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As a real-world example, there are workarounds used for banking by Muslims who don't believe in ursury.

https://en.m.wikipedia.org/wiki/Islamic_banking_and_finance

Murabaha is largely a semantic hand wave that really doesn't fundamentally differ from the credit/mortgage model we have. The lender makes profit, frequently there are late fees, the government gets involved if the loan is not repayed (with varying consequences based on the country), the underlying asset gets seized etc. The major difference is that you don't call the profit 'interest.'

It's really basically just a way for Islamic countries to claim that they are adhering to Sharia law while not being completely left in the dust because credit is so completely vital to a modern economy.

These are different forms of yield, which is a superset of interest (as are windfall, zero-coupon bonds, & cetera).

In addition to what wdewind said, the restriction on charging interest and late fees is problematic. What to do about defaults and late payments? In the Gulf, the solution is to put debtors in prison.

> It may make it worse for the lower class in this model because you can't inflate the number of dollars, but in real life there's a lot of good reasons to think credit markets are extremely helpful for everyone, including the lower class.

There are a lot of good reasons to think that they aren't, too.

If you model credit as something you give to one person then it looks like a win -- now that person can afford a home when they couldn't before. But if you make credit generally available then it causes price inflation. That not only means higher costs, you have to pay interest on the inflated price until you've paid off the principal. Which middle income people can generally never do, because if they could then the people in the percentile below them could have gotten an interest-only loan and outbid them for the house.

The result is that you get to claim a PR win because more people "own a home", except that the homes are really owned by the bank and the only difference from renting is that the payments are called interest instead of rent.

The number of people who own a home outright goes down because many middle income people could otherwise have bought a home without borrowing, but against the wildly inflated prices they have to take out a mortgage. Imagine the cost of a home was little more than a down payment currently is.

And this carries down through the generations because children who inherit a home now also inherit a loan in nearly the entire amount, the money used to pay inflated medical bills that are only so expensive because credit availability allows them to be.

It's perhaps not a coincidence that the last few decades have seen ever increasing credit availability while the middle class shrinks.

I'm not really sure what you're arguing here. As I've mentioned in other posts, there's obviously a balance, but suggesting that the credit markets could go away entirely and be supplanted by "friends and family" loans is a gross misunderstanding of the credit markets, and certainly would not at all benefit the lower class. The entire premise of TARP was that this is true and economists on both sides of the aisle largely agree with it.

> It's perhaps not a coincidence that the last few decades have seen ever increasing credit availability while the middle class shrinks.

I don't think so. I think it has much more to do with tax law.

> The entire premise of TARP was that this is true and economists on both sides of the aisle largely agree with it.

The premise of TARP was that allowing large institutions to fail and trigger a cascade of bankruptcies would have resulted in too much collateral damage to innocent parties who reasonably assumed that large financial institutions and insurers would meet their obligations.

Putting restrictions on bank lending is very different than allowing them to default at scale.

> I don't think so. I think it has much more to do with tax law.

That is a widespread belief but it has no basis. The rich have never paid high taxes in the US, even at times with nominally high tax rates. During the period in the 20th century that the highest individual rates were >80%, there were also so many loopholes that rich families regularly paid no taxes. And if the taxes actually paid haven't gone down then it has to be something else.

But "the power to tax is the power to destroy" as I'm sure you know. What difference in result do you imagine between a law discouraging lending and a law taxing it heavily enough to prevent wealth concentration?

Also, it's good to remember what 'marginal rates' are. I always say, if you want to argue as if marginal rates are the base rate, let's ask your accountant if they'd like to adopt your line of argument. I daresay they'd have a pretty clear idea of what's at stake.

We're getting lost in the weeds. What exactly are you proposing?

>Not GP but: much less credit would be extended because many stores wouldn't be able to do much with bookings.

Isn't that a good thing? In lots of places, e.g. Germany for one, people almost never buy with credit.

