Granted, inventment banks like Bear Stearns, Lehman Brothers, and AIG make unwise investments or corporate loans, sometimes leveraging their capital 30-40:1 which drives up the market needlessly. What we shouldn’t do in this situation is to create more central bank money to socialize the losses, especially when the central bank money created is actually borrowed money, secured only by the power of our military. It makes me sad that some day those loans will come due.

That’s a fair assessment. I had no idea rent was so expensive up there. Also, I feel I owe you an apology; my intent was not to say that you feel entitled, but looking back on it, I think it reads that way.

In any case, I still am convinced that fractional reserve lending is a problem for the overall economy, even if you accept lending as necessary. Low inflation is better for everyone except the banks, and in the end it turns out to be bad for them, too, as we’re seeing now.

I’m not sure how to handle the issue of interest on loans being condemned in the OT, but I’ll leave that for another day. I have a vehicle loan (albeit at 1.9% which is less than my savings dividends rate, and I keep enough saved to pay it off if I ever need to), so I’m not falling in line with that either.

I completely agree that Americans feel a sense of entitlement, but I don’t think I feel too much of one, so here is a little more information about the scenario on the ground to make this a fair example.

I currently live with my wife in the suburbs. A commuter rail train passes within a mile of my house which I take to work, (about an hour) but we are two suburbs passed the end of the subway lines, definitely in the suburbs. We aren’t in a bad neighborhood, but rather a Searcy like neighborhood. (Not in the country club)

I have rent an average 2 br apartment at $1200. The apartment we rent would cost $200K as a condo. We looked at a 2br, 2ba apt but it cost $1400/mo so we opted for the single bath. I could go cheaper with a 1 br. Moving farther out of the city would mean buying a car and paying for gas (my work pays for train pass or parking). $800 only gets you into a studio here which Crystal I didn’t feel was practical as we want to have enough space to invite people into our home as well as have parking spots for company which studios don’t tend to have. That studio apartment would cost $100-$150,000 as condo depending on whether it had air-conditioning and laundry hookups in the apartment. A very “normal” 3br single family house runs 400,000-600,000 in my town.

One more thing to add is that I don’t think I would ever do a 30yr mortgage. I think they rip-offs, so let’s make it 20.

Buying
House +200000
Interest +126806.89 P&I – +1361/mo
6 yrs of PMI = +11160 – +155/mo
20 yrs of insurance @ 1050/yr = +21000 — +87.50/mo
Property taxes = 3000 x 20 = +60000 – +250/mo
Income Tax breaks = -34237 – -142/mo prorated over 20 yrs
14 yrs savings once PMI is finished = -26040

So I’m paying 1711.5/mo
So in effect $479243 buys me a condo for 20yrs and 26040 cash.

Renting
288,000
511.50
Renting and saving 511.50 per month buys me 122760 in cash

I would never advocate borrowing money on something that “normally” depreciates in value. I feel borrowing is OK when you reasonably certain you can pay the money back and borrowing now is likely to better your financial standing vs. not borrowing such as I believe buying a house on 20 year mortgage could or in the case of getting a business off the ground.

Great to see you on here! This is your first time commenting on the blog, yes?

In reference to the pendulum, you’re absolutely right. Greed is running its course. However, I disagree that this is the fault of free market economics. We have not operated under a free market since 1913. The Fed is given a monopoly both to create money and to manipulate interest rates at their discretion. Money creation should be a government function, not left to private bankers. Interest rates would then be left to the market to decide. As it is, we purchase Federal Reserve notes (also called ‘dollars’ now) and pay private bankers interest for our own currency. Insanity to be sure, but far from a free market.

House prices are too high right now. If we left it to the free market, prices would fall, houses would still not be going up with no one to buy them, and you would not need a 30 year mortgage. I worked in mortgages and ran amortization tables for customers all the time when I worked for the bank.

Let’s do a real world example. I’m going to use the credit union where I worked since we have competitive rates. Let’s say you have a home that costs $200K and you buy it right now, at 5.375%, which is what NFCU is offering as the lowest right now. Over 30 years, you pay a total of $403,178.40. So the bank gets to loan you $200K, which they didn’t have prior to you requesting it, and they earn more than that amount in interest. You pay $400K for a $200K house. Also, you pay property taxes every year, even though the bank technically ‘owns’ your property, having paid for it with money they simply conjured into your account. Also, you pay homeowner’s insurance because the bank requires it to protect their collateral. Also, you’re going to pay PMI (this insurance protects the bank, in case you default) probably until you get your LTV down to 80%. If I’m reading this right, I’m estimating your property taxes would be in the ballpark of $3200/year on a $200K home in MA. To keep a conservative estimate, I’m going to say that amount never goes up for inflation. So $3200×30=$96,000. Now our total is up to $499,178.40. Let’s talk homeowners insurance. According to this, the average in 2007 for homeowner’s insurance was 1050/year. This almost never decreases and typically increases yearly. Just to keep with the conservative estimate, let’s keep it at $1050 at 30 years. $1050×30=$31,500. Total cost so far: $530,678.40. I’m not going to try and calculate PMI because it varies depending on the lender. So we’ll just say your cost is at minimum, $530,678.40 for 30 years. This also doesn’t include closing costs and fees banks charge when you go through the mortgage process; it doesn’t include the fact that few people keep the first house they mortgage on and few go without taking out a home equity loan once they’ve paid off some of the debt.

