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Kraigmo's avatar

If banks were only allowed to lend out money they actually had in their possession, (thus destroying credit's power).... would homes in the USA inevitably be sold for $50,000 instead of $200,000?

Asked by Kraigmo (8181points) June 23rd, 2010

I’m no economist obviously. That’s why I’m wondering and asking.

It seems that the market’s prices are based on the what the consumers are willing to pay. If people can fairly easily get a loan for $250,000.00, then that’s what the property builders will charge. But, if no one had access to that kind of dough… wouldn’t homes and other expensive things in America eventually be priced way less?

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21 Answers

wundayatta's avatar

Well, yeah, but let’s think about it. What makes prices go down? A lack of demand. One reason for a lack of demand is because no one can afford anything. As you point out, if no one can borrow the money, no one will buy houses. Demand will plummet. Houses will go unsold and fewer people will own houses and fewer houses will be built, and the economy will start deflating. Prices would be lower, but far fewer people would have houses. All of us would be significantly poorer.

This is the power of credit. It says that we have faith in each other and faith in our economy. We believe it is safe to extend credit because we will make money in doing so. The economy will grow and we will all be better off. Would you rather have a home that costs more or no home even though the homes cost less?

It’s a good question that raises a number of interesting issues. However, if you understand the principles of supply and demand, you can often think this stuff through on your own. Just ask yourself: What happens to supply? What happens to demand? That’s all I did to answer the question.

YARNLADY's avatar

No, there are so many issues involved in the price of houses that your suggestion is meaningless. If builders couldn’t borrow money to buy lumber and all the other materials involved in houses, they couldn’t build. Builders would simply stop building, people would no longer have any place to live at all.

Example – look what happens when taxpayers refuse to pay any more taxes. The government then closes the fire stations, the schools, the police departments, the mental hospitals, the parks, and all the other services that people used to have.

arpinum's avatar

you are referring to a 100% reserve system. If the USA switched to this method and did nothing else it would cause massive deflation. This could push down home prices, but your salary would be affected too, as well as everything else going haywire. More likely, monetary base would be massively expanded to keep the price level stable, and then there would be plenty of money to be lent out to maintain housing prices.

But in general, if credit lines froze up, demand could shift and prices would temporarily come down. Long term, if builders can’t sell expensive houses anymore, they won’t build them. US citizens would be moving into much smaller and more flimsy houses than is currently the case. Sell granite short.
Economic lesson: Price is not less than marginal cost over the long run.

JLeslie's avatar

Housing prices are partly based on supply and demand, but also it relies on the cost to build. Right now in much of the US there is a large supply or oversupply of housing, but if that starts to dwindle over time and we need to start building again, who is going to want to build a house for $300K knowing they can only sell it for $200k. The cost of timber, steel, flooring, everything would have to come way down in that case or no one will build. But, if building becomes necessary than all prices will begin to rise again I think. Although, I do think that if people have to come up with bigger down payments or the total price of house to buy it, it will help keep the prices down, and especially there will be fewer people buying houses as strict investments. Part of the reason prices went way up was people were buying to just flip property.

Zaku's avatar

@YARNLADY: you wrote:
“If builders couldn’t borrow money to buy lumber and all the other materials involved in houses, they couldn’t build. Builders would simply stop building”
– No, they would have to build only with what they could afford, not what they could borrow, or they’d have to collaborate with the materials suppliers.

“people would no longer have any place to live at all.”
– No, there are already tons of buildings, plenty for everyone.

wundayatta's avatar

@Zaku – No, there are already tons of buildings, plenty for everyone

Sure. If we go back to the living standards of the 1930s and institute communism.

IchtheosaurusRex's avatar

You wouldn’t buy your home under such circumstances. You would build it out of whatever materials were at hand. That’s all you could do after the total collapse of civilization.

YARNLADY's avatar

@Zaku I’m sorry, but you have zero concept of the economic system and the way things work in an overpopulated society. It’s useless to try to give you an entire education in these few sentences.

Kraigmo's avatar

@wundayatta, regarding the information provided in your first answer: Doesn’t that stuff imply that America must economically expand forever?

And if there were no credit (or at least no credit-based economy), couldn’t we at some point relax with what we have, and just produce goods and provide services, but without expanding?

