Wednesday, May 20, 2009

Fail to understand the following

and you could run for Congress:

If you understand economics, you'd know that the risk involved in loaning each money is different. There is significantly more risk in loaning Jake money than Howard. That means that if you charge Jake more interest, you are likely to have a lower loss based on that risk. So that's what you do. You charge Jake 20 percent interest, but only charge Howard 5 percent.

The following month, you decide that, for some external reason that has nothing to do with the loan - maybe Jake lost his lawn mowing job or crashed his bike - you are more worried about Jake paying you back than before. You now tell him if he wants to borrow more money, he needs to pay 25 percent interest.

Jake feels persecuted, so he complains to mom. Mom says you are mean and can't take advantage of Jake that way. She says you can't increase his interest rate.

How would you react?

If you said, "Easy, I would choose not to loan Jake any money because I can't be sure that I'll earn a high enough return to get my money back," then congratulations, you understand credit card companies and probably basic economics.

If you said, "Mom is right. He's my brother, so I should treat him more fairly," then congratulations, you might be a member of Congress someday.

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