It wasn’t by magic that the already wealthy gained access. It was because they had the wherewithal to protect the commercial and central banks from the risk of default: collateral. Collateral is existing wealth that a lender may seize to satisfy a debt if the borrower defaults on a loan. All commercial and private sector loans carry a “risk premium” that predicts the risk of default. In Keynesian economics, government debt is considered “risk-free” due to the fact that a government can simply create all the money it needs to satisfy a debt . . . which is fine in Keynesland in which the government is the ultimate owner of everything and everybody.
Anyway, as we saw in the previous posting on this subject, the risk of making a commercial loan is a key element of whether or not the loan will be made. After all. A commercial bank creates money and it needs to know that the borrower can make good on the promise that the bank made on the borrower’s behalf.
Because a lender is obligated to make good on any money he creates, even if a loan is not repaid, a prudent lender will therefore ensure that he will be able to do so. Most loans require that the borrower pledge some form of collateral, which is wealth that can be seized in the event the borrower cannot repay the loan.
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| Louis O. Kelso |
Lenders also add a risk premium based on the likelihood that the loan will not be repaid. The risk premium is key because ethical lenders do not usually want the collateral, but their money. Even if collateral is seized and sold, it rarely covers the full value of the loan, and may be difficult to liquidate in any event.
Louis Kelso proposed making lending more secure and less costly — and more accessible to everyone — by combining the traditional collateralization requirement and the risk premium. He proposed using the risk premium as the one-time premium on a capital credit insurance policy, thereby making it possible for anyone with a feasible capital project, not just one of the currently wealthy, to become an owner.
Kelso’s work directly undermines the fundamental assumption of both Keynesian economics and its reductio ad absurdum in the Great Reset. That is that wealth must be concentrated if we are to have economic growth and most people must be confined to wages and welfare for their income. After Kelso, no one can truthfully claim that concentrated wealth, especially über-wealth, is inevitable or in any way necessary.
So, it should be a relatively simple matter to get rid of the usurious orientation of modern finance. It is only necessary to end the reliance on past savings as the primary source of financing for new capital formation — and that is what we will look at in the next posting on this subject.
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