Standards of Living increase with increased productivity. This article shows that significant productivity increases are available in the Loans and Equity Markets. In these markets, a lack of reciprocity has led to decreased productivity. Although both buyers and sellers contribute to transaction profits, sellers receive all the profits and, as a result, earn income at the expense of buyers.
When a lender makes a loan to a borrower, the profit is the interest. The interest comes from the borrower, but the lender does not share it. Both parties take a risk on the loan, but only one benefits when the trust holds. Lenders argue that they have taken a risk on the money and could have used it for something else while the borrower has used and benefited from it. This is true, but the lender has received the money back and can use it. The interest, however, is different. The borrower supplies the money for the interest but receives nothing in return. Instead, they pay interest on the interest.
This article explores how to share risk and shows the resulting productivity improvements to Loans and Equity Markets.
The cost of making a loan is the interest created by the loan. The lower the interest, the more productive the loan. It is important to consider that loans come with inherent risks. Therefore, interest should be charged. However, it would be fair to distribute the interest between the lender and borrower based on their respective levels of risk.
Sharing reduces the money needed to repay the loan; hence the loan is more productive. Sharing with the borrower increases productivity and can be quickly adopted and implemented on existing and future loans.
Consider a loan of $1,000 at 10% to be repaid over five years.
An interest of a little over $300 is needed for the loan. Distributing between the lender and borrower reduces the cost of the loan. Lowering the interest rate also reduces the cost. Still, that is difficult in a modern economy because interest rates are regulated, and adjusting the risk between lenders and borrowers for different situations with interest rate changes is complex and prone to error. Adjusting sharing is simpler, provides finer personalised adjustments and is easily changed.
For example, lending to individuals bound by community group rules is less risky than lending to an individual and if the community risk changes, the share can change. For example, lending to government-initiated community housing is low risk.
Sharing the profits has another benefit, as it stops interest from compounding on the borrower’s interest share.
Banks changing to a 50:50 split of interest increase the productivity of home loans to individuals in a community and significantly lower the cost of housing and other construction. After construction, individuals within the same community can lower the cost of Capital to zero by lending to each other, with the borrower taking all the interest.
The increase in productivity speeds up the transfer of Capital for further use and increases the productivity of loans. Low-productivity loans tend to sit in assets or bank accounts as the lenders can sit back without extra effort and let borrowers produce the interest for them.
Profits from equity have the same characteristics as profits from loans. Equity profits all go to sellers. None go to buyers. There is almost always a greater risk to buyers than to sellers. The risk to buyers is higher when there are monopolies, oligopolies and oligopsonies. However, all markets become more efficient by sharing profits as it gives feedback to buyers and reduces the risk of “buyer beware”.
The profit motive is needed for commerce to operate efficiently. The issue with most markets is the lack of automatic individualised feedback allowing buyers to assess the value of products. Sharing profits provides that feedback and is more efficient than relying on free markets. It is important for government-regulated organisations like banks and infrastructure monopolies as it provides an automatic feedback mechanism to alert consumers of overpriced products and services.
However, it also advantages sellers as buyers are incentivised to return to the same seller.
Combining shared interest loans with communities of home buyers can reduce the cost of buying and maintaining a house by 50%, give investors higher, more secure returns, and speed up the transfer of houses within markets. This leads to higher community productivity as people move to reduce their costs.
Markets today are defined by the characteristics of dwellings. With sharing profits, the markets are defined by the characteristics of the people who sell and buy, leading to further societal productivity.
The Importance of Trust
Collaborating to share profits and embrace a reciprocal economy cultivates trust in markets. Trust is crucial for a flourishing economy, as it diminishes the need for costly risk management measures and promotes sharing and caring communities.
Implementing a banking system that distributes interest and reduces rewards for those who break trust creates an efficient and cost-effective banking system. This, in turn, leads to a reciprocal economy with low costs and high levels of trust.
Today loans are refused to people based on their characteristics of age, post-code, marital status, previous history of payments, and wealth. Benefits and reduced interest are given to wealthy people who pay on time and have a high credit score.
Transitioning from a system that favours individuals based on their personal attributes to a system that assumes everyone is trustworthy, regardless of their characteristics, and relies on shared interests to indicate dependable behaviour results in a more affordable and fair economy.
Minimum Cost Loan and Equity Markets
In markets prioritising low-cost loans and equity, the importance of price in selecting products and services to trade diminishes. Instead, sustainability, recyclability, environmental impact, health, well-being, and accessibility become significant metrics for determining the products and services to produce and sell.
This shift allows for more effective cost-benefit analyses, as other criteria are easily incorporated into project selection. Moreover, buyer feedback ensures that prices are fair and reliable.