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Comment by chimi | Hacker News Reader

Throughout history, every time loans are invented to pay for something, the price skyrockets. House, Cars, Education... except credit cards. What credit cards did is flatten the salary curve, filling the gap between where salaries should be if they increased as much or more than inflation and the cost of living, with debt.

Debt is a powerful tool when used correctly, but most people are unskilled in tool use, financial equations and themselves thus, debt is a Market for Lemons.

Consumers do not know what they are buying. They are buying cash and paying for it with future income.

People are generally more optimistic about their futures and irrationally excited about what they consume.

The banks have been allowed to sell cash with impunity. We have to stop that. We're just cooking the books as an entire society.

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"People are generally more optimistic about their futures and irrationally excited about what they consume."

I don't think that's quite it. People get comfort from following a plan. Go to college, take a bunch of loans, and it will all work out.

They think if it doesn't, someone will bail them out because they followed the plan. Everyone else is in the same boat anyway, and maybe one of them will find a solution, or they can band together and demand something from someone else.

That doesn't line up with reality though. A lot of people do get left behind. The people with the "plan" are nowhere to be found, and were just repeating what worked for them without looking at the new numbers.

> Debt is a powerful tool when used correctly,

Could you expand on that? It's a very interesting perspective

Companies (and people) take on debt to invest in themselves, knowing the growth can (hopefully) pay off the debt and generate more income in the long run. Here's a fun list of companies with debt: https://wolfstreet.com/2019/07/26/the-most-indebted-companie...

In the case of students, the idea is to take some debt now and pay it off with increased earnings. The problem is, those increased earnings aren't guaranteed and students are way worse at determining the return on their debt than companies with dedicated teams.

Thank you FrozenTuna for your input but I was specifically thinking of physical people, as opposed to companies.

I also meant a more specific application rather than a general iteration on the (perfectly valid) idea that if one can make more money with a value now, rather than later, and this opportunity cost is larger than the interest rate minus inflation, then the deal is good.

Student loans would be a good example of that in a well-functioning market. Are there many others?

Companies are people, legally speaking, but I see your point. See ours: Imagine yourself as a company and the same debt equation applies.

Companies, like you, need tools to produce goods and maintain their operations. You, if you're a programmer, need a computer. You don't have $1000 to buy one, but you have a credit card. You know, you can bill your hours out at say, $100/hr writing code. You need to write code for 10 hours to pay for the machine, but you don't have $1000 to buy the machine.

So you put $1000 on a credit card at 20% interest, buy the computer and then bill 100 hours on it @ $100 / hr = $10,000 in just one month.

You incurred a little bit of debt, bought something worth a lot, but worth a lot more to you because you can leverage that tool to make more money than it cost to buy the tool.

Think of debt as leverage. It's a little bit of money pressing down on a lever to lift more money into your pocket.

If you only use that leverage to buy assets that help you make money (fairly easy) or increase in value at a rate greater than the interest rate (difficult, risky, speculative), then your net worth will continue to grow.

That college degree in a practical field like engineering is an asset because you will leverage it to earn more money over your lifetime than you would without that degree. Compare this to a degree in the proverbial "basket weaving." You, in your lifetime, will never weave $400,000 worth of baskets you'd need to pay for that University of Chicago degree. That degree is a liability that will follow you, perhaps your entire life and might make your life worse than it would be had you never gotten it at all. You'll resent that degree so much you refuse to work because every penny goes to some bank that sold you a worthless piece of paper for $400,000.

Companies aren't people, legally speaking. This is a bizarre myth that just gets repeated as a sort of mindless anti-corporate shibboleth.

Companies are legal entities which can sign contracts, hold debt, open bank accounts, etc.

So are government agencies, unions, churches, mosques, guilds, charities. Does that means these are all people, legally speaking? For some reason nobody says 'the IRS is a person, legally speaking'.

Companies cannot marry, vote, file taxes as a human, get a passport or driver's license etc, because they are not human, legally speaking. They're just legal entities, as people also are, but of different types.

Don't get confused about the words used in the legal world around 'natural persons' etc; legal usages of words don't carry their common meaning and there are lots of examples of this you know.

