Opinion | The Need to Ban Compound Interest
While it might not seem like it today, compound interest throughout history has been the focus of much controversy in the financial realm. Over the past couple thousand years, there have been dozens of countries, kingdoms, and even religious laws that outright banned the use of compound interest as a form of predatory lending. The view being that an infinitely growing debt which grew at an increasing pace was certainly not an ethical way to go about the already nasty business of lending money. In fact, the image of usurers throughout history is almost uniformly a negative one, where oftentimes the devil himself is portrayed as a predatory lender of sorts, eventually repossessing the very soul of the person who had the misfortune of dealing with him.
In modern economic theory, the purpose of interest is largely framed as such: an investor takes a risk by initially lending money to someone who seeks to make a profit in some way, having no certainty that the debt will eventually be repaid, he charges interest so that the gains from the good investments can hopefully outweigh the unpaid debts. You will note that in this standard economic theory it is assumed that at least a certain percentage of people will never pay back the debt at all, and there is no provision for the reclamation of unpaid debts. In this way, the standard economic theory is a vast deviation from the norms and laws of today. Today money lenders are given so much power under the law that not only can they repossess items and garnish wages, but frequently they can maneuver through the court system in such a way that allows them to have the debtor imprisoned for a failure to make a minimum payment.
Because of the legal architecture surrounding debt in the United States, the purported risk being taken by the lenders is hardly a risk at all, undermining the very premise with which compound interest was originally justified. When looked at even further, a perverse sort of incentive is created for money lenders to dole out incredibly risky loans with exorbitant interest rates that they know cannot be repaid. We saw this in the 2008 crisis when it was revealed that such scams were being run by the biggest banks in the country wherein they lied to consumers about the true nature of the loans, and encouraged duplicity in the loan application process, such that consumers were left with high-interest rates and principles which were far out of their reach. A similar scam is being run today with used cars, where the financing of vehicles by many car dealers almost guarantees their default and eventual repossession, so that the same car can be sold, again and again, running the same scam on countless unsuspecting consumers who want nothing more than a fair deal on a cheap car.
With this, it is clear that what was once a financial instrument for investors, has now become a tool to exploit consumers purchasing goods that are by no means an investment. Some might say that if you think you aren’t getting a good deal that you should simply take your business elsewhere, but when the entire industry is incentivized to prey on the consumers, and the largest banks in the country are participating, saying that a good deal is hard to find would be a gross understatement. Plain and simple, allowing the charging of interest seems deeply inappropriate as a standard for operating with consumer debts.
For this reason, I think that it is time to look at our ancestors and the countless cultures that came before us who decided that, while it is appropriate to charge reasonable fees above the principal value of a loan, the charging of interest is simply a bridge too far. With many stories of people who perhaps took out a student loan for $40,000, have paid $30,000 or so back in monthly payments, and yet still somehow owe more than the principal value itself, the time has come for a complete reevaluation of our credit system. This is not to say that banks and lenders should not be allowed to make a profit, rather, they should charge steady, non-compounding rates, with a reasonable cap on the total sum to be paid. I think we can all stand in agreement that payment of anything beyond 150% of the principal is more than sufficient for a consumer to be considered as having paid their debt.