Can bad lending be regulated out of existence?: Philosophy Forums

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Can bad lending be regulated out of existence?

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Can bad lending be regulated out of existence?

Fried Egg
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Posted 02/27/08 - 01:55 AM: Subject: Can bad lending be regulated out of existence?	#1
It would seem that a prevailing interpretation of the recent credit crunch is that it was caused by irresponsible lenders. Lending to people and then selling some of the risk so that other market participants shared the weight of that risk. That, it is claimed, allowed lenders to lend out far more than they would otherwise have done leading to a reduction in the price of credit and people who shouldn't be able to afford credit being able to. The FSA in the UK has warned banks that in future they will not be able to carry on with such practices and that we should not expect credit to return to the low prices we saw prevail before the recent crisis: FSA sees credit squeeze on banks However, it is unclear to me whether the FSA is merely warning banks that they will find the market less willing to share the burden of risk on lending or whether they are threatening to regulate against such activity. Furthermore, it seems to me that the wishes of the FSA may be at odds with the objectives of monetary policy that aims to keep credit cheap, particularly when recession threatens. As we are seeing currently in America, with a recession looming, the federal bank is doing everything it can to expand the supply of credit, thereby lowering it's price to bolster consumer spending. So, it raises the question to what extent can we blame the recent credit crisis on irresponsible lenders? If the central bank is intent upon an expansionary monetary policy, what are the commercial banks to do in the face of this? They cannot unilaterally maintain prices of lending subtantially above the market rate because they will not sell credit. They can only participate in the credit expansion whilst looking for ways to protect themselves from the increased risk. They may now find it harder to pool the risk in the ways in which they have recently done so but they must find other ways in which to do so or else face dwindling profits or collapse. Therefore, either regulation will fail to prevent banks finding ways to lend "irresponsibly" by managing to pool their risk in new and innovative ways or else the regulators will succeed and thereby cause the aims of the central bank's expansionary monetary policy to be thwarted. And if that happens, it will undermine all the alledged advantages of having a fiat currancy and/or a fractional reserve banking system. If the regulators fail, it means we shall continue to see the same booms and busts in the future as we have seen recently and so many times in the past. Can we have our cake and eat it? I would say not.

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Posted 02/27/08 - 06:53 AM:	#2
This is confusing. You either want your cake, and want to eat it...or not. I ask you - what are cakes for? They are for eating buddy. If you want a free market, it should be free. Zero regulation. ok buddy, keep on rocking in the free world
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Posted 02/27/08 - 07:09 AM:	#3
litkey wrote: If you want a free market, it should be free. Zero regulation. Indeed, but a free market would not have a central bank executing an expansionary monetary policy. The need for regulation of is a consequence of having an expansionary monetary policy. The regulators of the credit market are working to curtail the effects of the central bank's monetary policy. The success of either will nullify the effects of the other. This is the inherent problem and contradiction that lies within our current system.

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Posted 02/27/08 - 07:22 AM:	#4
Fried Egg wrote: Indeed, but a free market would not have a central bank executing an expansionary monetary policy. The need for regulation of is a consequence of having an expansionary monetary policy. In your 'free market' what entity would do the executing? And what do you mean (in conjunction with the Q) by "expansionary monetary policy"? The regulators of the credit market are working to curtail the effects of the central bank's monetary policy. The success of either will nullify the effects of the other. This is the inherent problem and contradiction that lies within our current system. When you say 'effects' presumably you mean 'the negative effects'? Would you not concede that the central bank was making X good decisions 'if the economy was strong'? - Or dismiss such statistics in favour of what you refer to as a 'free market'?
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Posted 02/27/08 - 07:58 AM:	#5
litkey In your 'free market' what entity would do the executing? And what do you mean (in conjunction with the Q) by "expansionary monetary policy"? A free market with a commodity backed currency would not have a monetary policy and therefore there would be no "entity" executing it. That is not to say that a currency would not expand or contract, only that it would do so in a more stable fashion and in response to market forces (free from institutional interference). I don't mean anything peculiar by Expansionary monetary policy. When you say 'effects' presumably you mean 'the negative effects'? Would you not concede that the central bank was making X good decisions 'if the economy was strong'? - Or dismiss such statistics in favour of what you refer to as a 'free market'? Well, the purpose of an expansionary monetary policy is clearly to make credit cheaper and therefore make people borrow more. They do this because they believe that this will increase aggregate demand which will fuel economic growth. Presumably, they would ideally like it that only those who are "good" debters to borrow more but the central bank cannot make particular people able (and willing) to borrow more without making everyone else too.

