In my Kiwanis Club, are a couple of bankers. At one of my last programs, I, as usual, was speaking about precious metals. The question was asked, “Do gold or silver pay any interest?” The answer, of course, had to be “No.” I then asked the questioner and audience in general, “Does your home pay interest? Does your lawn mower pay interest? Does your living room sofa, or bedroom furnishings pay interest? Do your clothes pay interest? Does your car pay interest?” Chuckles, of course. Actually, let’s determine what “interest” really is, shall we? By dictionary definition, it is, “Money paid for the use of money.” I then asked Cheryl, one of the bankers, “How much interest does your bank pay for the use of money, 1%?” “No, actually it is 3/4%,” she said, and was rather embarrassed at the admission.
The query about other things we own and use, paying interest, isn’t far fetched at all. We use money to buy things we use and need. We have to pay for the use of the money if we borrow it, because we have none. It is a useful thing, in other words. The other things mentioned above, are also useful, but in actuality cost us to use, just like the money we may have to borrow. Furniture wears out, autos need gasoline, repairs, and homes require repair, taxes, and utilities to be paid to use them. Clothes need washing or dry cleaning, and on it goes. As the old expression says, “Nothing is free, not even the air you breathe.” Everything we use, buy, need, or for that matter borrow, has a cost attached to it. Does the home cost to own? Does the clothing we wear, cost us? The same with all other items around our home, or which are useful to us. When we borrow from someone, we must pay the cost of the loan, or use of the money, which is called “interest.” We pay for the use of everything we own, not just borrowed money.
The bank, which pays 3/4% interest on a CD, currently charges 9% for an auto loan, and this is when they keep the title as insurance against default. Aside from operating costs, the bank then, makes a whopping 8 1/4% profit on your money. The bank had no funds to loan at 9%, until someone deposited dollars at 3/4% for them to loan. Nice business, huh? If you have a mortgage at 6% interest for 30 years, the mortgage company undoubtedly sold your loan to Fannie Mae or Freddie Mac, at a discount of perhaps one percent, meaning they loaned no one anything, and got a 1% bonus for doing so. A $300,000 loan, gave the mortgage company an instant $3,000 profit. Many times it happens twice the 1%, or $3,000 for the originator, and $3,000 for the next in line before Freddie or Fannie gets it. And you, the person who needed the $300,000 for your home, probably paid one or two “points” ($3,000 or $6,000) to get the loan. Lots of irons in the fire.
What did Freddie or Fannie do to get the dollars to buy the paper from the mortgage company, who bought the loan from the bank? Not a damned thing. Freddie and Fanny are “pseudo government corporations,” who can loan all they wish, and can get virtually unlimited funding from Uncle Sam, based on the value of the security; which is your home. In reality, not a single entity in the chain of mortgages has invested a dime. You, the borrower, paid for all the expenses in the “settlement costs,” and since neither the bank, mortgage company, nor Fanny or Freddie had to have a single farthing, but drew it all from Uncle Sam, one can see how grand a scheme it really is.
There is talk about Fannie and Freddie going bankrupt, if the housing industry does the same. Here’s how it would work. Housing values go down, and jobs are lost. Defaults occur, as payments are not being made. Foreclosures occur, and lots of houses are for sale because of the foreclosures. The more there are for sale, the less they will be sold for, due to the fact that there are more for sale than there are buyers. “Stott’s law,” again, which simply says, “The more of anything there is, the less they will be worth.” Houses included. Even though Freddie and Fanny are semi government outfits, they still have a lot of stockholders, and if they go, their stock will go too. Don’t buy Freddie or Fanny stock.
If a neighbor borrows a cup of sugar, you don’t charge interest for the loan, do you? Even though you had to buy the sugar, you trust her to return it. Your money paid for the sugar you loaned. The bank, mortgage company, nor Freddie or Fannie didn’t buy a thing, nor did they have a cost of anything, when they loaned the money. You had a cost for the sugar, but the big boys had no cost at all, other than staff and paperwork. Since the bank pays you 3/4% interest for the use of your money, and then turns around and charges someone who borrows your money 8 1/4% more than they are paying you, it is a pretty good bet that the banker will come out OK. If the neighbor doesn’t return the cup of sugar, you will be out more than the bank, percentage wise anyway.
I am not against charging interest for the use of anything. The use of a rental car isn’t called “interest,” but “rent.” An apartment “rents” for a certain amount of dollars per month, and the renter is paying for the use of that facility. In reality, “rent” is “interest” on an investment of capital by the apartment owner, or owner of the rental car. A tool rental company buys expensive tools, and rents them, to get a return on their investment. The auto renter, buys cars, and rents them to get a return on his investment. The owner of an apartment building has bought the building, and tries to get a return on his investment through the rents he charges. The apartment gets damaged by careless tenants, weather, and decay. The rental car wears out, as do tools and other rental items. A businessman has to be very careful to get a return on his risk investment, no matter what business he is in.
How much capital did the bank, mortgage company, or Freddie and Fannie risk, when they loaned dollars for you to buy your home? None. It was printed scrip, called dollars, which were produced out of thin air. The apartment owner, hotel owner, or auto renter, have huge sums of capital tied up, in the hopes of getting return. The bankers have your dollars, which you loaned them for a fraction of what they charge to loan your dollars to someone else. They have no capital invested, in other words, like the apartment, rental car, and tool owners have. They have your capital to loan, not theirs. The mortgage companies, and Freddie and Fanny have none of their capital invested, because they have none. This is not counting the fact that if the bank doesn’t have enough deposits to loan them, they can tap the fed for as much as they need, with no strings attached.
When a loan is made, the money supply goes up, and when the loan is paid off, the money supply goes downÂ…technically at any rate. Fanny and Freddie can loan all they wish, and watch the money supply go heavenward, and with no cares of any kind, other than a collapse in the real estate industry. Even then, it’s only paperwork, and no employee or manager is going to lose anything personally, like you would if you stopped making payments. It’s all fluff and cotton candy. No one has anything at risk, other than you. Your 3/4% interest is taxable.
The question is then, why would anyone loan their dollars to a bank at 3/4% interest, when by anyone’s figuring, our inflation rate is over 10%? Even the government CPI figures say we are having close to 4% inflation, and this is about as accurate as Hitler telling the Germans they were winning. No, gold and silver pay no interest. Except in the last two years, they have gone up about 50%. Also, they don’t require paint, repairs, rent to be collected, or property taxes paid on them. Nuf said? Protect yourself.