I could be wrong, but at some point, our system will hit a wall, won’t it?

wundayatta's avatar

@Kraigmo That’s a good question. Yes. Most or all economic models rely on infinite expansion. There is no such thing as holding still. Change, or die. Just like every other living thing, we are always trying to develop capabilities that will enable us to compete more effectively. Evolution is always happening, and that includes in a human economy as well as in all the other life forms.

But remember, we’re talking about humans here, and we value more than physical things. We have political and social evolution, too. What this means is that infinite expansion does not necessary require infinite resources.

Much of the economic expansion in the future will come from intellectual property. It is already more important now than it has ever been. The develop of the internet has created a voracious demand for content. We, here, right now, are creating content (for free, I might add), that is meeting a demand around the world for answers we are providing.

Presumably, I can do what I’m doing for pay somewhere. I’m working on that. If I do succeed, then I doubt if I’ll have time or interest to provide free content any more. This is the kind of thing that will drive economic expansion more and more.

Zaku's avatar

@YARNLADY I was pointing out your overuse of hyperbole. The things you wrote were not true.

@wundayatta What needs to change or die is the premise you describe, and the reaction of labeling any other way of thinking communism.

wundayatta's avatar

@Zaku Fortunately, economics is descriptive, not really prescriptive. Economists only understand things after the fact. They can’t really say that if you do this, that will happen for sure.

In any case, life has always changed or died, so it seems likely that will continue to happen.

And I am not labeling any other way of thinking communism. You are twisting my words far out of shape. I was only saying that if you limit resources and insist that is enough for everyone, then you have to have an allocation system that forces people to share. Sounds like communism…. nope, I’m wrong. True communism allows choice. This is actually a dictatorship. Fortunately or not, people are unlikely to ever want to share things equally amongst everyone. Maybe a few communes here and there, but most people, I don’t think, would be willing to be so generous.

Zaku's avatar


Ok, so I replied to you by referring to the experience I often have with other people, not you, of speaking outside the box of conventional economics from a hopeful benevolent imaginative perspective, and have people throw the “C” word around inaccurately, such as, it seemed to me, when you replied:

Zaku: “No, there are already tons of buildings, plenty for everyone”
wundayatta: “Sure. If we go back to the living standards of the 1930s and institute communism.”

Meanwhile you, it seems to me, have responded to things I write by assuming I am saying things I am not saying. I merely point out that there is already an abundance of housing, and I also feel that adding more and more humans and more and more housing is problematic given that the planet only has so much to it, and other species and non-human habitats are being wiped out as a result, which it seems to me will simply result in mass human death as well as non human death at some point, for no good reason other than “civilized” thinking seems stuck in models of expansion, conquest, growth, control, domination, extinction, economic theory, etc., rather than principles other traditional cultures have used to survive in balance with the non-human world for far longer than it took “civilization” to create this threat to our own survival.

wundayatta's avatar

@Zaku What concerned me is that it is all well and good to say there is an abundance of housing. Let’s assume that is true, although I don’t believe it is.

Right now, there are millions of people without homes. There are even more who occupy homes. These homes are of many different types of quality.

My question is practical. How do you propose to use the current housing stock to house all the people? If you can’t provide a mechanism to do this, then there isn’t enough housing and your assertion is untrue.

I assumed you would have some redistribution mechanism such as those often used in totalitarian regimes that called themselves communist (soviets and maoists). I don’t happen to think they actually were communist, but I used that term because that’s how most people, I believe, think of communism.

But perhaps you don’t have a communist redistribution of the wealth (housing) system in mind. Perhaps you have some other mechanism. However, if you are unwilling to get practical, then your assertions are meaningless.

Now you also speak of an expanding population. I don’t believe I was talking about that. I was talking about an expanding economy, which is a quite different thing. I believe we can expand the economy while using even fewer resources. All it takes is increased efficiency or productivity. Humans have been continuously improving productivity for a long time.

The population problem is a different issue, and unrelated to this question, I believe. Again, though, if it is a problem, what is your solution? Your doable solution?

Personally, I believe we will only be able to affect population growth very marginally. It will do what it will do. It’s out of our control in the same way the tides are out of our control. We can put in a few sea gates to generate electricity, but that won’t affect the tides much at all.

However, I do not believe population will expand indefinitely. From the demographic projections I’ve seen, the population will top out at 10 or 12 billion and then proceed to fall. A falling population is a very serious problem for humans (although maybe not for other species).