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Posted 02/27/08 - 08:33 AM:	#6
Fried Egg wrote: litkey A free market with a commodity backed currency would not have a monetary policy and therefore there would be no "entity" executing it. That is not to say that a currency would not expand or contract, only that it would do so in a more stable fashion and in response to market forces (free from institutional interference). I don't disagree with this; Although one's ideology may equate to the same thing as a 'monetary policy'. For example right wing republicans seek protectionism, and they do so while espousing the 'free market.' You clearly would not advocate protectionism, although I find it difficult to understand your view, because presumably you would still have a government, meaning this government would be handed with the responsibility of "working in the interest of people." (or the voters). -How does this little dilly alter 'policy'? Well, the purpose of an expansionary monetary policy is clearly to make credit cheaper and therefore make people borrow more. They do this because they believe that this will increase aggregate demand which will fuel economic growth. Presumably, they would ideally like it that only those who are "good" debters to borrow more but the central bank cannot make particular people able (and willing) to borrow more without making everyone else too. [/quote] We live with a central bank. And a state. There is also the desire for X growth. What is wrong with this? If it means people working without an interventionist government, how are you going to stop 'intervention' - people will work in their own interest. Where you are clearly wrong, is that you fail to see the idea that Intervention itself is required to SAFEGUARD a freemarket. If business was left alone, it too (im sure you're aware of this) would seek (and does) to protect its interests- - - MICROSOFT. Edited by litkey on 02/28/08 - 03:56 AM
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unrealist42
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Posted 02/29/08 - 05:45 PM:	#7
The current lending problem has more to do with deregulation. I don't know about the UK too much but I imagine the situation is similar to the US. In the US the Savings and Loan banks, the ones that make the majority of home loans, were deregulated in the 80s which caused a huge spate of bad loans and Bank failures eventually costing the government, and taxpayers, some $800Billion. Consequently, S&L bank regulations were tightened again. As a result, these banks did not participate in the current bad loan debacle but are now under pressure due to falling home prices. The culprits this time are the non-bank lenders. Financed by hedge funds and investment banks seeking high returns, these lenders were unregulated in the home mortgage markets. The only government oversight on their activities was on the sale of the collateralized debt obligations to insure that the collateral actually existed and this was by the SEC which wasn't really interested. As I said, mortgage banks were precluded from participating in this because they were required by regulation to refuse loans that the non-bank lenders could make. This is due to heavy lobbying by the non-mortgage lenders, hedge funds and investment banks to avoid regulation. So, investment banks and hedge funds participated heavily in providing these non-bank lenders with money and because they did not orignate the mortgages and so did not fall under the same regulations as the mortgage banks. It was a loophole in regulation big enough to make huge short term profits while driving the entire economy into the ground at some future point so they did it. The Fed played a very small but significant role in this, as long as interest rates remained low the scam could continue but there was always a point where the Fed would step in and raise interest rate. Everyone knew this would happen but no one knew when so the game continued, for 8 years, getting more and more outrageous as it went on. No down payment, variable rate loans, no income check, interest only loans. There was no way this could continue. To prevent this in the future is simple, require all mortgage lenders to play by the same rules as the S&Ls.

