Libertarian Perspectives on Predatory Lending and Economic Manipulations

Predatory lending is a practice that, while not limited to any particular ideological framework, has drawn significant scrutiny especially within the libertarian community. This form of lending can be described as at least as stupid and evil as it sounds, reflecting its catastrophic effects on individuals and economic stability.

Understanding the Economic Forces Behind Predatory Lending

One must understand that the phenomenon of predatory lending is driven by underlying economic forces. Typically, it would be economically nonsensical for a lender to provide funds to borrowers who lack the capability to repay. These borrowers represent a high-risk population, and lenders would logically be averse to such risky ventures. Conversely, it is because of a series of manipulative financial practices that predatory lending becomes feasible.

Economic Manipulations Leading to Predatory Lending

1. The Federal Reserve and Fractional Reserve System

At the heart of predatory lending is the institution of the Federal Reserve and its fractional reserve system. Under this system, banks are able to take one dollar and lend it out a hundredfold, with money they don't even possess. This privilege allows them to effectively counterfeit money on demand, giving them an endless supply of capital to throw at speculative and risky ventures.

2. Collateralized Debt Obligations (CDOs)

Another key factor is the use of CDOs, or Collateralized Debt Obligations. These financial instruments enable banks to bundle debt from worthless borrowers and repackage it as a “high-yield investment.” The lender gets paid upfront, while the ultimate risk is shifted to unsuspecting buyers, leading to inevitable defaults and financial ruin.

3. Corporate Financial Institutions

Moreover, many financial institutions today are structured as corporations, which shift the risk from individual investors to shareholders. In the past, financial institutions were privately owned, and their owners were personally liable for their risky investments. With corporate status, the owners now enjoy limited liability, enabling them to take huge bonuses and retire, while shareholders eat the losses. This has a long history, dating back to the colonial era in the United States.

Libertarian Solutions and Reactions

From a libertarian perspective, these practices are a clear example of government intervention and economic manipulation. Libertarians, by definition, believe in minimal government intervention, free markets, and individual responsibility. Most libertarians are well aware of these economic manipulations and would not tolerate or support them.

Libertarians would likely advocate for:

Reducing Federal Reserve Powers: Libertarians would call for the Federal Reserve to be dismantled or at the very least subjected to stricter regulatory oversight to prevent such manipulations. Ending Corporate Privileges: Corporations would be required to be treated as partnerships or trusts, eliminating limited liability and thereby making unethical business practices less attractive. Severing CDOs: CDOs would be banned, with strict regulations placed on the financial products and instruments that put funds at risk.

By addressing these issues, libertarians argue that predatory lending can be eradicated, restoring confidence in financial markets and promoting a more equitable economic system.

Conclusion

In summary, while predatory lending is a complex and multifaceted issue, the libertarian perspective offers a clear and principled framework for addressing it. By understanding the underlying economic forces and advocating for market-based solutions, libertarians can work towards a more just and sustainable financial system.