I assume libertarians are opposed to banning usury.
Why?
@eliot: I wrote a really long post... then decided it was all muddled. So, here's a cut-down version.
Jones can file suit, claiming that Smith owes him money... and if Smith doesn't show up to court and answer Jones' challenge, Jones wins by default. That's the meaning of default. The party who shows up to court wins by default, supposing the other party is a no-show. But let's say Smith really does owe Jones money. He cannot file a suit that says "I owe Jones no money" and then if Jones doesn't show up to court, Smith is free of his obligation by default.
I think that shows the one-sidedness of it all. At any time, I can send you a "notice" in the mail that you owe me money. The threat implied in this notice, is that if you don't respond to me, I will file a suit against you. And should I choose to do that, you must respond regardless of whether you can afford a lawyer, etc. or else I will win by default. The whole concept is intrinsically abusive and is rampantly abused by creditors and collectors.
But it doesn't work the other way around. I can't send a letter to my mortgage company: "I hereby declare I owe you no money." They'll just laugh and throw it in the garbage... because there's no way I can follow up and file a suit along those lines... "Show up to court to defend yourself against my claim that I owe you no money." There is no way to make such a lawsuit that I'm aware of, except as a counter-claim to a prior lawsuit, filed by a creditor.
Jct: Yes, I've read Libertarians do not want to infringe the liberty of the rich to enslave the poor with unpayable debts. Oh, and interest is on cows, usury is on inert matter because when everyone borrows 10 chips and everyone owes 11 chips in the mort-gage death-gamble contract, someone gets morted, knocked out of the game into starvation by lack of life-support tickets. That's one liberty I don't think the Libertarians should been so quick to accept. I'm a Libertarian-Socred: I want no cops in gambling, sex, or drugs, or rock&roll, I want no usury on loans, pay cash or time, no dole. Check out LETS timebanking community currencies for bottom-up solution or UNILETS or Argentine Solution for top-down (paying workers with small-denomination government bonds saved both Argentina and Russia during their bank crashes.
because when everyone borrows 10 chips and everyone owes 11 chips in the mort-gage death-gamble contract, someone gets morted, knocked out of the game into starvation by lack of life-support tickets.
Care to elaborate what you meant?
Oh, and suggesting your own post as an answer is uncool, IMO.
I guess what I'm trying to say is that it's mathematically identical.
Its not mathematically identical: Lets assume we have a 10 day loan of $100,000 at 1% per day. In the first example you have the interest compounded by adding it to the principal where the next days calculation for interest is based on the new principal balance. In example two the interest is not compounded and is only calculated based on only the original principal. There is a $462 difference in the amount of interest owed.
There is no legal action whereby you can tell someone "put up or shut up."
This is not true. When you file for bankruptcy arrangements are made where some creditors are paid and others legally have to eat the bad debt. Once the bankruptcy is discharged creditors have no legal recourse to recover money from you.
if you believe someone owes you money, you may file a legal action to force that person to prove they don't owe you... it's completely one-sided.
This is also not true. If someone takes you to court because they claim you owe them money.... they are the ones who have to prove it. They have to provide evidence that they gave you money and you agreed to repay under certain terms. If a creditor decides to take you to court and they cannot produce evidence the case will simply be dismissed. To claim other wise is just untrue.
Jones can file suit, claiming that Smith owes him money... and if Smith doesn't show up to court and answer Jones' challenge, Jones wins by default. That's the meaning of default. The party who shows up to court wins by default, supposing the other party is a no-show.
I'm not sure this is entirely accurate. If I sue you and you dont show the court is still going to ask me to make my case that you owe me money. If I have no evidence the court would certainly not award me a judgement.
At any time, I can send you a "notice" in the mail that you owe me money. The threat implied in this notice, is that if you don't respond to me, I will file a suit against you. And should I choose to do that, you must respond regardless of whether you can afford a lawyer, etc. or else I will win by default.
You have to respond because the court commands you to. But you wont lose by default because you dont show up. You lose because evidence is presented that you do indeed owe the money and you are not present to dispute the evidence.
This sounds entirely resonable to me. If it was any other way I could avoid all legal action by simply refusing to show up for court.
I can't send a letter to my mortgage company: "I hereby declare I owe you no money." They'll just laugh and throw it in the garbage... because there's no way I can follow up and file a suit along those lines... "Show up to court to defend yourself against my claim that I owe you no money."