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Posted 02/29/08 - 09:55 PM:	#8
I wonder how much less credit would be used if there was no poverty, and if almost all families could afford to live without credit. I might speculate that people would still borrow because they are greedy, but then why not borrow from friends and family? I think there will always be bad lending as long as there is a market for it. It seems to me that the question is: how can we make an economy that isn't based on credit?
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Posted 03/01/08 - 03:57 AM:	#9
unrealist42 To prevent this in the future is simple, require all mortgage lenders to play by the same rules as the S&Ls. Even if we assume this to be true, that such regulation could prevent all future bad lending, it would only serve to thwart the aims of an expansionary monetary policy. However, I sincerely doubt it would be effective in stopping bad lending. As I have illustrated above, lenders will simply seek more and more innovative ways to avoid regulative restrictions, to find ways of selling the burden of risk onto others who are less savvy to the long term consequences of cheap credit, in order to profit from the prevailing conditions generated by the expansionary monetary policy.

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Posted 03/02/08 - 02:04 PM:	#10
Fried Egg wrote: unrealist42 Even if we assume this to be true, that such regulation could prevent all future bad lending, it would only serve to thwart the aims of an expansionary monetary policy. However, I sincerely doubt it would be effective in stopping bad lending. As I have illustrated above, lenders will simply seek more and more innovative ways to avoid regulative restrictions, to find ways of selling the burden of risk onto others who are less savvy to the long term consequences of cheap credit, in order to profit from the prevailing conditions generated by the expansionary monetary policy. The real problem is too many people with too much money and unrealizable expectations of the ability of that money to generate returns greater than economic growth or monetary policy can afford. Over recent years monetary policy has enhanced this perception through the misguided policy of increasing the money supply beyond the need of the economy. The problem with that is that those who control monetary policy are incapable of guaging which sectors of the economy actually produce sustainable economic growth. Since many of them come from the financial industry they tend to be biased towards it while neglecting to take account of signals from other sectors such as the housing market. The Fed only acted to rein in the overinvestment in the housing market when the financial sector started to show signs of trouble from it. The economy dodged a bullet in 2000 when the tech bubble burst but tech is a far smaller economic engine than housing. While the tech bubble bursting effected some 1-3% of the US economy it had a heavy effect on financial markets. Housing is over 20% of the economy and much of its activity is outside the financial markets so the failure of the housing market will have a much bigger effect on the economy than on the financial markets initially. It is becoming more and more obvious that monetary policy, while effecting economic growth, cannot control it. It cannot force the economy to grow faster than it is capable of and eventually efforts in this direction will produce a boom and bust cycle in different sectors that can endanger the wider economy when it bursts. Regardless of monetary policy the problem is too much money sloshing around the world looking for immediate opportunities for short term gain. As long as global investors can move money around at will this will continue. They will flood into markets and create bubbles and try to get out before they collapse wrecking entire economies along the way. This global financing of a real estate bubble is not such a new thing. It was what caused the collapse in Asia in 1997. It started when the IMF bullied Thailand into easing restrictions on foreign investment in the real estate market.

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Posted 03/02/08 - 06:03 PM:	#11
The only thing that can be regulated out of exsistence is the free market. To put it simply bad lending can be de-regulated out of exsistence. Instead of proping up banks through the federal reserve and corperate bailout the government needs to foster a hands off approach. The reason so much bad lending was permitted to occur was because the creditors and the debtors did not have to worry about the consequences of the market. In a truley free market banks who give bad loans quite simpley go under. But in the US banks aren't part of the market, they've been removed, now the government backs them up and when things look bad they inflate the currency. The banks look like they're losing money but in the long run they're pulling in much much more times what they gave out. The entire credit crisis is a transfer of wealth from the borrowers (the poor and middle class) to the lenders (the banks) and the institution (the federal reserve). Regulating lending practices won't solve anything. It will make it harder for people to get loans, and when they do the interest rates will be through the roof. Besides it's not in the government and the banker's best interest for this to happen. It's in their best interest to keep printing the money, easy credit, easy returns, easy profit.