No, because it means much less economic growth. There is obviously a balance: too much lending and the economy collapses the other way. But too little lending is really bad for everyone too, and there are pretty fair reasons to think it might impact the lower class the most. Getting rid of (relatively) easy access to credit would be completely catastrophic for the global economy.

> No, because it means much less economic growth.

You're assuming the alternative to lending at interest is nothing rather than something.

A loan really does three things.

First, it creates new money. When you borrow money from a creditor, notice that they generally don't mail you a bundle of dollar bills. What really happens is that they credit your account with the loan amount, and at the same time create a loan account with a negative balance which is what you owe them. These cancel out, which causes their books to balance even though it is simultaneously the case that the amount of cash in their vault hasn't changed and the amount of money in your bank account has. This is why increased lending causes price inflation.

Second, it causes there to be more money in the hands of borrowers. This is where you get economic growth; people have more money to spend.

And third, it causes the borrower to owe the lender interest.

Notice that the first two are the only ones that are actually good for anything. Even the inflation is generally a cost, but in moderate amounts it's beneficial because it counteracts the natural deflationary tendencies of a growing economy. All you really want is for people to have money to spend.

But you don't actually need any lenders for that. If all you want is to create new money and give it to people, the government can create money by fiat and just hand it out to all citizens, or pay for government with it in lieu of taxing people. It's the same thing, there is just no interest.

> You're assuming the alternative to lending at interest is nothing rather than something.

No, I'm arguing with what you proposed, which is this:

> > People would still lend money to their friends and family. Stores would extend credit to customers because they want to make sales.

which is not in anyway a meaningful alternative to the actual credit market.

> Notice that the first two are the only ones that are actually good for anything.

Except that the first two only exist because of the third.

> But you don't actually need any lenders for that. If all you want is to create new money and give it to people, the government can create money by fiat and just hand it out to all citizens, or pay for government with it in lieu of taxing people. It's the same thing, there is just no interest.

It's the same thing, there is just no incentive whatsoever for the behavior to happen, so it reality it's not at all the same thing. This would cause massive devaluation of currency.

> It's the same thing, there is just no incentive whatsoever for the behavior to happen, so it reality it's not at all the same thing.

What do you mean? The government creates money all the time. They love it -- they get to spend money without raising taxes. The only downside at all is that in the extreme it causes too much inflation.

If we made it harder for banks to make loans but then created correspondingly more money and used it to lower taxes on people so they would have more money and not need to borrow as much, what economic difference do you see other than interest not being paid to banks?

It may be easier to imagine if you think of the government as a bank that makes interest-only loans at 0% interest.

> This would cause massive devaluation of currency.

Bank lending already does that. Look at housing and education prices (where the inflationary effect of lending is strongest), or even the general value of the dollar over time. The dollar has lost more than 90% of its value since 1950 and far more of the increase in the money supply has been due to banks than the government.

$1 in new loans and $1 in government-created money cause the same amount of inflation. If you replaced one with the other the only difference would be that no interest would be paid to the bank.

> The government creates money all the time.

The vast majority of new money is not created by the government, and that fact seems to be missing from your argument. If we no longer had credit we would be shrinking the available money supply by about 90%. This would be completely catastrophic for not only the US but the entire global economy.

Maybe you could be more specific about what you're proposing because I feel like I am not really understanding it.

> Maybe you could be more specific about what you're proposing because I feel like I am not really understanding it.

Cause less money to be created by banks and more by the government, and have correspondingly lower taxes (or even negative taxes) on middle income people.

>But you don't actually need any lenders for that. If all you want is to create new money and give it to people, the government can create money by fiat and just hand it out to all citizens, or pay for government with it in lieu of taxing people. It's the same thing, there is just no interest.

Oh boy. You might want to take an economics class there bud, what you're talking about would just create the same situation Zimbabwe is in. More fiat without anything backing it leads to inflation.

>No, because it means much less economic growth

And why would "more economic growth" be a good thing?

I don't want endlessly slaving to make the pie bigger (while ignoring second order effects, from quality of life, to environmental issues, to debt etc).

