broke overnight.
You're the one being naive not to see this.
Now, this is where it gets tricky.
The banks, when lending money, have to take ALL of this into consideration, and apply it to a LARGE population.
They have to work out what % of people will pay back on time, and which won't.
But the banks provide another service, they take in money as well, and gamble with it (according to their strict profit based rules) and then return that money (with a cut) to the people who put the money in.
Everyone wins, right?
Well, what if the large population were all asking for loans, and the returns look GOOD, but the bank doesn't have the money. Or any other kind of gamble. The system has always worked to this point...
But then the % of people paying back drops, which means the bank is at a massive loss, then the market is going to change (a change in money coming in and out of the market). This was housing loans, mostly.
So the bubble bursts. The money coming in is less than the money that's gone out. Prices go waaay up. And money is lost.
The money isn't gone, it's just tied up in loans which aren't getting paid back.
To recoop that lost, the banks have to turn interest rates sky high.
It's not enough.
The Government has to bail them out.
This situation is applicable for the name: Black Swan Event.
It is an event which you could not predict.
And event which you have to reason to believe would happen.
But in hindsight, it seems so obvious it would happen.
So people who read up on the topic think to themselves, How did they not see it coming?!
Because no one did.
No one predicted that the system which assessed risk would fail, and that less and less people would make good on their loans. No one predicted how this would affect the market.
A system which works 99.99% of the time, still fails just once, but that's all it takes.
First, to counteract the negative effects of inflation.
And second, to counteract loans that default, or are otherwise unpaid.
In the 60s, about £5000 per year was a GOOD wage. A comparable wage nowadays would be ten times as much. So if I leant you £5000 in 1960, I would expect £50,000 back in 2012 (these numbers are estimates, I'm not looking up inflation statistics for an example.)
If I only asked for £5000 back, then I would be at a HUGE loss.
Remember, the true value of money is what you can do with it. Money is a go between for transactions. If items change value, or the amount of wealth a country has changes, then the value of the money MUST change as well to compensate.
However, there's also the possibility that I will never get my money back.
Say I lend £5000 to 10 people in 1960.
One of them never returns the money.
In 2012 I'll get £45000 back, but I'd actually be at a loss.
So I have to ask each of the 9 for roughly £556 extra to cover that loss.
Then there's profit to consider. If I'm going to be lending money, I want to be rewarded for my services.
However, I also want to reward people I KNOW will pay me back.
So if you have a good history, I can make the interest rate lower, so that I just break even with a small profit.
If you have a bad history, then I'm taking a gamble, and when you gamble, you expect a return equal to or greater than your possible loss, so the interest rate is much higher.
Of course, you KNOW this before I lend you the money. There'll be a contract that dictates the interest rate.
The contract we enter together is not some kind of theft. I don't need to lend you the money, and you don't need to accept. If you really have no way of making your money and need a loan, then I can draft whatever terms I want.
I repeat, it's a service, and they charge for that service.
In a perfect world, bankers do not ask for interest, and chefs wouldn't charge for meals, and every company and business would go broke overnight.
You're the one being naive not to see this.
Now, this is where it gets tricky.
The banks, when lending money, have to take ALL of this into consideration, and apply it to a LARGE population.
They have to work out what % of people will pay back on time, and which won't.
But the banks provide another service, they take in money as well, and gamble with it (according to their strict profit based rules) and then return that money (with a cut) to the people who put the money in.
Everyone wins, right?
Well, what if the large population were all asking for loans, and the returns look GOOD, but the bank doesn't have the money. Or any other kind of gamble. The system has always worked to this point...
But then the % of people paying back drops, which means the bank is at a massive loss, then the market is going to change (a change in money coming in and out of the market). This was housing loans, mostly.
So the bubble bursts. The money coming in is less than the money that's gone out. Prices go waaay up. And money is lost.
The money isn't gone, it's just tied up in loans which aren't getting paid back.
To recoop that lost, the banks have to turn interest rates sky high.
It's not enough.
The Government has to bail them out.
This situation is applicable for the name: Black Swan Event.
It is an event which you could not predict.
And event which you have to reason to believe would happen.
But in hindsight, it seems so obvious it would happen.
So people who read up on the topic think to themselves, How did they not see it coming?!
Because no one did.
No one predicted that the system which assessed risk would fail, and that less and less people would make good on their loans. No one predicted how this would affect the market.
A system which works 99.99% of the time, still fails just once, but that's all it takes.
The way that the banking system and interest actually works is mis-understood by many.
This somewhat applies to how capitalism works when it gets towards it's end game state (which we are starting to see today)
In terms of interest, and banks lending money.
There is a serious point you have missed.
you mention lending 10 people £5k
Now if you or I were to lend 10 people £5k we would need £50k in cash to hand over.
The same does not apply for banks.
The bank requires only £5k.
It can then lend out the same 5k 10 times.
(this is called fractional reserve banking)
the additional £45k did not exist before the bank lent it out.
It was in fact the very act of debt bondage that has the value of 5k.
The piece of paper 'you' have signed that legally requires you to pay back 5k creates the very value that the bank is 'lending' you.
So lets go back to your example.
A bank lends 10 people £5k and one of them does not pay any of it back, the other 9 do.
You point out that this is a 5k loss for the bank.
In real terms it is actually a £40k profit for the bank.
you start off with £5k and a year later, you have £45k
(hows that for an investment)
Whats more you don't even need to get back the £5k from the guy who is not paying it back.
It's the piece of paper, the debt bondage that has the value. (just like a £10 note)
So the bank could sell that piece of paper to another bank.
To make it attractive to buyers, they would sell it for less than the total repay value.
This selling of debt, caused the big ol' crash of 2008, and is still very much legal.
So what does this have to do with interest?
Interest / inflation is caused because the amount of money in the system has increased, while the amount of things and people to buy things has stayed roughly the same. (in comparison)
Because the Banks are de-valuing their customers money with fractional reserve lending methods, they give their customers a little bit of extra money to plug the devaluation gap that their own activities have caused.
It's not about sharing the risk.
Why do they then charge interest on loans?
Because they can. And it's a great way to make even more money.
Unfortunately these interest rate are not static, they are devaluing the money at an exponential rate.
Which brings me to where the end game of capitalism is leading.
Time however is short for me at the moment.
So more on that another time :-)
RE: endgame
