* From: "David B. Shemano" Charles Brown writes:
>> What is the logic supporting the idea that interest should be paid for money >> lent ? I believe many or most mortgages have more interest paid than >> principle. In part this is done by payments being allocated to interest >> payments before being allocated to principle payments. How is this >> rationalized by economics ? How is wealth created by the lending of money to >> buy a place to live ? David: You are asking an age-old question. Smart people going back to Aristotle have thought there is something wrong with interest on money lent. The logic of interest ultimately goes back to the principle that human beings would rather consume today then consume tomorrow (i.e. they value the present more highly than the future). If I offered you a dollar now, or offered you a dollar next year, would you think both offers were of equivalent value? If you do, there is not much to say. If you agree they are different, then you can see that if I have a dollar, and you ask me to exchange that dollar for the promise of a dollar next year, it is not an equal exchange. Interest is what balances the transaction. ^^^^^ CB: I guess you are saying you have a "live for today" philosophy. Why are you saying you value a dollar today more than a dollar tommorrow ? What does today's dollar have to do with tommorrow's dollar ? I ask you for a dollar today. I don't say anything about a dollar tommorrow. _You_ for some reason bring up a dollar tommorrow, that I haven't said anything about. Seems you only bring it up so you can get more money out of me. I guess one can't get to tomorrow if one doesn't get through today. So, if I asked you today for a dollar tommorrow, you wouldn't charge me interest to borrow it ? Related to this is the question of whether you should consume what you presently have, or defer present consumption in order to invest in capital, which will enable you to consume more in the future than you would if you consumed now and did not invest in capital. Interest is a price signal that helps to regulate what is presently consumed as opposed to what is invested for future consumption. ^^^^^ CB; This doesn't quite ring true, does it ? ^^^^^^ Regarding the housing market, if there was no lending, it would be by definition impossible for anybody ever to buy a house unless they had current resources in excess of the price of the house. That would restrict home ownership to very few people and the majority would be required to rent. For most people, home ownership is a very good investment compared to renting. ^^^^^^ CB: And sellers of houses would never sell any houses to anybody but the rich tiny minority. So, the _sellers_ of houses should pay part of the buyers' interest, because they are benefitting from the loan. Otherwise, sellers would never sell any houses except to the rich few. Then there are land contracts. Why not have all transactions be pay as you go ? Sellers of houses benefit enormously from having the buyers get mortgages rather than land contracts. They are relieved of much risk. So, the sellers of houses should be paying much of the interest. Home "ownership" is a bit of a scam under a mortgage. A mortgagor basically a tenant, since they can be evicted if they fail to pay the note.
