No one in this country is forced to take out any loans. If a person feels a loan offered to him is not a good deal, he should not accept the loan. It's as simple as that.
It is always an option to save up money and purchase the object with cash. The other option is buying it now buy paying a greater price. Effectively, this approach "buys" the cash used to purchase, and the cost of buying the cash is the interest.
If your argument were correct, and loans did not add value to society, people would not take loans. The fact that so many people take out loans disproves your hypothesis -- actually, loans add value.
Last but not least, banks are companies just like any other. If a person feels that today's banks are offering too high of interest rates, that person should be encouraged to start his own bank and offer lower ones. If he is correct, he will take business from the competing banks by undercutting their price.
Our economy is a market. Goods and services are priced according to their value. If you, an individual believe the price is higher than the value, don't purchase the good or service. You should think of loans the same way. When offered a loan, decide if the benefit (having cash now when you otherwise shouldn't) is worth the cost (the interest).
You might decide that having a car now is worth it because it saves you 2 hours per day on your commute compared to the bus. You might decide that this increase in time is worth the price of the car -- and that having this car now rather than in 5 years is worth the price of the interest. If you decide that, it makes perfect sense to take out a loan.
Lending money does create value in society directly and indirectly. It creates value directly the same way that any service does -- a person pays a price to use the service -- and the service is getting cash immediately that one could not otherwise get. What you are trading is expected future income for current liquidity. This has value and risk: risk because future income is not definite, and value because there is an opportunity cost to that money.
Rather than provide you solely with academic and abstract examples, let me provide you with a very concrete one:
Imagine a farmer who earns $100,000 per year tilling his fields by hand. He might know that he could produce $500,000 per year, if only he had an expensive piece of farm machinery. That machine costs $1,000,000, so he might have to save for the next many years in order to purchase it with cash.
In the world you propose, this farmer has no option but to save for years -- even though he could be earning 5x as much right now! Indeed, the economy is best off if a bank can give this farmer a loan for $1,000,000 to buy the farm machinery now. Having the farm machinery, the farmer now earns $500,00 per year; he pays off the loan easily and society is better off because he can produce more food.
This is the underlying concept of loans. In this example, without a loan, the farmer can only produce $100,000 of value. With the loan, he can create $500,000 of value per year. By introducing loans into the economy, this farmer and every other business can immediately produce more value using machines it could not have bought. The whole society is wealthier because this farmer is producing $400,000 more of food. The farmer is better off because his income has gone up 5x.
This is how it works with loans all throughout society. It's harder to see that with housing because the benefits are closer to intangible. Nevertheless, having a house is very important to people, and it would be difficult for them to be productive and happy without them.
Up in your essay you whine that you have to pay rent to a landlord, and "the system" is broken. The system is not broken at all -- it's working just as it should. No one is forcing you to lease an apartment. You could live on the street. But you've decided that the benefit of living in an apartment is worth the price of the lease -- that was your decision to make, and you made it. It's unreasonable for you now to complain that it's somehow unfair.
You certainly are not owed housing buy society; it's your job to provide yourself that from your income. If all landlords went away and stopped offering leases, would you be better off? Would you have purchased your own house and be living in it?
If all banks went away and stopped offering mortgages, would the people you know have saved up cash to buy their homes instead? Would they really be better off?
The alternative to loans is saving up cash to buy products outright. Ask yourself if you would really be better off in a world with no loans. How would you have a car, a house, or business capital equipment? Are you going to save up your money to buy these things in cash?
No one in this country is forced to take out any loans. If a person feels a loan offered to him is not a good deal, he should not accept the loan. It's as simple as that.
It is always an option to save up money and purchase the object with cash. The other option is buying it now buy paying a greater price. Effectively, this approach "buys" the cash used to purchase, and the cost of buying the cash is the interest.
If your argument were correct, and loans did not add value to society, people would not take loans. The fact that so many people take out loans disproves your hypothesis -- actually, loans add value.
Last but not least, banks are companies just like any other. If a person feels that today's banks are offering too high of interest rates, that person should be encouraged to start his own bank and offer lower ones. If he is correct, he will take business from the competing banks by undercutting their price.
Our economy is a market. Goods and services are priced according to their value. If you, an individual believe the price is higher than the value, don't purchase the good or service. You should think of loans the same way. When offered a loan, decide if the benefit (having cash now when you otherwise shouldn't) is worth the cost (the interest).
You might decide that having a car now is worth it because it saves you 2 hours per day on your commute compared to the bus. You might decide that this increase in time is worth the price of the car -- and that having this car now rather than in 5 years is worth the price of the interest. If you decide that, it makes perfect sense to take out a loan.
Lending money does create value in society directly and indirectly. It creates value directly the same way that any service does -- a person pays a price to use the service -- and the service is getting cash immediately that one could not otherwise get. What you are trading is expected future income for current liquidity. This has value and risk: risk because future income is not definite, and value because there is an opportunity cost to that money.
Rather than provide you solely with academic and abstract examples, let me provide you with a very concrete one:
Imagine a farmer who earns $100,000 per year tilling his fields by hand. He might know that he could produce $500,000 per year, if only he had an expensive piece of farm machinery. That machine costs $1,000,000, so he might have to save for the next many years in order to purchase it with cash.
In the world you propose, this farmer has no option but to save for years -- even though he could be earning 5x as much right now! Indeed, the economy is best off if a bank can give this farmer a loan for $1,000,000 to buy the farm machinery now. Having the farm machinery, the farmer now earns $500,00 per year; he pays off the loan easily and society is better off because he can produce more food.
This is the underlying concept of loans. In this example, without a loan, the farmer can only produce $100,000 of value. With the loan, he can create $500,000 of value per year. By introducing loans into the economy, this farmer and every other business can immediately produce more value using machines it could not have bought. The whole society is wealthier because this farmer is producing $400,000 more of food. The farmer is better off because his income has gone up 5x.
This is how it works with loans all throughout society. It's harder to see that with housing because the benefits are closer to intangible. Nevertheless, having a house is very important to people, and it would be difficult for them to be productive and happy without them.
Up in your essay you whine that you have to pay rent to a landlord, and "the system" is broken. The system is not broken at all -- it's working just as it should. No one is forcing you to lease an apartment. You could live on the street. But you've decided that the benefit of living in an apartment is worth the price of the lease -- that was your decision to make, and you made it. It's unreasonable for you now to complain that it's somehow unfair.
You certainly are not owed housing buy society; it's your job to provide yourself that from your income. If all landlords went away and stopped offering leases, would you be better off? Would you have purchased your own house and be living in it?
If all banks went away and stopped offering mortgages, would the people you know have saved up cash to buy their homes instead? Would they really be better off?
The alternative to loans is saving up cash to buy products outright. Ask yourself if you would really be better off in a world with no loans. How would you have a car, a house, or business capital equipment? Are you going to save up your money to buy these things in cash?
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