debts.....................

 

It's almost impossible to go broke without borrowed money being in the equation.

-Peter Bevelin, Seeking Wisdom: From Darwin to Munger

induced......................

 

     To twenty-first-century policymakers, the interest rate is simply a lever used to control inflation and tweak economic output.  Yet an acquaintance with the Babylonian origins of interest should give pause for thought.  Interest has always been with us because resources have always been scarce and must be rationed somehow, because wealth is unequally distributed between creditors and borrowers, and because, as Böhm-Bawerk says, 'interest is the soul of credit.'  Interest exists because loans are productive, and even when not productive still have value.  It exists because those in possession of capital need to be induced to lend, and because lending is a risky business.  It exists because production takes place over time and human beings are naturally impatient.

-Edward Chancellor, The Price of Time: The Real Story of Interest

About interest..................

 

     "The emergency of interest to incentivize lending is the most significant of all innovations in the history of finance," writes the financial historian William Goetzmann.  This point is well made.  Finance allows people to transact across time.  The farmer borrows barley to sow his fields but must wait until harvest before repaying the debt.  Industrial processes—even the light crafts-based industries of the Ancie4nt Near East—require time in production from raw materials to the sale of finished goods.  A text from third-millennium Mesopotamia shows that the preparation of cloth took over a year.  Foreign trade consumes a lot of time.  When capital is tied up in industry or trade, the interest charge bears some connection to the time used in production.

     In any society with private property, whether in Mesopotamia or later civilizations, the payment of interest is required to induce people to lend their resources.

-Edward Chancellor, The Price of Time: The Real Story of Interest

A really good question....................

 

Solvency is maintained by means of the national debt, on the principle, "If you will not lend me the money, how can I pay you?"

-Ralph Waldo Emerson

A good question................

 Our friend Ben Carlson opines on, Why Higher Interest Rates Haven’t Mattered (Yet).  Included with this post is this handy pie chart:

The proposition is that the overwhelming majority of home borrowers have locked in very low rates and are unaffected by the recent rate increases.

It is hard to disagree with that, but we're pretty sure it doesn't tell the whole story.  Most commercial and investment loans are variable rate mortgages.  Typically, they are fixed for a three- or five-year period, then they adjust to reflect the current market conditions.  We believe that there is a bit of turmoil ahead as those loans adjust over the next year or so.  As an example, we recently had a five-year adjustable-rate mortgage adjust from 3.75% to 8.25%.  Yeow.  Fortunately for us, we were able to pay the loan off.  Not all borrowers we be as fortunate.  Stay tuned.

Making a case for.................

...........................................paying down the mortgage.   While it is an interesting discussion, our tendency has always been to invest in more real estate and take out another mortgage.  Different strokes.........

Building blocks..........................

     It's a thrilling story of invention:  the young wizard of Menlo Park has a flash of inspiration, and within a few years his idea is lighting up the world.  The problem with this story is that people had been inventing incandescent light for eighty years before Edison turned his mind to it.  The lightbulb involves three fundamental elements:  some kind of filament hat glows when an electrical current runs through it, some mechanism to keep the filament from burning out to quickly, and a means of supplying electric power to start the reaction in the first place.  In 1802, the British chemist Humphry Davy had attached a platinum filament to an early electric battery, causing it to burn brightly for a few minutes.  By the 1840's dozens of separate inventors were working on variations of the lightbulb.  The first patent was issued in 1841 to an Englishman named Frederick de Moleyns.  The historian Arthur A. Bright compiled a list of lightbulb's partial inventors, leading up to Edison's ultimate triumph in the late 1870s. [one version of that list may be found on page 38 of this pdf.]

-Steven Johnson, How We Got to Now:  Six Innovations That Made the Modern World

image via

Featherbeds.................................

"People seem to want the government to create a giant featherbed for them, so they don’t have to worry about anything at all."

-Scott Sumner, from this post on the financing of commercial developers and moral hazards

via

On car payments......................

Will the next financial crisis come from a bubble in auto lending? Ehh, I don't know, I think it would be a little too cute to have two U.S. financial crises in a row that are both precipitated by securitized loans to consumers to finance durable-goods purchases. Financial crises usually show more creativity than that. The next crisis will probably be in something weird, like clearinghouse collateral or bond market illiquidity. But "the country’s auto debt hit a record in the fourth quarter of 2016, according to the Federal Reserve Bank of New York, when a rush of year-end car shopping pushed vehicle loans to a dubious peak of $1.16 trillion," and "delinquencies among lower-rated borrowers have risen to the highest level since 2009," so if you want to worry about it go ahead.

While I have you here, though, I should say that a reader pointed out a glaring omission in my discussion of auto lending and smart contracts yesterday: self-driving cars! In the fairly near future, if you borrow money to buy a car, and you miss a payment, the car will just tootle on back to the dealer's lot. There'll be no GPS tracking or ignition override or anything messy like that; the car will just execute the contract itself. The future will be amazing, but also kind of tough.

-As culled from Matt Levine's wonderful blog

an emphatic no...............................

A practice had grown up whereby the heads of the bank regulators from around the world met with central bank governors each September.  In 2007 the bank regulators were asked whether the US sub-prime mortgage market was sufficiently large to bring down major banks.  The answer was an emphatic no.  Although the stock of such mortgages was around $1 trillion, potential losses were not large enough to create a problem for the system as a whole.  After all, the loss of wealth in the dotcom crash earlier in the decade had been eight times greater.
     This time, however, the banks had made large bets on the sub-prime market in the form of derivative contracts.  Although these bets cancelled each other out for the banking system as a whole, some banks were in the money and others were under water.  The problem was that it was impossible for investors, and in some cases even for the banks themselves, to tell one from the other.  So  all banks came under suspicion.  Banks found it difficult, and at times impossible, to raise money that only weeks earlier had been easily attainable.  They stopped lending to each other.

-Mervyn King,  The End of Alchemy:  Money, Banking, and the Future of the Global Economy

Is the thirty-year mortgage..................

...............on your personal residence a good thing or a bad thing?

Yep.  In an inflationary economy (remember those?) it is your friend.  In a non-inflationary economy it is not your friend.  If your thought is that your house is a long-term home to raise a family in, it is your friend.  If your thought is that this place is just shelter and you will be re-locating soon, it is not your friend.   As with most things, painting with too broad a brush will give you wrong answers.  The real answer is....it depends.  How about letting individual borrowers and lenders make their own informed decision?

Here is a quote from a guy painting with too broad a brush.