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Posted 03/03/08 - 01:47 AM:	#12
unrealist42 Regardless of monetary policy the problem is too much money sloshing around the world looking for immediate opportunities for short term gain. As long as global investors can move money around at will this will continue. They will flood into markets and create bubbles and try to get out before they collapse wrecking entire economies along the way. It is precisely this mobility of capital that allows the markets to rapidly respond to unexpected problems. It is because the the insatiable hunt for profit opportunities, and the rapid way in which can be deployed, that do not have to fear the specter of monopoly prices. I know that's off topic but we do need a little more joined up thinking around here.

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Posted 03/04/08 - 05:09 PM:	#13
Fried Egg wrote: unrealist42 It is precisely this mobility of capital that allows the markets to rapidly respond to unexpected problems. It is because the the insatiable hunt for profit opportunities, and the rapid way in which can be deployed, that do not have to fear the specter of monopoly prices. I know that's off topic but we do need a little more joined up thinking around here. You are correct that this is the leading explanation for increasing the mobility of capital and it has a certain logic and if it was actually used for this you might have an argument. But the reality of capital mobility has not shown this to be so. Instead the increased mobility of capital has resulted in a more volatile and less predictable world economy that precludes long term investment and creates increasingly frequent and more widespread economic calamity in sector after sector. In order to avoid being caught up in one of these sector calamities many investors shun illiquid long term investment. As a result, the entire economy has become monetized and money has become the ends instead of the means. This has been going on for quite a while now and is a major reason for the deindustrialization trend in many of the most developed countries. Equity markets punish companies that try to make long term capital investments that reduce profitability and cash flow for even a short term and so these companies tend to avoid doing so, even when it means their eventual failure.

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Posted 03/07/08 - 12:50 AM:	#14
unrealist42 wrote: You are correct that this is the leading explanation for increasing the mobility of capital and it has a certain logic and if it was actually used for this you might have an argument. But the reality of capital mobility has not shown this to be so. Instead the increased mobility of capital has resulted in a more volatile and less predictable world economy that precludes long term investment and creates increasingly frequent and more widespread economic calamity in sector after sector. In order to avoid being caught up in one of these sector calamities many investors shun illiquid long term investment. As a result, the entire economy has become monetized and money has become the ends instead of the means. This has been going on for quite a while now and is a major reason for the deindustrialization trend in many of the most developed countries. Equity markets punish companies that try to make long term capital investments that reduce profitability and cash flow for even a short term and so these companies tend to avoid doing so, even when it means their eventual failure. Your reasoning is confused and circular. Increased volatility and uncertainty cannot be both the cause and the result of the increased mobility of capital. Which is it? It should be clear to anyone that an increased mobility of capital and tendancy towards shorter term investments is a consequence of the increased volatility of the markets that is caused by something else.. That something else, I would argue, being the increasingly loose monetary policy we have seen over recent decades. In addition, the increased demand for liquidity and monetary holdings does not indicate and demand for money as an ends in itself. It is a natural response to increased uncertainty in the markets, a need to protect one's self against unexpected problems. Edited by Fried Egg on 03/07/08 - 12:55 AM

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Posted 03/08/08 - 04:25 PM:	#15
Fried Egg wrote: Your reasoning is confused and circular. Increased volatility and uncertainty cannot be both the cause and the result of the increased mobility of capital. Which is it? Well, it is both. Volatility in local markets created a drive to increase capital mobility outside of these markets which in turn increased the volatility of all markets and the need for even greater capital mobility. It is a matter of a changing of the scale of a phenomenon that has existed all along. It should be clear to anyone that an increased mobility of capital and tendancy towards shorter term investments is a consequence of the increased volatility of the markets that is caused by something else.. That something else, I would argue, being the increasingly loose monetary policy we have seen over recent decades. All that loose monetary policy does is increase the velocity of money and allow its further concentration. While this certainly exacerbates the problems created by capital movement, it is by no means the root cause. In addition, the increased demand for liquidity and monetary holdings does not indicate and demand for money as an ends in itself. It is a natural response to increased uncertainty in the markets, a need to protect one's self against unexpected problems. The desire for capital mobility for short term speculative investment has always been with us and until recently had been strictly controlled. It is the new mobility of capital itself that is the root cause of increased market volatility.