This makes no sense. When I claim you own me money that you have refused to pay back, I am in essence claiming that you have stolen money from me. You are telling me that an individual who has not been allegedly stolen from should be the one to initiate the law suit?
Law suits are initiated by those who are claiming to have wronged in some way. Not the other way around.
BTW, Clayton, I think that using the compound interest for contracts is far from being artificial - it is in fact the natural one.
By this I mean that two loan contracts for 1 month, when naturally combined, result in one contract for 2 months using compound interest, not simple one.
Insisting on limiting the loan contract liability is just asking for arbitrage - A can borrow $100 from B to be returned in 1 year as $110, with some additional fees if returned later, but never more than $120. Then A can lend these $100 for one year term indefinitely, first to C, then to D, then to E (let's say, undercutting the going rate of 10%, so earning only 9% a year). After 3 years, A finally decides to return $120 to B, keeping the positive balance for himself. I do not see this model as sustainable.
I understand that the mortgage market is heavily regulated and probably a lot of these regulations are actually good things as far as they go.
They say everyone (and every AnCap) has a blind spot. I guess this is Clayton's. I could understand saying that laws against murder are good as far as they go, but the prevention of voluntary transactions, com'on man... If both parties know what they are agreeing to, I don't see a problem. And bankruptcy is always an option if things get out of hand.
You are highly mistaken as to what Clayton is saying.
EDIT: Here is one of his statements from earlier:
Clayton: But what, exactly, is the agreement? That's the point. Being "held to terms of agreement" is, as Rothbard notes in EoL, an anti-liberal conception of what a contract is. A contract is, at root, a conditional property title. "Terms of the agreement" is a squishy and ill-defined concept... and, ultimately, it leads to unlimited liability. Any agreement, however tiny - even if such an agreement was never actually made! - can balloon into astronomical liability.
But what, exactly, is the agreement? That's the point. Being "held to terms of agreement" is, as Rothbard notes in EoL, an anti-liberal conception of what a contract is. A contract is, at root, a conditional property title. "Terms of the agreement" is a squishy and ill-defined concept... and, ultimately, it leads to unlimited liability. Any agreement, however tiny - even if such an agreement was never actually made! - can balloon into astronomical liability.
I fully agree that people should be able to create voluntary agreements with each other, but not just any old agreement is considered a valid libertarian contract. The fact that you think bankruptcy is a legitimate method of reneging on these agreements should be a hint that they are not as legitimate as they might seem.
I know all that. But if you engage in many separate simple interest contracts, you can just as easily run out of property to fulfill your contracts. You are bankrupt. Just because the numbers become large at some arbitrary point in time is irrelevant. If we enter into a compound interest contract that matures to a maximum defined benefit, the objection falls away. Compound vs simple is not the question. The question is about unlimited liability.
I understand and accept that a professional creditor may combine contracts in this way, and do so to both the advantage of creditor and debtor. It is clear that interest is in some sense "exponential" with respect to time, just from looking at the market outcomes.
That said, this has nothing to do with the question of justice, which is really the question that law is seeking to answer. "What is the just outcome in this situation?" You can't just reach for the first industry-standard calculation method you come across and declare that to be just. The word justice is as literal as it gets: justification. That is just what can be justified. Just saying "there are loan houses who combine and refinance loans using such-and-such equations" is no more relevant to a particular debt dispute than arguing over the true price of oranges in the case of a missed orange shipment. Contracts that are wide-open and refer to things like "going price" or what-not, are ill-formed contracts and lead to increased, not decreased conflict. This doesn't mean that such contracts will not be made anyway, however, the idea is that in an unhampered market in law, we should expect the settlement of disputes over such messy contracts to be expensive vis-a-vis better-crafted contracts, thus, we should expect the market to impel people to write clearer, more cost-effective contracts. IOW, this isn't about taking anyone's "freedoms" away, it's about understanding a) where does justice fit into this and b) what are the various cost impacts of structuring and enforcing contracts?
The point is that the chain of contracts should always be in the form of a simple "if then" model, or perhaps a couple, clearly cascaded and precedented conditionals and should conform as closely as possible to the Rothbardian view of a contract as a conditional transfer-of-title... the more clearly the language corresponds to this view, the more cost-effectively disputes arising from violation or perceived-violation of the contract can be settled.
