Reason for a New Age

Posts Tagged ‘loans’

Propping up a Three-Legged Table

Posted by publius2point0 on 2010/02/27


There was a website some time ago that had an interesting way of displaying statistics. If you looked up “exports” or “life span” or whatever other statistic, it would morph the map of the world, blowing countries up like a balloon if they were at the high end, or shrinking them down like they’d sucked on a lemon if they were at the low end. The end result of this was a very clear representation that you did not want to be an African. To be certain, each country is unique, with varying levels of any one problem. Possibly some are doing quite well even. But overall it’s just being nitpicky to say anything other than that “Africa” needs aid.

And I suspect that if you were to look at where most of the aid in the world goes, the answer to that question would be Africa. It’s certainly been the poster location for charities since I was a small child, so for at least 30 years, Africa has been the recipient of most of the world’s charity.

But when we say a country “needs aid”, we’re making the presumption that charity is good. In general, people who need aid, need it because they can’t run their own lives themselves. Handing them any amount of money, subsequently, is nothing more than throwing money into a pit.

The obvious response is that the goal isn’t to turn the person around, it’s to keep them alive until they can turn themselves around. In international terms, it would be to keep the people alive until the country reforms itself.

The question becomes, though, whether things reform quicker when they are buoyed or when they must support themselves.

For instance, let’s look at Communism. Cuba, by virtue of proximity to the US, has been receiving billions of dollars every year from Cuban immigrants, and is now perhaps the most stable Communist country in history. The people may not be happy nor satisfied in their lives, but things are not so awful that reform is needed. The USSR, on the other hand, collapsed due to its own inefficiencies and hence had to make the transition to Capitalism. China, realizing that they were going to collapse if they didn’t change, was able to start this transition in a more managed and gentle fashion. If the USSR or China had had a sufficient income from Capitalist countries, would they have made these reforms, or would they still be going?

If aid was removed from all these African nations, it might lead to an immense number of deaths. But at the same time, over a period of 30, 50, or a hundred years, it’s quite likely that far more will die due to poor or malicious governance. In the long run, a larger number of lives are saved by forcing things to turn around than by providing charity and allowing the status quo to continue.

Of course, the argument against this is that reform requires a certain level of financial stability, meritocracy, and so on to lead to anything like success. Plunging a poor nation into even greater poverty might foment the desires to hold a revolution, but without the resources to do so. Without solving issues of tribal differences, you might end up with tribal war replacing centralized, malicious government: Hardly an improvement. On the other hand, one might postulate that as things become dire, the willingness to move into Africa and effect real change, rather than simply providing charity, will rise in the rest of the world. And certainly with that sort of support, change can be effected, if properly managed.

Overall, generally, I worry about the worthiness of charity.

Take for example animal shelters. They capture stray dogs and cats, seeking new homes for them, providing free medical care, and only putting the animal to sleep if all else fails. (Of course, most of the animals do end up being put to sleep.) When people consider getting a pet, quite often you’ll see people telling them to go to the animal shelter and pick out an animal there because otherwise it will be put to sleep, and they will get it for free. They are providing aid to all the poor mistreated animals of the world. On the other hand, if you go and buy a pet from a proper breeder, you’re just killing puppies.

But let’s think of this rationally. A proper breeder makes sure that the animals are healthy, interviews the people receiving the animal, has a contract that limits what the recipient can do–for instance making sure that the animal is spayed or neutered–and makes sure that each puppy finds a home. A non-proper breeder will let brother and sister breed, sells the animals cheap to anyone, with no limitations, and feels free to dump any excess animals in the streets to fare for themselves–so called “puppy farmers”.

Because we have animal shelters which do their best to save strays, we don’t feel a great need to reform the system. There is a “fallback”. We all just conveniently ignore the fact that even with the fallback, an inexcusably large number of animals are put to death.

Charity let’s you feel good about letting problems remain unfixed. The problem isn’t that people don’t get enough pets from the animal shelter, it’s that you don’t have to be registered to sell puppies. You don’t have to follow any guidelines to maintain your pet business. I suppose I don’t know what precise measures would be the most effective, really, but the point is that the animal shelters allow us to feel morally superior at the same time as not having to go in and find a real solution. Personally, I’d rather say that a shelter can’t take in any more strays than they can actually place in a home. They can’t put more than 5% of all those that they catch to sleep. This would be a sane and rational backup for a working system. If you had that in place and this resulted in tons of strays wandering all around our cities, it would force a real solution being enacted. It would, ultimately, save more lives and probably cost less.