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Posted 03/08/08 - 05:30 PM:	#16
I have a question to throw into the debate: Can capitalistic lending be taken out of existence? Could a well-functioning society be created in which formal lending does not take place. I am saying capitalistic lending and formal lending simply to distinguish that type of enforced lending from the friendly lending that may take place in an informal way but is not enforced by a government or other coercive institution. For example, I might help a friend move his stuff with an expectation that he will help me move next week, but I would not use force against him or take him to court if he did not end up helping me in return. I suppose I am asking, can a relatively well-functioning society be created in which contractual obligations are not coercively recognized? What do you all think? If so, I think it would help eliminate the boom/bust cycle and usury in general.
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Posted 03/09/08 - 12:08 AM:	#17
unrealist42 Well, it is both. Volatility in local markets created a drive to increase capital mobility outside of these markets which in turn increased the volatility of all markets and the need for even greater capital mobility. It is a matter of a changing of the scale of a phenomenon that has existed all along. I'm sorry but that still doesn't make much sense. You have still not explained how or why increased capital mobility should lead to increased volatility and economic calamity. Indeed, in a situation in which environmental changes were rapid and unpredictable, the more mobile capital was, the more able the economy would be to avoid calamity. We would only expect increased capital mobility to lead to problems when circumstances were more stable and less subject to change and uncertainty. But in such circumstances, we would have no reason to see an increased demand for liquidity. Quite the reverse. All that loose monetary policy does is increase the velocity of money and allow its further concentration. While this certainly exacerbates the problems created by capital movement, it is by no means the root cause. It lowers the price of credit thereby increasing malinvestments and bad debt. Hence increased volatility and an increased demand for liquidity. The desire for capital mobility for short term speculative investment has always been with us and until recently had been strictly controlled. It is the new mobility of capital itself that is the root cause of increased market volatility. Nonsense. In the days of the gold standard we did not see such market volatility and there far less fiscal controls than what we have now. The difference between then and now was the existence of a tight monetary policy. Floyd I have a question to throw into the debate: Can capitalistic lending be taken out of existence? Could a well-functioning society be created in which formal lending does not take place. I am saying capitalistic lending and formal lending simply to distinguish that type of enforced lending from the friendly lending that may take place in an informal way but is not enforced by a government or other coercive institution. For example, I might help a friend move his stuff with an expectation that he will help me move next week, but I would not use force against him or take him to court if he did not end up helping me in return. I suppose I am asking, can a relatively well-functioning society be created in which contractual obligations are not coercively recognized? What do you all think? If so, I think it would help eliminate the boom/bust cycle and usury in general. Why, in such a society, should we expect strangers to lend money to each other? Afterall, it is only amongst friends and family that informal lending would take place. It is amongst strangers that rules of contract are needed, between people who have no reason to trust each other to fulfil their promises. Generally speaking contract law allows for he division of labour to extend beyond friends and family to encompass strangers. If we were to not enforce contracts that did not immediately exchange, that are displaced through time, we would see the collapse of one crucially important part of the division of labour. What we would see is the rapid de-capitalisation of society would would lead to the rapid decline in productivity towards pre industrialised levels. Complete disaster in other words.

