R&D should not be funded by debt, period. Taking a loan means you need to pay interest on a regular basis. When will the R&D pay off? Years down the road, if ever. So the borrower either overborrows and pays interest out of his overfunding, or tries to become a Ponzi until (if he is lucky) his R&D pays off.

The cash flow timing is too uncertain, and there is an open question as to whether the borrower can make good. The very fact that you suggest that R&D be funded by debt illustrates how our culture has grown accustomed to borrowing for uses that should be funded out of retained earnings or equity investors.

As to a small business owner, if you look, the credit card lending to them has not been secured by the business, but by looking at their personal credit history, and the debt is guaranteed personally.

And 9 out of 10 new businesses fail. They are not good risks. BTW, the traditional sources of funding for new businesses is owner savings, friends and family, and more recently, credit cards.

Established businesses are a different story if the have a base level of predictable earnings or assets they can pledge.

Usury rates could easily be set as a percentage over Treasuries. That is even how Smith expressed them, as a premium over the best borrowing rate.

The other problem with usury laws is inflation and constantly changing interest rates. Fixed rate usury laws (which we use to have) become totally irrelevant when those things are volatile.

The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn’t let that happen. The Justice Department transfers 500 white-collar specialists in the FBI to national terrorism but then, the Bush administration refused to replace the missing 500 agents.
Brooksley Born a regulator tried to do the right thing to regulate one of these exotic derivatives that you’re talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. And it’s this type of derivative that is most involved in the AIG scandal.

bill moyers interview

Self Help in Durham is another institution that championed responsible lending practices to low income folks.

Very politically active.

Its founder was recently beat up under very odd circumstances:

Mugging delivered message

http://www.newsobserver.com/134/story/1335527.html

This Depression was set in motion by (1) excessive leverage by the banks once more, but (2) the lifting of usury laws back in 1980 to fight inflation that opened the door to the highest consumer interest rates in thousands of years and shifted spending that created jobs into the banks as interest on things like credit cards. As a percent of GDP, household debt doubled since 1980 making the banks rich and now the clear and present danger to our economic survival. A greater proportion of spending by the consumer that use to go to savings and creating jobs, goes to interest and that has undermined the ability to avoid a major economic melt-down.

I think its more to Smith’s point that banks will chase risk if it pays, and its important to put limits on that to make sure capital is distributed more wisely. That could be usury laws, or stringent accounting and regulated markets for derivatives.

Now that’s the Nemo we know and love.

I don’t think anybody is making the argument that usury laws would’ve prevented this particular crisis, just that it’s an interesting anecdote coming from a father of capitalism from a different era. Egregious payday lending, as you point out, is the most gruesome example of such lending that is largely predatory and detrimental to society as a whole. I still can’t believe it’s legal, but I guess if it’s not above ground, it’s the loan sharks…

It’s much more interesting and challenging to ponder how to bar banks from real estate speculation using us mirror-foggers as vehicles. In a sense, making secured loans against collateral they believe will be money good is kinda the entire goal. Seen any creative ideas you can point me to?

The stereotypical subprime loan put a person in a house he or she could not afford using a prime credit 5% 30 year fixed rate loan.

The subprime loan had a teaser rate of 2% and a permanent rate of 8%, and charged lots of fees up front, which were rolled into the principal, plus a large prepayment fee at the back end.

The borrower cannot possibly pay 8%, so he or she MUST roll the loan in one year, thus incurring the prepayment fee plus new origination fees far exceeding the annual dollar cost of the nominal 8% permanent rate. All paid out to the bankers at the time of refinance and rolled into the new loan.

Funny thing, though, when you lay it all out like that it becomes really obvious that this system could not possibly last more than 3 or 4 cycles. I wonder how all those ultra-smart, ivy league, New York bankers were fooled?

If only good lending was made, rates would have been even lower than they were. Bad lending was used to increase them above what they otherwise would have been. So, no, the problem was not low rates, but not low enough rates, not rates that could actually be repaid. Rates were in fact too high, rates that could never be repaid.