IMF Loans

The International Monetary Fund (IMF) is a UN organization that loans out money to developing nations. These nations can than use this money to try and rebuild their country, modernize it, better their infrastructure, or whatever else. The idea being that they will make all this money back and pay off their loan. Of course, the IMF isn’t the only organization to have done this. One of the ills that has beset Haiti is the repayment of loans to the US from when the country separated from France and sought international acceptance, nearly 200 years ago, and still being paid off today.

The problem is that, like I noted in True Economic Ill, if a country or other organization is inherently poor with making plans, has the wrong goals, or otherwise pisses its money away, trying to buoy it up is just throwing money into a black hole. Giving a loan to an inherently ill organization simply adds further burden since, unlike charity, you’re expecting to be paid back later.

Forgiving these loans would be, to the countries that are paying loan fees and haven’t improved due to them, a boon to be certain. But, it would also set a horribly dangerous precedent. Ultimately, I don’t think it’s feasible on that measure.

When a corporation has a primary backer and becomes financially unstable, the backer is always able to force the leadership out and put in their own guy to turn things around. This might not be good so far as the CEO was concerned, but for the backer and all of the employees of the business, it’s certainly a much better option. For an organization set up specifically to give loans to countries that are already financially unstable, to not have a similar ability is foolhardy. No one is being helped.

Advertisements

Posted in Editorial | Tagged: , | 1 Comment »

Stock: A Primer

Posted by publius2point0 on 2010/01/28


According to the Wealth of Nations, “stock” is named so because traditionally it referred to the goods used to produce products. I.e. the stock of supplies. In his time, that may have been grain or wool, machinery to refine it, and the factory in which it is produced. These days it might be more along the lines of computers and internet bandwidth.

A wealthy man, Arnold, possessing property with a building upon it, and believing that his friend Bill has a good idea for a business might lend him the use of the building in which to start the business. In return, Bill pays him some regular, monthly fee which could be set to eventually cede the property to him, or be assumed to eventually return to the original owner. While Arnold maintains ownership of the property, he can always sell the lease to some third party. The person who buys it knows that he will receive monthly payments for some period of time after which he either gets the property free for whatever use he wishes or earns back more than he paid Arnold for it before the deed to the land passes to Bill’s hands.

You might be thinking to yourself that I’m just talking about rent, leases, and mortgages but the point is that this is how stocks began–though not limited to property like this.

The amount of excess property or other supplies that a wealthy person has to give away is generally going to be fairly limited. He might have extra he could give, but not enough to form the capital for an entirely new business. And of course if he has the sort of supplies that would be useful to a particular business, that’s probably because that’s what sort of business he is already in. He has no great desire to fund a rival.

Dealing in an excess of supplies is fraught with more issues than simply lending money straight. Arnold gives Bill $1000, and Bill uses that money to go out and purchase what he needs from several dozen different sources and start his business with it.

This is just a loan, though, and there are some problems with loans. Most predominately is that in the 19th century, when the Wealth of Nations was written, you may have been liable to have ended up in debtors’ prison. Even if you didn’t, getting in debt is certainly a rather bad thing. The other problem with loans is that they are liable to be based on actuaries, which might, for example, say that your average business lasts less than 5 years–in which case, you have to pay off all of your loan, plus interest, in that small period of time.

What Bill does to solve this, is he goes and finds a bunch of other people like himself, too poor to make a large enough loan to be worthwhile. They don’t have actuaries and they see themselves as having enough to gain as to be willing to possibly throw all their money away. He gets a small sum from each of them and tells them that what he will cede some percentage of the ownership of the business to them. This way there isn’t actually a loan, rather they earn a part of the profits commensurate with their level of ownership.

But how much is that worth? Do you say that whatever the CEO’s salary is, the owners each get a value that is proportioned in relation to that? What happens then when the CEO sells off more stock, does his own salary decrease? Or say that instead you set it based on the profit of the company each year–you can barely sell off more than a percent cumulative among those wishing to buy, or you would be unable to compete.

An enterprising Bill came up with a rather clever scheme. He said to everyone, I’ll sell you 1% of interest in the company for every $1000 you give me. You can take your ownership and sell it to other people or back to me at any point. If the market price for 1% stays at $1000, I’ll give you 10%, or $100 in dividends. If the market price rises to $2000 for 1% ownership, then I’ll give you $200 each year–again 10%. If the company goes broke, then I don’t owe you any money back. If the company never goes broke, you’ll continue to receive your dividends. And of course, if ever the company is purchased, the purchasing party may try to buy out your share since they need a controlling interest, at which point you’ll have received the market price for your ownership, as well as all the dividends up to that point.