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Posted 03/09/08 - 02:30 PM:	#18
Fried Egg wrote: Nonsense. In the days of the gold standard we did not see such market volatility and there far less fiscal controls than what we have now. The difference between then and now was the existence of a tight monetary policy. Market volatility has always been with us, even during the decades of the gold standard there were booms and busts created by the deflation and then expansion of the money supply as new gold was found. This was caused by reserve banking and the accumulation of wealth into speculative markets and away from productive investment and day to day transactions. There is no difference between then and now except in matter of degree. The crash of 1929 occured when the world was still on the gold standard. The period from about 1950-1990 was the most stable period of economic growth and it was accompanied by restraints on capital mobility and much state directed capital investment more than anything else.

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Posted 03/09/08 - 02:54 PM:	#19
Floyd wrote: I have a question to throw into the debate: Can capitalistic lending be taken out of existence? Could a well-functioning society be created in which formal lending does not take place. I am saying capitalistic lending and formal lending simply to distinguish that type of enforced lending from the friendly lending that may take place in an informal way but is not enforced by a government or other coercive institution. For example, I might help a friend move his stuff with an expectation that he will help me move next week, but I would not use force against him or take him to court if he did not end up helping me in return. I suppose I am asking, can a relatively well-functioning society be created in which contractual obligations are not coercively recognized? What do you all think? If so, I think it would help eliminate the boom/bust cycle and usury in general. Islam forbids usury and so many Islamic banks use a different method for their lending than interest charging western banks. An Islamic bank will take an interest in the enterprise it is lending to and take a share of the profits that are generated. Loan repayment is a repurchase of the banks investment in the enterprise and the profits the bank makes on its share ownership being the return on its money. Rather than being a disinterested party collecting rent for its money, the Islamic bank becomes a close partner in the enterprise. It is more work for the bank and more difficult to get a loan under these circumstances but there is no usury involved and the bank is not so disinterested in who it lends to.

