A loan earns rental interest insofar as the money is a durable good that can only be employed exclusively. The opportunity cost of not being able to use the good while it is on loan translates the durable good into a stream of services, with the renter of the good, in effect, buying a portion of the stream for an interval of time. As such the stock is really an aggregation of flows that can be sold on an exclusive basis for some rental fee.
A loan also earns risk interest on account of the possibility that the debtor might default on the redemption of the bond. As such the interest fee is a bet on the institution of private property in the society.
Transacting in bets around default does not belong in the marketplace. The market should never create incentives for the violation of private property claims or for the aggregation of those violations.
Insofar as death is an irreducible element in life, in a healthy society the institutions that directly touch the management of death need to be heavily insulated from market incentives. Hospices should not be for-profit institutions nor should short sellers be able to drive a corporation into bankruptcy.
Rental interest rates should not be so high that the lender doesn't care about the ability of the debtor to redeem the bond – it turns rental interest into risk interest.
No comments:
Post a Comment