> Companies aren't people, legally speaking.

Yes, they are.

> So are government agencies, unions, churches, mosques, guilds, charities. Does that means these are all people, legally speaking?

Yes, all those things have legal personhood.

> Companies cannot marry, vote, file taxes as a human, get a passport or driver's license etc, because they are not human, legally speaking

Being human, legally speaking, is different than being a person, legally speaking.

> Don't get confused about the words used in the legal world around 'natural persons' etc; legal usages of words don't carry their common meaning and there are lots of examples of this you know.

But since you are literally discussing what things are legally, your plea to ignore legal usages is...bizarre.

Yes, sometimes companies are 'legal persons' when discussed in a legal context as I mentioned.

We are not in a legal context, so to use such language in a normal context without elaboration will obviously mislead most listeners. It is a false statement since it leads the listener to false conclusions.

>Being human, legally speaking, is different than being a person, legally speaking.

It is incumbent to explain this to normal listeners, otherwise you're misleading them.

Mortgages are, typically, a functional debt market which is good for all parties involved. Well qualified buyers generally lack the capital needed to purchase a home outright. However, a bank can come in and provide long term financing at reasonable rates.

The buyer is pleased, because despite the interest payments, over time the buyer is building equity in a fairly stable or appreciating asset. This is a great example of "worthwhile" debt, and the private market for mortgages is thriving.

Of course, when guardrails are thrown out and mortgages are handed out haphazardly, things can get a bit messy, as we know.

I've been doubting a mortgage is worthwhile debt for society for a while now. For the individual, it's not worthwhile, it's just pretty much the only way you can get a house anymore -- unless you are very adventurous. Even the amortization schedule is weighted to benefit the banks.

The reality is if you get a typical 30-year mortgage, your house costs you 3x the list price you thought you were buying it for.

>In 1940, the median home value in the U.S. was just $2,938. In 1980, it was $47,200, and by 2000, it had risen to $119,600. Even adjusted for inflation, the median home price in 1940 would only have been $30,600 in 2000 dollars, according to data from the U.S. Census.

https://www.cnbc.com/2017/06/23/how-much-housing-prices-have...

Why 1940? Because Fannie Mae was created in 1938 after a housing crisis in the 1930's. https://en.wikipedia.org/wiki/Fannie_Mae

The majority of a person's labor throughout their life is now given to banks. It doesn't take 30% of your productivity for 30 years to build a house. It doesn't take 10 years for a person to build a house. You can build a 1,000 sqft house in a year with $50,000 worth of materials (even less) and a piece of land.

Where has the rest of the typical $200/sqft home cost gone? To the banks! That's $150,000 cash, and $450,000 total outlay of capital, if you buy that cash with a mortgage.

I propose, the loans themselves are the reason we now dedicate a decade of our life to our shelter. I do not believe this is a good thing. I do not believe this is worthwhile.

You will save money and have a better, more free life -- debt free life, if you save up enough money to buy land, plus $50,000 of materials and build your house yourself.

Loans enable every single level of the housing industry vertical to extract more money from you. Architects costs more. Utility services cost more. Building codes get more onerous. Builders charge more. Insurance companies charge more (since the houses cost more). Taxable values go up, costing you more. All of these increased costs are enabled and exacerbated by mortgage "innovation."

Everyone wants this except the first time buyer, but the first time buyer takes all the risk with a new purchase.

It is completely unbalanced. The younger generation is suffering the most and I think it's unfair and detrimental to the future of society.

> Even the amortization schedule is weighted to benefit the banks.

Can you explain this or say what the alternative amortization schedule might be? In a normal mortgage, the initial payments are more interest because you're paying interest on more principal.

You got it already! Imagine if most of that first payment went to the buyer's equity instead of interest.

Then the first payment would have to be much larger, because the amount going to interest is determined solely by the interest rate and principal.

You're always free to make additional equity payments. Modern mortgages don't have prepayment penalties.

What debt does is allow money that won't be available until some time in the future to be used for present purchases. It's a bit like the idea of a chemical catalyst, in that the effort required to trigger a transaction is lowered, though this is a catalyst that requires being paid back.

