Today I've been reading some more of Thomas Sowell's: Basic Economics.
The main point that he got across today was about Investments and Investment risks by both sides, the lender and the borrower. How the Lender can, by lending out $1 million dollars in total can recoup, and even make a 20% profit by having just 60% of the borrowers pay back what they were lent, plus interest. But with government interference, by putting a cap on the annual rates of interest, the only people that the lenders would want to, or even should, lend to would be millionaires because that's the only way they could recoup the money they lent out if they were to have that 60% rate of return. So the lower the annual rate of interest, the fewer people will be eligible to receive those loans, because there would be no incentive for the lenders to lend out money.
I have two questions:
ReplyDelete1) Can you give me a mathematical example of how lending $1 million can turn a profit? Example: If I lend you $1000 and you pay me back 1100, I have a profit of 10%. If I lend mom $1000 and she only pays me back $900 of it, I've lost $100, or 10%. How can I profit overall?
2) What conclusion can you draw from the idea of the government setting the interest lending rates, instead of them being agreed to by the lender and the borrower?