1/9/2013 Usury, honeymoon loans, and financial regulation

This coming Wednesday,  we will be discussing loans at the Ideas Cafe.

Usury, or to charge for lending money, was seen as an evil from thousands of years ago.  I understand that the church was against charging interest on loans which forced borrowers to borrow from those outside the faith.  This opened the opportunity for the Florentine bankers to lend a discounted amount but demand repayment in full just so that they can say they are not charging interest on the loan.


Trust human ingenuity to get around a man made rule.

There will always be people who can use a loan now and people who are saving money for the future so it is a natural match for these two parties to come together and agree on an interest rate that both sides would find equitable.

But are money lenders still seen as greedy today?  Is that partly responsible for people's negative image of bankers?  Should working people saving for their retirement and lending that retirement money before they need it be seen in the same light?

Maybe that it is just that there is more borrowers than lenders and in a democracy, the minority can get victimized by the majority.

When we save money, are we not lending it to the bank?  Suddenly,  it does not seem so unreasonable to demand that the bank pay us interest to deposit with (lend to) them.  When we invest in bonds, we look for as high an interest as we can get.  Yet we complain about the bankers and investment houses for not giving us decent returns for our money.

Is this just our selfish view of our role depending on whether we are the borrower or the lender?

Maybe it is the middleman, the banker and the investment house that is taking too much in between the depositor and the borrower. 

Why are we not bypassing the middleman? Why do credit unions not offer substantially better deals than the banks?


What about the reasons for taking out a loan. 

We can all see the need for that housewife in the third world that needed to borrow money to buy a sewing machine so that she can do some sewing to earn extra income for the family.  Or the manufacturer who borrow money to upgrade their plant to higher efficiencies or to serve more markets.  But what about car loans, especially car loans to get that bigger gas guzzler?


Or a loan to go on vacation? Is it ever justified to borrow money just to relax? Particularly through credit card loans on high interest rates?

What if the vacation is for one's honeymoon.  Happens when one is young, with little savings, years of earning power ahead, and a once in a lifetime event that is meant to last forever.  Is this not the epitome of justifying a loan for an opportunity never to be experienced again?


Or is it to saddle one's budding marriage with extra burden ?

What about the amount of interest being charged for loans.  Is this an agreement between the lender and borrower and nobody else?  Should the government be involved in limiting the amount of interest charged?

While it is easy to say government should stay out of private agreements,  we need to recognize that the experienced player in this is at a definite advantage.  There are enough variations in the rate calculation, collateral obligations, early redemption privileges and all manners of other details to confuse the inexperienced borrower or lender.

But government regulations tends to be the blunt instrument, oblivious of the individual situation.  Where is the balance between protecting the inexperienced versus limiting the market?

Then there are the third parties that were never brought into the agreement but maybe involved, either in bailing out the insolvent borrower, or lost their investment on what is represented as a "sure thing"?  How do we identify these third parties ahead of time and protect them before the borrower and lender agree with each other?