How about we learn to enjoy a moderate rate of economic growth, or even a steady economy, and focus on improving other aspects of life besides bank accounts?

>But too little lending is really bad for everyone too, and there are pretty fair reasons to think it might impact the lower class the most.

Under the current model though. Whereas e.g. better distribution of wealth might help them more than more lending.

> And why would "more economic growth" be a good thing?

Because billions of people still live in poverty worldwide.

> I don't want endlessly slaving to make the pie bigger (while ignoring second order effects, from quality of life, to environmental issues, to debt etc).

No one does. Economic growth, although not by itself, helps alleviate a lot of these issues. There are other factors that also impact this, and I'd argue a lot of the economic issues we face aren't from too much growth but from these other factors (taxation etc.) not being handled properly. So in general more growth is advantageous, but we have to other things going right as well.

> How about we learn to enjoy a moderate rate of economic growth, or even a steady economy, and focus on improving other aspects of life besides bank accounts?

Well a lot of people disagree about what things like quality of life and adequate environmental care are. One of the beauties of capitalism is that it allows people with wide disagreements about what's important in life to coexist and even benefit each other.

Edit: sorry I didn't see this before:

> Under the current model though. Whereas e.g. better distribution of wealth might help them more than more lending.

Maybe, but if that better distribution of wealth comes at the cost of shrinking the overall system (which there is a real reason to think would happen: this is why people and corporations bank outside of the US frequently already) then I think it's hard to conclusively argue either way.

Again this is not to say I don't see problems with our current economy, I just think "it's growing too much" is not one of them.

But the causes of poverty are not an insufficiency of economic growth, it's the distribution of the fruits of economic growth. In many places the wealth and/or political power (which are to some extent proxies for each other) are hoarded by a small number of people who have no interest in distributing them.

In their view it's better to be a big fish in a small pond than a small fish in a larger pond. Of course this isn't a foolproof strategy (dictators and kings sometimes come to ignominious ends) but holding onto as much wealth and power as possible while keeping the majority of people disenfranchised is a much safer strategy than spreading the benefits as widely as possible and hoping that everyone will love you enough to assure your future security.

Well a lot of people disagree about what things like quality of life and adequate environmental care are. One of the beauties of capitalism is that it allows people with wide disagreements about what's important in life to coexist and even benefit each other.

Yes, but it doesn't assure that, and that's where it gets ugly. If too much of capital is controlled by someone who doesn't care about the environment and is fine with cutting corners or actively polluting, then the less well-off people suffer and die, sometimes horribly. If that problem gets bad enough, then everyone could suffer as the whole environment is wrecked - like the population of a country whose leader foolishly enters a war and gets bombed, or a world where reckless fossil fuel production/use continues past the point of long-term sustainability.

You'll recall that Keynes said 'in the long run, we are all dead.' Capitalism would be great if everyone lived long enough to have their day at the top of the pile, just as it is enjoyable to play Monopoly as a board game because while you might lose one game today you might have the pleasure of winning tomorrow. But people are not economic abstractions; if you're poor and you can't compete effectively in a capitalistic economy then there's a good chance that your life will be terrible, and then you'll die.

I mostly agree with all of this and felt like it was covered by:

> Economic growth, although not by itself, helps alleviate a lot of these issues. There are other factors that also impact this, and I'd argue a lot of the economic issues we face aren't from too much growth but from these other factors (taxation etc.) not being handled properly. So in general more growth is advantageous, but we have to other things going right as well.

Agreed, I just don't feel that an insufficiency of economic activity is the issue right now, as compared to a few years back when it appeared the world might fall into a deflationary spiral or seize up in a liquidity crisis.

>Because billions of people still live in poverty worldwide.

That depends on available resources and distribution -- not economic growth.

Besides, what's really bad about poverty is not access to lack of access to West-level consumption but lack of basics -- from health care to housing.

I agree with that. Economic growth can help these issues, but it's not the only, or even the biggest, factor. As I mentioned...