For the general public, instances of use include:

- Small but seasonal businesses. Farming is the classic case, but any sector in which receipts are seasonal (though relatively predictable) apply: hostelry, tourism, landscaping businesses, construction, etc.

- Small nonseasonal business. Writing or other contract work in which production and income can be disconnected by months, sometimes years. The risk is higher here, but can still be bridged.

- Large-ticket purchases. Automobiles, appliances, and electronics are typical. Numerous present credit banks got their start as the lending arms of large manufacturers, who could rely on a constant stream of incoming payments to advance loans to new customers, increasing net sales. GMAC (General Motors Acceptance Corporation, now Ally Financial, is the classic case).

- Revolving credit lines. These generally started as credit accounts specific to a given store, often a department store. They eventually became much of the current credit card industry, by way of Bank of America. Here again, the general principle is to advance credit, easing purchases.

Credit can be (and very often is) misused. But having a flexible payment mechanism on demand without requiring layaway or specific authorisation, and serving as a general check on other factors (credit cards have effectively been a social credit scoring system for decades) benefits ... at least some.

Interestingly, much of the actual financial risk gets pushed off onto merchants. Though costs of managing credit do land on the individual.

And no, I'm not much of a fan of the system. It exists, and has its uses, however.

The boom and bust cycle is a feature not a bug. Here's money, go make stuff. You think it's yours, but we'll eventually take it all back in the bust. The money we lost we created out of thin air.

>They are buying cash and paying for it with future income.

Yes, that's what interest is, and it often makes sense.

There's a lot of value of having something (that you buy with money) available to you now rather than in a couple of years - especially if the means to make money depends that item (be it a car, education, a tractor, a musical instrument, set of tools, or what not).

Also, there was a lot of value for me to travel when I was a grad student and had a much more flexible schedule - and, frankly, was younger. I wish I took out loans for that, paying them off now that I'm working full time would not be a burden.

But while you rob your future self by taking a loan, you can't donate anything to your former self no matter how much you have.

TL;DR: there's value for people in having the right things at the right time.

> Throughout history, every time loans are invented to pay for something, the price skyrockets.

Which is why interest-bearing loans are prohibited in the three major religions. Puts things into perspective.

Which major religion other than Islam forbids it?

It's been some time since my Bible studies but isn't there something in the Old Testament against loans / lending money with interest?

No. It says the borrower is a slave to the lender and to be aware. But it is not against the Church.

Leviticus 25:36-37 says otherwise.

According to the following, it's prohibited:

[1] https://bible.oremus.org/?passage=Leviticus+25:36%E2%80%9325...

[2] https://bible.oremus.org/?passage=Exodus+22:25

Usury was prohibited in Christianity until not that long ago.

"At the time, usury was interest of any kind, and the canon forbade the clergy to lend money at interest rates even as low as 1 percent per year. Later ecumenical councils applied this regulation to the laity." - https://www.jstor.org/stable/3161033?seq=1#page_scan_tab_con...

I read somewhere that this is behind the awful stereotypes in the merchant of venice. Because of the historical prohibitions within the religion, loans were taken out with lenders from outside the religion.

Judaism and Christianity. Although many of their followers strayed from the original teachings.

Having just read ‘Debt: The First 5000 years’ I don’t think the author contends that price skyrocketing was the reason interest-bearing debt was banned, but I could be wrong.

Do you have a source?

It's a natural consequence of such. The main reason is that it is a predatory practice that feeds off of other people in need.

> It's a natural...

It is though? Again, do you have a source?

> The main reason is that it is a predatory practice that feeds off of other people in need.

Before it was said that the reason was skyrocketing prices?

> Before it was said that the reason was skyrocketing prices?

There are several reasons, which may be tightly correlated. You can't deny that interest bearing loans are predatory due to the fact that they feed off the needs of others, some of which are beyond their control. Secondly, because now interest bearing loans are a means of making income (particularly for those with a lot of money), we end up with the cycle where loans are advertised to people, such that people who don't need them are heavily incentivized to get them (e.g. mortgages, credit cards, etc.). We end up in the cycle we see today.

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