What is unjust or inefficient about your example with purchasing the house?
Should Dave not be allowed to borrow money to own a house? Should only the wealthy, with sufficient cash reserves, be permitted to buy a house, without financing?
If you don't value the house as much as Dave -- on a net present value of the future payments you have to make to own it -- why should you have it, instead of Dave?
Should real estate prices be capped, by a central planning board, so that Dave cannot borrow too much to own it? If so how does the seller choose who to sell to, between you and Dave? Who says the house is worth X, and not Y, when Dave is happy to pay Y?
Or is it unjust that Dave likes the house enough to commit much of his future income to it?
Why is Dave a moron? Because he disagrees with you on what to use his future income for? Should you be able to tell Dave what to spend money on, and what not, out of your view of what is socially efficient?
Perhaps not just you; you could get a few of your neighbors together and call a vote on what Dave can spend his money on. Based on social utility, of course.
But to go back to your example. Suppose you choose not to outbid Dave, because you are smarter, and instead opt to rent an efficiency studio and save up over your life and build a sizable amount of investment assets (because you did not spend frivolously on a large house). As you age, you look for your savings to work for you, because you were smart enough to defer consumption and now you feel you should be rewarded.
Where to put your assets? There are many choices. Should one of them not be the option to lend Dave's son, Dave Jr., money for his own house, in return for a level of interest to compensate you for use of your capital? But that's a pain to find the borrower and vet him, and risky if it's just relying on Dave Jr (who may be a moron like his father).
What if there was an agent you could pay, who would originate the loan, check that the title was valid, check Dave Jr.'s credit, author the loan documents, and then provide it to investors like you -- or even bundle them together, so that you could spread risk of default over a few different mortgages, instead of just one?
That would be great -- you could earn a return on your saved capital, and Dave Jr. would get what he wants too (even if you disagree with what he should want)!
Ah, but of course, agents like that are just parasites. So instead of reinvesting your saved capital with someone willing to borrow the money, you stuff it in your mattress.
The prices of things are not what they are worth, but what the market will bear.
The 30 year mortgage allows a rich man to outbid you on the home that you want to buy to live in, a property that he has no personal interest in, so that you can pay interest on the money you only had to borrow so that it could not be loaned to someone else, such that they could afford to pay more than you. That money pumped into the market only serves to raise prices. Houses are built larger and more expensively than they otherwise would be because the buyers are able to pay more.
If there were no mortgage loans available, the market would be producing a greater number of cheaper homes for sale, and a greater number of rental homes for investors, with more economic separation between those markets. The rich man outbidding you for property would have to actually assume ownership of it, and would shoulder some risk of carrying vacant rental units. Venturing into property-owner-land as a rentals investor would evoke a nasty NIMBY response.
Believe me when I say that it is possible for every person in America to own their own home, even with just a single minimum wage job for the whole household. But it isn't bloody likely, thanks to mortgage lending, zoning laws, and building and occupancy codes that completely eliminate entire classes of low-cost housing as either unprofitable for developers or outright illegal.
This same phenomenon is now occurring in higher education, wherein loans inflate the price, the product remains essentially the same, and the buyer is saddled with an enormous burden of debt. Debt is a trap laid by the wily for the foolish. But it persists because the practice nestles snugly into a Nash equilibrium. The practice is not at an absolute maximum, but neither player alone can improve his position by making a different move.
The only way for the erstwhile borrower to win is to form a cartel able to punish anyone who takes a loan to pay for a good or service too scarce to supply everyone in the cartel. In other words, non-rich folks win by regulating the hell out of lending, to reduce the number and amount of loans available.
Precisely. Now the real question is, why isn't everyone outraged over this practice? Why is none of this taught in junior high school? Why are we told that personal debt is a fact of life, and makes the world go around?
The answer lies within another question: Cui bono?
OK, so loans taken for purposes of speculation on scarce goods are a Bad Thing. But loans taken to build up real infrastructure and support innovation still seem to be a very valuable service that the financial industry provides.
And they have leveraged this one valuable service into a massive industry that, while still engaged in the valuable service, has also branched out into destructive parasitic services. One cannot remove the parasite, because no effective alternative exists for the necessary and valuable function.
So what is to be done? The only plan likely to work even a little bit would be to establish a government bureau of capital and infrastructure investment, such that if the financial industry vanished overnight, the small businesses engine would not putter out. But such an agency would be an obvious target for lobbying, regulatory capture, and personnel rotation to and from the financial industry.
They have us over a barrel, and they know it.
If lending were abolished entirely, people who would otherwise lend would be forced to buy shares, with all the associated risks of ownership.
Should Dave not be allowed to borrow money to own a house? Should only the wealthy, with sufficient cash reserves, be permitted to buy a house, without financing?
If you don't value the house as much as Dave -- on a net present value of the future payments you have to make to own it -- why should you have it, instead of Dave?
Should real estate prices be capped, by a central planning board, so that Dave cannot borrow too much to own it? If so how does the seller choose who to sell to, between you and Dave? Who says the house is worth X, and not Y, when Dave is happy to pay Y?
Or is it unjust that Dave likes the house enough to commit much of his future income to it?
Why is Dave a moron? Because he disagrees with you on what to use his future income for? Should you be able to tell Dave what to spend money on, and what not, out of your view of what is socially efficient?
Perhaps not just you; you could get a few of your neighbors together and call a vote on what Dave can spend his money on. Based on social utility, of course.
But to go back to your example. Suppose you choose not to outbid Dave, because you are smarter, and instead opt to rent an efficiency studio and save up over your life and build a sizable amount of investment assets (because you did not spend frivolously on a large house). As you age, you look for your savings to work for you, because you were smart enough to defer consumption and now you feel you should be rewarded.
Where to put your assets? There are many choices. Should one of them not be the option to lend Dave's son, Dave Jr., money for his own house, in return for a level of interest to compensate you for use of your capital? But that's a pain to find the borrower and vet him, and risky if it's just relying on Dave Jr (who may be a moron like his father).
What if there was an agent you could pay, who would originate the loan, check that the title was valid, check Dave Jr.'s credit, author the loan documents, and then provide it to investors like you -- or even bundle them together, so that you could spread risk of default over a few different mortgages, instead of just one?
That would be great -- you could earn a return on your saved capital, and Dave Jr. would get what he wants too (even if you disagree with what he should want)!
Ah, but of course, agents like that are just parasites. So instead of reinvesting your saved capital with someone willing to borrow the money, you stuff it in your mattress.
To make society more efficient.