Demographic projections are not terribly reliable, so who knows what will really happen. All we can do is hope for the best and plan for the worst.

Now you also mention traditional cultures that have different principles that you believe let humans live in balance. Do you have examples of these cultures? Have you studied the actual history of these cultures instead of listening merely to their myths? Have you drawn any conclusions about the viability of cultures that do not expand economically?

Zaku's avatar

@wundayatta You are introducing many new questions, which are interesting, but you are adding them to what is already a tangent to the question here.
All I did was reply to a couple of YARNLADY’s replies which seemed to me obviously exaggerated to the point of inaccuracy and misinformation, and you replied to one of those, which was:
YARNLADY: “people would no longer have any place to live at all.”
Zaku: No, there are already tons of buildings, plenty for everyone.

So, in the context of an assertion that people would no longer have any place to live at all if the lending laws changed, I was calling bullshit.

I was not submitting a manifesto for property redistribution, or solving homelessness. Those are large and complex topics with circumstances that vary widely from place to place. I am not going to reply in detail to your other questions because they really should be their own topic, and I’m not sure I’d want to invest the time and mental energy to get into all that now anyway. However your last message seems like an invitation to an inconsistent and possibly endless disagreement. I have studied anthropology. I suggest you read Ishmael.

wundayatta's avatar

@Zaku I just think it is wrong to assert there are plenty of buildings for everyone when people do not have access to those buildings. @YARNLADY‘s statement is true. But I see the difference in our interpretation of the statement. You are taking it as a description of physical reality and I am taking it as a description of functional reality. You are right in your interpretation of the assertion. It is not true that there will no longer be places for people to live. There will be places that could house everyone. But no one will have access to them. So people will not have places to live. Tricky language—English.

Zaku's avatar

@wundayatta Aha! That makes sense.
I think there’s at least one other predictable layer of inaccuracy to YARNLADY’s prediction. Not only would a change in bank lending fail to make the existing buildings disappear, but I expect it would also fail to cause the people who live in those building now to stop living in those buildings. (i.e. YARNLADY: “people would no longer have any place to live at all.”) It seems to me it would also create some sort of new economy where people would need to figure out how to negotiate who lives where. I think I am not responsible for designing or predicting how or what would happen, but I think it is very unlikely that people would stop using their physical abilities and resources, and stop living in buildings, because of a radical shift in lending. I expect that economic theory would not accurately predict exactly what would happen. Especially if the prediction is in line with YARNLADY’s conclusion that people would not be able to figure anything out and all go live in the streets because they’re helpless without the old lending paradigm.
And yes, I’m ignoring for the moment your earlier question about the people who currently are not allowed a decent place to stay.

wundayatta's avatar

We can play hypothetical games all day if we want. I think the assumption that at some point we would eliminate lending, period, is so unlikely that we are safe in saying it can not happen.

If we were considering something that could happen, then I don’t think you’d have an obligation to solve the resulting problem. It would get figured out somehow, and you can’t really predict that.

However, since the hypothetical is impossible. then we are only playing a game. As such, I think you do have a responsibility to describe how it would be possible to achieve your hypothetical goal—in this case, redistribution of housing. If you do not, then it is a kind of cynical jerking around to even raise the hypothetical. I.e., I don’t think it is playing nice. I feel somewhat manipulated and used.

Zaku's avatar

(Note the question in this thread is not if lending were eliminated, but rather, lending more money than really exists or represents any real asset. I don’t think that’s impossible at all. Economy is essentially an invented game or set of traditions. It’s entirely possible to invent other sets of rules and get people to agree to them.)

It seems to me there are many ways to distribute assets without invoking borrowing imaginary money.

So it seems to me you are asking a whole new question, and that it really deserves a new question/thread, and I’m not really sure what your remaining question is. I suppose it is something like, if banks are only allowed to loan money that they actually have, how might it also happen or be possible to arrange that housing could become more available to people in the USA? Yes?

wundayatta's avatar

I don’t think it’s likely that any “invented” set of rules will ever have more than a marginal influence on the economy. Most of our rules are the result of how the economy evolved and our attempts to constrain theft antisocial economic behavior at the margins.

Kraigmo's avatar

@Zaku, the first two paragraphs of the very last thing you said, are exactly what I was about to write just now, until I saw you had just said it.

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