> If there was zero risk there should be zero premium.
Suppose someone living the HN dream makes a bunch of money from his startup, and decides to pay off his mortgage. It might be structured as a loan from his company to himself, which then has zero risk.
A bank processing an FHA loan has zero default risk, since the government steps in to pay them. And they often sell the loans to a government-run company anyways.
A bank giving a conventional mortgage will often require 20% down, and again they resell the loans to a government-run corporation after a few years anyways. If you default in those first few years, they effectively get a 20% discount on the original purchase price of the house when they take it. Not zero-risk, but the 2008 financial crisis appears to have only had a 30% drop in house prices. (Obviously, subprime lenders can't resell their loans to the government, and didn't require a heavy down payment)
Generally speaking, the idea that interest mostly pays for risk assumes that there is no 'low-hanging fruit' where guaranteed returns are possible if only there was money. Paying down high-interest debt is one form of guaranteed return, so theoretically there shouldn't be such a thing as high-interest debt if the market was mostly efficient.
I guess the conclusion of your view is that: If people were more diligent about handling their money, banks wouldn't make as much risk-free money.
> I guess the conclusion of your view is that: If people were more diligent about handling their money, banks wouldn't make as much risk-free money.
That's very likely the case. Although the real world does not like zeros and tries hard to push some complex high order effects that will be triggered before any zero is realized.
Suppose someone living the HN dream makes a bunch of money from his startup, and decides to pay off his mortgage. It might be structured as a loan from his company to himself, which then has zero risk.
A bank processing an FHA loan has zero default risk, since the government steps in to pay them. And they often sell the loans to a government-run company anyways.
A bank giving a conventional mortgage will often require 20% down, and again they resell the loans to a government-run corporation after a few years anyways. If you default in those first few years, they effectively get a 20% discount on the original purchase price of the house when they take it. Not zero-risk, but the 2008 financial crisis appears to have only had a 30% drop in house prices. (Obviously, subprime lenders can't resell their loans to the government, and didn't require a heavy down payment)
Generally speaking, the idea that interest mostly pays for risk assumes that there is no 'low-hanging fruit' where guaranteed returns are possible if only there was money. Paying down high-interest debt is one form of guaranteed return, so theoretically there shouldn't be such a thing as high-interest debt if the market was mostly efficient.
I guess the conclusion of your view is that: If people were more diligent about handling their money, banks wouldn't make as much risk-free money.