[GJM] James Robertson.....Multiple Personality Disorder?

[Peter Hogwood]

Rodney, I've inserted some replies [Reply]:

Peter Hogwood
---------------------------------------------

Dear Peter,
 
Thankyou for informing us about Zack Johnson (your
partner in Monroe, Louisiana), your good self, and
past happy times at the Houston, Texas, Rice
University Economic Studies Club with Bill Ryan as
stimulating faculty adviser.
 
1.  Definition of interest.

You define interest as "anything beyond principal that
is paid by the borrower to the lender no matter how
calculated" and you say that interest has three
elements -- administration cost, default insurance
premium and lender's profit.
 
I wish to dispute the lender's profit because
a) administration cost contains an element of profit 
---------------------------------------------

[Reply]:  Not as defined as being salaries, wages and
ordinary business expenses charged against gross
income.  The net after expenses is profit.
-

b) when the bank creates the money it is making a huge
profit on something which is ultimately society's
property (and not a private bank's).  
---------------------------------------------

[Reply]:  Why do you think the profit is huge.  What
they are lending are liabilities to themselves, not
the public.
-

Society's right to a proper use of the money supply
has been usurped. 
This might not matter if the banks allocate the money
efficiently for the purposes of a genuine free market,
but they do not --  at present, as events are proving,
the improper allocations are bringing disaster to the
global economy. 
c) the profit is highway robbery.  I gave examples of 
i) the Nigerian loan which resulted in a repayment of
eight times the original principal;
---------------------------------------------

[Reply]:  Please explain the dates and circumstances
of this particular Nigerian loan.
-

 and ii) a home loan of, say, repayment of $300,00O on
a principal of $100,000.
---------------------------------------------

[Reply]:  This is the same assertion that Steve Nieman
made.  That would be $200,000 over thirty years, which
is effectively less than $200,000 in terms of original
principal dollars when inflation is factored in,
because the borrower is continually amortizing his
loan with ever more cheaper dollars.  Moreover, that
would only be at a relatively high rate of interest on
the initial loan.
 
2.  Distortion of free market mechanisms
 
Profit is contained within the administration cost 
---------------------------------------------

[Reply]:  Again, profit is not contained within the
administration cost but is a separate component of
interest, along with the default premium.
-

and interest is in fact a large tax which has the
consequence of greatly diminishing the consuming power
of the borrower (think of the extra $200,000 on the
home loan) AND of diminishing  the borrower's ability
to repay.
 
Furthermore, the addition of an outrageous element of
interest has the hugely undesirable consequence that
the 'free market' economy always requires TWO lots of
financing (one for production and one for consumption)
with the result that there is continual inflation.
 
Kindly say exactly why there should not be a money
supply originating with the national bank but
administered by the banking system (charging
administration cost and default premium) on market
principles.
---------------------------------------------

[Reply]:  Why do you think that would be cheaper than
today's system, particularly when the default premium
is factored in?
-

In particular, please say why there is any
"bureaucratic fiat" in such a supply 
---------------------------------------------

[Reply]:  The bureaucratic fiat comes in if the
consumers of financial services don't pay the full
costs of supplying financial services, i.e. zero
interest loans.
-

since the bank would be responsible for ensuring that
the allocations are made on market principles
---------------------------------------------

[Reply]:  The allocations are not on market principles
if the consumers of financial services are not paying
the full costs of those financial services.
- 

(which include the development and spreading of
productive (and the associated consuming) capacity for
the purposes of implementing Say's Theorem).  The
criteria for the lending should be i) can it pay for
itself; and ii) does it further the development and
spreading of productive capacity.
---------------------------------------------

[Reply]:  But in a market economy this is
entrepreneurial risk.  You want to strip the
competitive entrepreneur from the equation, and
substitute for him a board of bureaucrats who will
make that determination before the money is lent. 
This was the Soviet method. Or don't you remember?
- 

That is not an interference with market mechanisms but
rather an implementation of them.  You are under the
illusion that the present allocations really do serve
the purposes of a genuine free market.  They do not --
and the global crisis is proving that in a big way
 
3.  Fifty false assumptions of your economics or
neoclassical economics
 
Kindly view the fifty false assumptions as assumptions
of the economics which you espouse or, if you like,
those of mainstream neoclassical economics.  I do not
mind which.
---------------------------------------------

[Reply]:  They are neither the economics that I
espouse or correct interpretations of neoclassic
economics, for that matter.
-
 
But, instead of indulging yourself in a generalised
allegation of flawed understanding, kindly say
specifically which ones are wrong and why (if you
can).
---------------------------------------------

[Reply]:  I'm not going down the entire list, but for
the moment I'll concentrate on just one:

"It is a matter of small importance that the banking
system creates money out of nothing sufficient for the
repayment of the principal of a loan but not of the
interest."

It is simply not true that the banking system creates
money out of nothing sufficient for the repayment of
the principal of a loan but not of the interest. 
Fractional reserve banking disburses loans PLUS
salaries, wages, dividends and ordinary business
expenses to the more general community sufficient to
pay principal PLUS interest back to the banks.  It's a
question of simple mathematics and monetary flows. 
The market economy is a cooperative commonwealth in
reciprocal trade.
-


Thankyou.
 
Rodney Shakespeare.
 
 
PS  With reference to your previous email. I have not
proposed a default premium insurance for homes.  It is
not necessary if there are no 125% loans but, say, 80%
ones; proper valuations and declarations of income;
and no inflationary money supply.  In those
circumstances, sufficient collateral is the home
itself. 


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