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Posted 03/09/08 - 03:42 PM:	#20
Fried Egg wrote: Why, in such a society, should we expect strangers to lend money to each other? Afterall, it is only amongst friends and family that informal lending would take place. It is amongst strangers that rules of contract are needed, between people who have no reason to trust each other to fulfil their promises. Generally speaking contract law allows for he division of labour to extend beyond friends and family to encompass strangers. If we were to not enforce contracts that did not immediately exchange, that are displaced through time, we would see the collapse of one crucially important part of the division of labour. What we would see is the rapid de-capitalisation of society would would lead to the rapid decline in productivity towards pre industrialised levels. Complete disaster in other words. Hi Fried Egg, I am not saying you are wrong because I have not studied or contemplated the matter enough to have faith one way or the other. Nonetheless, in the little thought I have put to the matter, I do not see the necessity of enforcing contracts. The lending that results from contractual enforcement leads to credit-based economies and usury, which seem more damaging to the typical person than any benefits. Namely, I speculate that the existence of enforced contracts, credit-based economics, and usury is one of the main reasons so-called free-markets tend to lead to monopolization of wealth and power as well as the existence of what some people call wage-slavery, as the wages of the workers are cut by wealthy usurers who are empowered by the enforcement of contracts. I like the idea of free-market economics. I believe that as offensive coercion is removed from an economy and the government's hand is taken out of voluntary exchanges between people, then all deals become more voluntary in that they are voluntarily entered by both parties. This gives each party personal responsibility for themselves (i.e. self-regulation), which they then exercise more in their own favor than a third-party government, and so the deals are more mutually beneficial. That develops into complex natural economies with people freely entering into a wide arrangement of mutually beneficial deals. I think the same essential principles can be applied to the use of coercion to enforce contracts. To make an analogy, why can't people enter into economic relationships the same way they enter into sexual relationships? Surely, people enter into long-term, mutually beneficial sexual relationships, but we would not propose coercively enforcing a contractual obligation someone made to have sex with another person at a future date, right? Some societies have allowed husbands to force their wives to have sex, but we would call that rape because we see the benefits of not enforcing contracts in that regard. Though analogous, I think the same applies to economic deals. People making deals about the future will understand that they are resting on the other party's trustworthiness or self-interest to continue the deal, and I believe the people would take precautions to protect themselves without the reliance on the coercive enforcement of contracts. That self-protection and self-regulation combined with the absence of coercion is what makes free-markets and free societies superior to statism, in my opinion. I lean towards believing that agreements would be fairer and freer if contracts were not enforced by coercive force. Nonetheless, if you do not mind, I would like for you--or anyone else--to explain why you think the people in society benefit from the coercive enforcement of contracts or why it is supposedly helpful or required in free-market economies. -Floyd
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Posted 03/09/08 - 04:18 PM:	#21
unrealist42 wrote: Islam forbids usury and so many Islamic banks use a different method for their lending than interest charging western banks. An Islamic bank will take an interest in the enterprise it is lending to and take a share of the profits that are generated. Loan repayment is a repurchase of the banks investment in the enterprise and the profits the bank makes on its share ownership being the return on its money. Rather than being a disinterested party collecting rent for its money, the Islamic bank becomes a close partner in the enterprise. It is more work for the bank and more difficult to get a loan under these circumstances but there is no usury involved and the bank is not so disinterested in who it lends to. When everyone's interests are considered, your examples seem much closer to ideal than full-blown usury. Since the bank's success in the deal is intertwined with the success of the recipient of the loan.
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Posted 03/10/08 - 06:02 AM:	#22
unrealist42 wrote: Market volatility has always been with us, even during the decades of the gold standard there were booms and busts created by the deflation and then expansion of the money supply as new gold was found. This was caused by reserve banking and the accumulation of wealth into speculative markets and away from productive investment and day to day transactions. There is no difference between then and now except in matter of degree. The crash of 1929 occured when the world was still on the gold standard. The period from about 1950-1990 was the most stable period of economic growth and it was accompanied by restraints on capital mobility and much state directed capital investment more than anything else. Firstly, get your facts straight. We came off the full blown gold standard in 1914. What we had in between the wars and for a while after WWII was not in anything but name a gold standard. Secondly, the distinction between speculative and productive markets is entirely bogus. All investments are speculative and all speculation is inherently uncertain. Whilst it is true that market volatility can (and did) exist even under a more stable and tight monetary system, my point remains intact, in that markets were more stable. Thirdly, the area that saw the most spectacular growth in the period to which you refer (1950-1990) is that of the state. Conventional GDP measures make no distinction between private and public economic activity.

Fried Egg
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Posted 03/10/08 - 06:52 AM:	#23
Floyd I lean towards believing that agreements would be fairer and freer if contracts were not enforced by coercive force. Nonetheless, if you do not mind, I would like for you--or anyone else--to explain why you think the people in society benefit from the coercive enforcement of contracts or why it is supposedly helpful or required in free-market economies. Perhaps they are not absolutely necessary but, as I have said already, contract law helps facilitate the extension of the division of labour to include strangers (people you have no reason to trust). Whilst it is true that reputations may give you a good reason to trust strangers, one need look only so far as ebay to see how well such a system can work without contract enforcement, I think that larger transactions, where far more hangs in the balance as it were, people might become very reluctant to engage with strangers. To what extent would "capitalistic lending" be taken out of existence by the abolishion of coercive contract enforcement anyway? This is largely debt that has to be written off because the debtors simply don't have the money to pay back the debt (or else any assets they do have far way short). I think that what you are effectively proposing is tantamount to legalising fraud. The prosecution of fraud is usually considered part and parcel of the enforcement of property rights because it is regarded as implicit theft. Which raises the question, would you like to see the end of the coercive enforcement of property rights generally? Should the state initiate aggression against thieves? Or should the responsibility lie with the individual to protect himself against theft? Edited by Fried Egg on 03/10/08 - 07:07 AM