Now let’s look at renting. You don’t pay property tax, homeowner’s insurance, or PMI. $1600x12x30= $576,000 by itself. That is a lot of money to pay over the years and not even own anything at the end of it, and it’s $46K more expensive than going the mortgage route. Of course, with the mortgage, you actually own the house when you’re done. Sounds like a pretty good deal in comparison.

The thing the banks don’t tell you is that these are not your only options. We have grown accustomed to a standard of living that says we have to rent a nice house and live in a nice neighborhood. If we don’t do these things, we feel like we just won’t survive, because that’s the message our culture sends us. I live in a 2 bedroom, 2 bathroom apartment and the rent is $425/mo. Of course, Searcy is a far cry from the Boston area in terms of price, so let’s go with $800/mo instead. That would drop the cost to $288K over 30 years and leave you $288K at the end with which to purchase a house. Actually 288K is a low figure, since you could put the money in CDs and earn sizable interest during that time. If you put way $800/mo for 30 years at a 4% interest rate, you’d have just over $555K. That keeps you from putting the money into investments, where it would be vulnerable, and assumes a low CD rate. You could probably find a house you liked for $555K. Even if you just started with a lower rent apartment and then saved up the extra money for a down payment to get a mortgage when you had a family and needed the extra space, you could eliminate a huge chunk of the interest you’d be paying right at the start. It makes sense to live low rent as long as you can if you are able to save up during that time.

Now, you mentioned inflation and that’s a big problem, no doubt. One of the reasons fractional reserve lending is so bad is that it literally is the cause of inflation. It is inflation. They create money from nothing, and because of the rules, the loan amount is multiplied close to 100x in terms of extra money in the system. Even if we say that we have to retain lending with interest, at the very least we must abolish fractional reserve lending. It makes no sense, it is the cause of inflation, and it only benefits the bankers. If you are unsure what I mean when I say that they create money from nothing or that the money is multiplied up to 100x, please check out the links to my older blogs in the original post, or watch the Money as Debt link.

All that having been said, your advice at the end is the best, no matter which system of lending we find ourselves in. I accept that lending is unlikely to be abolished completely, and that lending at interest is unlikely to be outlawed. The very least we must do, though, is to get rid of fractional reserve lending. It has no other option but to fail. As you mentioned, adding inflation will only stave off collapse for a short time, and then we will feel it. The level of inflation needed to stave off this collapse increases exponentially every year. We are soon approaching the point where we could not possibly borrow enough (with hopes of paying even one monthly payment) fast enough to inflate to our needs. We need to revamp the system.

2.) I beg of you the question. Is it smarter for you rent for 30 yrs paying $1200 (my current rent) and walk away with nothing or to buy a house for $200,000 with mortgage payment of $1200 and walk away with $200,000.

If you are to answer that you should save the extra money above your $1200 until you have enough to buy a house, its impossible. Because even if I save $400 month in addition to my $1200 rent payment, it will take me 41yrs to accumulate $200,000 assuming I can’t loan it to anyone for a profit. The house would cost $1 million dollars by that point and all I would have was a good down payment. Houses tend to fairly steady holders of value over the long term (there are market ups and downs)

The end result of that is because I couldn’t ever afford to buy a home, the rich person who I rent from only gets richer and I only get poorer. But if I was to borrow the $200,000 and pay it back over 15-30 yrs responsibly, its a win for the lender because they make money off of me and its a win for me because I have valuable asset, something I needed to have/have access to anyway.

The answer is that you have to be wise about it. Don’t borrow money unless you absolutely have to or its smart to do so. Try to borrow it not at interest. Don’t lend money to someone for something that they shouldn’t be borrowing for or under unfair terms. Give and lend to people who are without means out of the goodness of your heart at times. and teach others to do the same.

And read No Debt, No Sweat by Steve Diggs, a practical guide living a debt free life.

I’m convinced lending at interest is immoral. If that is the case though, I’ve got to find some way to disengage from that system. If I’m being totally consistent, I can’t invest in the stock market or even hold an interest-bearing bank account.

As I said, the most likely scenario that people would accept is lending with interest, but only on money that actually exists. That’s the only way that doesn’t inevitably lead to failure. When you create money from debt, there is no other possible end than this. Perhaps we need a large scale depression for people to see the light.

Lending without usury? It’s a bold proposition. I have mixed feelings. On the one hand, if God says it can it be bad? On the other hand, if there is no interest (#1) what is the upside for rich people to stake their money & loan it someone, and (#2) does the borrower have as much incentive to pay it back? If we all lived under the purview of Kingdom of God, LLC, I agree it woudl be the way to go. But in FME, I can’t see how this would work.

I just don’t think a world without debt is very practical.