How loan terms are calculated should not be in view. For example, let's say I go to the bank and ask for a 10 year loan of $100K. They come back and tell me they will loan me $100K in exchange for an IOU contract that I will pay $916.66 per month for 120 months; if I miss payment for 30 days, I agree to a $100 fee, if I miss payment for 60 days, I agree to a $250 fee, and if I miss payment for 90 days, I agree that double the outstanding balance is owed to the creditor, i.e. conditional title transfer. This is a perfectly enforceable contract, and the amount of interest on the loan is calculated using compounding (10% APR, compounded monthly). The fees act as a grace period, and the defaulting value acts as an incentive to meet the original terms. The instrument does not "accrue interest" over time once defaulted on, any more than a stolen bicycle "accrues interest". The doubling also serves to take into account enforcement, collection, legal, etc. costs on the anticipation that arguments like "you cost me money by forcing me to have to secure my own property" are invalid.
In other words, all we have really done is reworded the contract. It is no different than an ordinary mortgage contract except that all the squishiness has been discarded - there is no room for the judge's discretion, or for either party to argue about prevailing prices, abusive interest rates, and so on. The contract is just a simple marker of the terms of a conditional exchange of property. Nothing more. Rothbard quotes Hobbes in EoL who points out that, when it comes to law, words matter, so being nit-picky about contract wording is just part of the territory.
Clayton -
dude6935: I know all that. But if you engage in many separate simple interest contracts, you can just as easily run out of property to fulfill your contracts. You are bankrupt. Just because the numbers become large at some arbitrary point in time is irrelevant. If we enter into a compound interest contract that matures to a maximum defined benefit, the objection falls away. Compound vs simple is not the question. The question is about unlimited liability.
The fact remains that if you believe that bankruptcy is legitimate, then you believe that it is legimate to reneg on these so called contracts. If you believe these are legitimate contracts, then you believe that theft is legitimate. Let the cognitive dissonance commence!
That has nothing to do with simple vs compound interest. Like I just said, the issue is ultimately about unlimited liability. Weather or not defaulting on a loan is theft is neither here nor there. Even if it is theft, what are we to do, make the borrower a slave? Let the contract state these things. We have no business interfering in voluntary agreements (assuming there truly is agreement).
Clayton:In other words, all we have really done is reworded the contract. It is no different than an ordinary mortgage contract except that all the squishiness has been discarded - there is no room for the judge's discretion, or for either party to argue about prevailing prices, abusive interest rates, and so on. The contract is just a simple marker of the terms of a conditional exchange of property.
Yes exactly. The issues in question are unlimited liability and weather or not people understand the agreement, not the mathematics behind the agreement. If X then Y. What takes place within the calculation is irrelevant once a defined value is agreed to.
So, if a "usurer" uses clear contracts with defined values, we should have no problem with that activity.
The issues in question are unlimited liability and weather or not people understand the agreement, not the mathematics behind the agreement.
That was my point - I'm trying to underscore that the current system does accept compound interest in calculating liability in certain cases. Since mathematics really has nothing to do with the question of justice, I'm arguing that this should be dispensed with. And, as a prediction, I think that once this is dispensed with, it will have a massive impact on the nature of the loan market. I think the loan market would massively shrink in size, I think that simple interest, fixed-term loans would become more common and I think that interest rates would go up quite a bit, especially in the low-end lending market.
Clayton, it looks like the key issue isn't all about interest, its the fact that courts don't enforce the tool of the performance bond, as described by Rothbard in Ethics of Liberty. So they have to use other vague measures, such as including interest.
And it looks like the issue is a problem with the "innocent until proven guilty", that the debtor is "guilty until proven innocent". Am I right?
Schools are labour camps.
@eliotn: You can put it that way but I want to underscore that I think older moral/legal philosophers were well aware of these issues and the prohibitions on "usury" (that is, lending at interest, even simple interest) were actually based on these considerations. This is very clear from Sharia law regarding banking. It is permitted to effectively lend money, and it is even permitted to make money lending money, but the instruments are structured such that there are no open-ended obligations. It's a gross and irresponsible over-simplification to simply say "Islam prohibits lending at interest". Yes, it does, but it also effectively permits credit when the arrangement is properly structured. I guess what I'm trying to say is that I see a historical correlation between the rise of positive legal theory in the West and the explosion of credit-based, Western economies. When you throw "justice" out the window, it's all just a big math equation.