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RichardKennaway comments on Rationality Quotes Thread November 2015 - Less Wrong
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It's not about possible vs impossible. Its about industrial and social standards.
If a private individual goes to a bank and asks to take out a loan, and then starts asking about the possibility of more forgiving terms in the case of a default, the bank suddenly becomes incredibly suspicious. Planning for unexpected emergencies is seen as admitting that you intend to default. As a result, banks largely don't let people negotiate for generous debtor protection clauses, or, when they do, they only agree after incredibly punitive interest rates are agreed to. As a result, private individuals by and large just don't ask for that sort of thing. It's Not Done.
What I feel would be better is if creditors had a culture of less suspicion here. Debtor forgiveness clauses should be the default that a debtor opts out of with a bespoke loan exchange for a lowered interest rate rather than something they have to opt into if they're allowed the option at all. A debtor arranging their affairs such that a sudden injury does not financially cripple them should become the new norm, not an example of unusual prudence. Likewise, a debtor asking to take on that risk in exchange for a lower rate should be by seen creditors as dangerously recklessness rather than as confident and therefore trustworthy.
A poor person comes to the bank and wants a loan. The bank judges them a high risk, and either declines to offer the loan or offers it at a high rate of interest.
No way of drawing up loan contracts differently can affect that basic relationship between the risk of a loan and its cost.
Banks are not charities. They provide a service in return for a profit. As with any business, they must make a profit on whatever service they provide, at least on average, or they will cease providing that service. Even if the bank were set up as a non-profit organisation for the good of its customers rather than its shareholders, it still has to have a business model that breaks even. Selling £10 for £5 is not a business model. Laws and regulations that make a business sell £10 for £5 result in the business ceasing, or changing its form to avoid the laws.
ETA:
I think the causality works the other way round. You can't make up social rules and say "wouldn't it be nice if people behaved like this?" That's not to say that what we have at present is the only possibility, but one has to think about how an alternative would actually work, and not merely imagine happy faces.
FFS the bank makes a profit in every example provided. I don't want to say that you obviously didn't read the post, but I honestly can't see any way you would come to post this comment otherwise.
Loans are a service. Loans with gentle defaults are a more desirable service. Those seeking loans would often purchase such services preferentially and at a profitable premium to the bank, if they were available or if asking for them were socially acceptable. Laws should be passed to encourage banks make such offers.
I don't see why this would be so.
Consider the usual death spiral: the "gentle default" (GD) loans are more expensive than "normal" loans. This activates the self-selection bias -- people with good credit will take "normal" loans and people which expect that their probability of default is high will take the GD loans. This makes the population of GD borrowers skewed towards high default rates. To compensate for this, the bank raises the rates on GD loans. This, in turn, reinforces the self-selection and the GD borrowers population becomes even more skewed towards high default. Rinse & repeat, crash & burn.
Besides, if you insist that this service would be profitable for the banks, why are they not offering it? The social conventions which prevent individuals from asking for these terms do not apply to banks -- if this idea were good, they would take the initiative and create such a product.
Because you have chosen imaginary numbers to produce that result. But however the loan is structured, the bank must get its return or it will decline the business.
As Lumifer pointed out, you are proposing an insurance scheme against default. This is an existing structure, perhaps too much so. In the UK it is called Payment Protection Insurance. The problem with PPI is that it was sold under pressure to people who did not need it. The fallout from that has cost some banks billions, or rather, it has forced them to give back billions they should never have received. to the extent that a whole secondary form of dodgy business has sprung up to assist people in making claims for having been mis-sold these policies.
A poor person comes to LW and wants to post a laborious article. LW judges them a high risk, and either declines to post the article or offers it at a high rate of 2 Karma points. PS: Sorry to misuse your comment; it was the most recent one. ;)