One of the justifications for legitimizing interest on a loan is the notorious ‘risk premium’ theory: I lend you 100, and you give 105 in a year. Why 105? Because the future is uncertain, and I feel that there is 5% chance that you cannot pay me off.
According to this economic theory, the sum returned must always be greater than 100 because a probability is always positive. This theory is going down the drain today in a context of negative interest rates. States and multinationals return less than 100 when they borrow: I lend you 100, and you give me 98 in a year. Why 98? Because… uh… damn, I don’t know.
We must therefore look for another explanation. I will give you one.
Imagine that the one who lends money seeks the economic interest of the society (in a capitalist logic). His purpose is to maximize growth when it grants a loan. I lend 100 to a person who has a project, and I expect this project to create maximum growth: I lend you 100, and you give me 105 in a year. Why 105? Because current economic conditions make me think that we can expect a growth target of 5%.
This theory also works when the economic outlook is negative, and we want to impose negative interest rates: I lend 100, and you give me 98 in a year. Why 98? Because it’s a total mess right now. If you give 98, that’s good enough.
Here and now, is everyone currently borrowing at negative rates? No, otherwise you would know.
When an SME borrows at 2%, and a multinational borrows at a negative rate of 1% it is because the banker considers that the SME presents a more uncertain project. In this case, it is a mixture of the two theories set out above that applies.
This way of thinking of bankers is harmful in a several respects, and it can be improved for the common good.
Imagine that an economic committee under the aegis of the state gives growth objectives to economic actors (banks and borrowers): 2% growth per year for instance, and then impose penalties and rates bonuses not according to your risk profile, but according to the interest of your project for the common good (and not in the interest of the bank).
If you invest in polluting activities, you have a 3% penalty and therefore you must borrow at 5%. In other words, your project is harmful for the common good, so you must report 5% growth for it to be accepted by the Nation. In the same way, imagine your project is ecological or humanitarian (renewable energy or assistance to the weakest members of society). In this case, your project is subject to a 4% bonus by decree. You then borrow at -2%, and you are asked to return 98 instead of 102 in order to encourage you.
Now imagine a bank that wants to take a slice of pie to speculate on the stock market. One can imagine a rate of 20%. Ditto for a multinational that borrows to buy its own shares: there is no interest in the real economy, and the rate can also be 20%.
What about the “risk premium” in all of this? It is illogical to penalize a project by imposing high interest rates on it because it is too risky. If it is risky at 2%, it will be even more risky at 6%!
In the present case, the banking logic must be binary. The bank must take responsibility for lending or not. No more, no less.
What about the bonus/malus of interest rates for housing loans? It must depend on whether it is a first home or not, if it is for the main residence or not, if it is a new home or not, if the real estate project is social and ecological or not, etc.
And how do we remunerate banks in this system? By fixed costs which may depend on the relative success of the projects. The most successful banks in their choice of projects may also grant more loans in the future.
It becomes clear that banks are not investing their money, but granting credits with public money. They do not have to bear the losses in the event of crises, nor to grab the profits in times of growth. Thus, banks regain their intermediation role between the state and the real economy.
Targeted growth is an eminently political decision. Same for the bonus/malus interest rates according to the category of the activity. Transparency is essential, and strict rules must be implemented to avoid any interference from lobbies.
With the aforementioned logic, interest rate takes a new dimension. Words change in meaning: interest is no longer that of banking and finance, but it becomes the interest of the common good.
Yet, there must be a popular will to push political leaders to act and to put in place this kind of proposal…
Anice Lajnef, March 2020