Over the years and centuries, however, it was discovered that people chose to largely ignore the promise of dividends. You are banking on the company being either purchased, or being able to fob ownership off onto a second person when the company is valued highly. The modern day rate of dividends is actually only about 2.8%, rather than the 10% I proposed in my example. Bill likes this because it means that he doesn’t have to really give any money to the people who own stocks, just other people or other companies who wish to take the company over.

In the end, a stock’s value is based on the value of the company it is connected to–which we will call Widget MFG–in a fairly roundabout way. The owners guess how much they think another company would pay to purchase a controlling interest of Widget MFG. This company bases that on how much profit they can gain by adding Widget MFG to their roster. As a Widget MFG grows, though, the odds of it being purchased decline. Logically, this would mean that the value of the stock would decline–but of course, if it did, a company could purchase controlling interest, so it ends up stabilizing around some particular value that makes it hard to purchase a company of that size, but not impossible, given the profitability of the company.

For nearly all cases, this is a fairly effective way for an actual, sane market value to be reached. And of course the overall value of the market can be expected to continue growing since loans–which stock are a version of–go into creating new markets or increasing efficiency (e.g. production/cost). Everyone wins.

Posted in Theory | Tagged: , , | Leave a Comment »

Insurance, Loans, and Socialism

Posted by publius2point0 on 2010/01/13


I recently gave an overview of the philosophy of loans, so I won’t cover the basics of that here. I will give an overview of insurance first though.

Say that everyone faithfully saved up money to deal with emergencies: Broken legs, burnt down house, car crash, etc. You’d end up with a bunch of people who, out of sheer good fortune, had an excess of money because they had saved without ever having an emergency. Then you would have other people who were horribly in debt, due to a string of misfortune that could never have been predicted. We might, as a society, know that the odds of any one person breaking his leg is 1 in 5000 per year, but no one knows which specific people are going to be the ones to whom this occurs. There’s no way for an individual to know ahead of time how much he is to save up. We can tell him based on actuarial data how much he should save on average, but that is horribly inefficient.

Not to mention that people aren’t good at saving up without sticking their hand in the honey jar.

Each of us knowing that we are as much at risk of tragedy as anyone else, we join hands and set up a fund that covers the average amount of emergency funding for each, knowing that some will need less and some more, but that it will all balance out in the end. A person who puts in money without ever hardly taking any out might feel cheated, but of course he might just as well have been the one who drew out the most. Overall, it is a fair system.

The worry comes, however, that someone might abuse the collective fund. If you were to simply leave a basket full of money that each person could take when they had an emergency, you’d have rather a lot of people with emergencies. And so you need some third party to manage the fund and to ascertain the honesty and value of each request. Of course, this person has to be paid himself, but it is easy enough to say that his wage is a separate fee from the actual insurance payments and any extra insurance money there may be in a year can never be added to his wage. And there you have a system which is at least decently trustworthy and beneficial to all involved.

Now a thing that people might not realize is that most social programs are simply insurance or loans.

I will be employed for some percentage of my life. I can’t know for how long that period will be or how often, but I certainly need to continue to feed myself during this period. And so, when I am working, some amount of money goes to a central fund that then is shared among all when this sort of emergency transpires. This is a case of insurance that happens to be government run.

In many countries (the UK and the Scandinavian countries, for example), anyone can go to college. A person is given a minimum funding for both their lessons and their livelihood. If their grades are not kept to some minimum, the funding is stopped. But in either case, once they have found employment, the money that they used to go to college is taken back. This might occur as either a set tax through the whole country, or a fee imposed on that one individual. Now you might say that it can’t be a loan if the entire nation is taxed to put only a few through school, but as I have stated, the philosophical purpose of a loan is to see and achieve a better future. Those who go to college and end up creating the better things in life are benefiting everyone in the nation, and so it could be said that everyone is indebted to that person. (Note that I would not personally choose this approach.)

Social Security taking care of the old through their retirement, is another case of insurance. People, not knowing for how long they will live nor how much aid they will need in their last years, pay into a fund (in advance) that then sees them through this period of time. Some need more, others less.

Even communist-style equal wages could be called a vast business of insurance. Each person, not knowing how great his personal needs will be in life, simply cedes all money that he earns, taking back as much as he needs, rather than as much as he earned. And of course, then, the party that oversees the insurance fund makes sure that any one request is honest and decides how much it costs to cover.

Returning to the Law of Toos, the issue of socialism is one of quantity and specific setup. You can’t say it’s entirely a bad thing unless you are quite happy to get rid of your automobile insurance, health insurance, student scholarship, and other such things. Humanity as a whole benefits to some extent by aiding one another, as I will show in my next blog.

Posted in Theory | Tagged: , , , | 2 Comments »