Floyd
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Posted 03/10/08 - 02:37 PM:	#24
Fried Egg, I believe the most common claim of justification for the use of governmental coercion is to create order and allow for the complex relationships thereof. But when coercion is absent, we have seen that more order and mutually beneficial relationships develop because each party has to take responsibility for themselves and self-regulate themselves. For the fair and free division of labor, I think self-regulation is generally superior to the presence of and reliance on coercive force. You say that contract law facilitates the extension of labor. Of course, there are two points in response I wish to make: Firstly, many forward-looking deals could still be made with strangers based upon common methods such as credit checks, income verifications, etcetera. Of course, the onus would be on each party to do their own due diligence (which is true of most free interactions). Secondly, how desirable are the extended exchanges facilitated by the coercive enforcement of contracts? Would the rest of us benefit from the hindrance of usurers, speculators, and mostly unproductive people who profit from the boom/bust cycle? I believe so, and I believe they are empowered at the expense of workers by the credit-based economy which is based around the coercive enforcement of contracts. I am not necessarily proposing the legalization of fraud. Fraud can be redefined to only refer to deceit about past facts or immediate actions, and not forward-looking promises. As such, all parties involved would be aware that forward-looking promises have no legal value. Let the money-holder take care of their own money without relying on coercively taking it and more back from someone who signed a contract, who would more often be the victim of fraud; Can we really call it honest for a regular citizen to be held to some long contract of legal jargon that he signed under the pressure of a profit-seeking usurer who relies on coercive force to regain his money and to gain his profit? Property rights and theft are topics we probably disagree on? However, I they are not influential to questions regarding what would be best for the state to do or not do. That is because property rights and theft are defined by the state, its laws, and the use of coercion to enforce the laws. A property right is simply a state declaring someone as owner of something. Theft is simply someone taking possession of property in a way that the state will, according to its laws, use coercion to rectify. I am proposing that it might be helpful for the state to not recognize contracts (i.e. forward looking promises). If it was what is desired, property rights could still exist in that I am not proposing we do not recognize trades. For example, a homeowner could still sign their house over to someone else, but would not be have to obey a contract which said he would sell it over later. In other words, when a person says I'll pay you tomorrow for something today that is a caveat emptor/venditor situation--or perhaps we shall say lender beware. If I can make one more example, if a random Nigerian emails me asking for $50 and I have no way of ensuring that I get it back, naturally I do not sent him the money. That's fine and dandy. If I go to some random bank and ask for them to give me $1,000, they will likely say "Sure, here you go!" That seems very problematic to me. It seems like legalized loan sharking to me. Let's live in freedom without loan sharking. Let the bank be as responsible with giving me their money as I am with giving a random Nigerian my money. This all is mostly suspicion. I am not entirely convinced of how well or not a society would develop without enforced contracts. -Floyd Edited by Floyd on 03/10/08 - 02:41 PM
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Fried Egg
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Posted 03/11/08 - 01:52 AM:	#25
Floyd It seems to be that you not actually arguing against contracts as such, but rather contracts based on promises or expectations. And rightly so, because such theories of contract are not derivable from the general notion of property rights. Murray Rothbard wrote that the only contracts that should be enforcable are those where failure of one party to abide imply theft. This therefore is only the case where title to property has already been transfered. This is basically "title-transfer" theory of contracts. Of course, such a system of contract enforcement would not put an end to "capitalistic lending". Loans would need to be secured by assets of the debtor. Title to these assets would be transfered to the creditor on issuing of the loan and transfered back again later on repayment of the loan (or not as the case may be). But it would put an end to unsecured loans (among strangers anyway). If this is what you are driving at, then I am in full agreement with you. Well, I must take issue with this point: A property right is simply a state declaring someone as owner of something. Actually, property rights should be a general set of principles that govern how property comes to be owned, not a specific dictat assigning ownership. Furthermore, it is not about the state issuing people with property according to how it sees fit. It is about recognising people's natural right to the fruits of their actions. It is about a guiding set of principles that allow people to pursue their ends with the security of knowing where the boundaries are, that if they do not cross those boundaries, they will not run into conflict with others pursueing their ends.

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