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Title: A crisis of biblical proportions
Date: 05-May-2009
Category: Opinion Essays
Source/Author: Jack Flanagan
Description: Today we face a meltdown in financial markets of truly biblical proportions. It could also represent a tipping point in societal organisation as only something of this magnitude could. I think a biblical analogy is apt because I have been struck in the past few weeks by comments on the financial system using biblical metaphors. This led me to think that there may be biblical solutions that might indicate how one should remedy the problems we are facing as this is not the first collapse of some form of market system, nor will it be the last, and remedies for past collapses might be instructive.


Jack Flanagan 
 
Today we face a meltdown in financial markets of truly biblical proportions. It could also represent a tipping point in societal organisation as only something of this magnitude could. I think a biblical analogy is apt because I have been struck in the past few weeks by comments on the financial system using biblical metaphors. This led me to think that there may be biblical solutions that might indicate how one should remedy the problems we are facing as this is not the first collapse of some form of market system, nor will it be the last, and remedies for past collapses might be instructive.

We all know the verse from Timothy (6:10) that “ .. the love of money is a root of all kinds of evil.” , and the Hebrews (13:5) verse “Keep your life free from the love of money, and be content with what you have.” So a key to the current problem could be found in the fixation of some of our banking and shadow banking brethren on money. It is not that making money out of lending against real estate or providing margin loans to acquire shares is itself bad. However, the situation changes if the values of assets against which loans are pledged are likely to fall. I was struck by the comments of Adair Turner, Chairman of Britain's Financial Services Authority, in relation to the validity of the fees and interest charged on the more esoteric bank products:

"In the years running up to 2007, too much of the developed world's intellectual talent was devoted to ever more complex financial innovations, whose maximum possible benefit in terms of allocative efficiency was at best marginal, and which in their complexity and opacity created large financial stability risk."

"There must be a suspicion that some and perhaps much of the structuring and trading activity involved in the complex version of securitised credit was not required to deliver credit intermediation efficiently, but achieved an economic rent extraction made possible by the opacity of margins and the asymmetry of information and knowledge between end users of financial services and producers." (January 2009).

Turner is basically saying that the fees charged were excessive and as such usurious. At the same time some senior bankers, a little late, have branded 100 per cent mortgages as immoral and that the love of money is not good for society.

Recent comments in newspapers which indicated that Britain’s Northern Rock Bank had continued to lend mortgages up to 125 per cent of property values after being rescued by the British government; that the CEO of Royal Bank of Scotland had negotiated a larger than agreed pension before he resigned and refused to give any of it back; and that AIG had paid over $200 million in bonuses after being rescued by the US government, all indicated that the very people who had been instrumental in the meltdown were profiting from it even as taxpayers were rescuing their organisations from collapse.

Turner’s comments and the newspaper articles led me look again at the concept of usury which had seemed somewhat quaint to me before the current meltdown, but which could now be seen in a new light. Church organisations have, at best, had an ambivalent relationship with interest on loans and probably with good reason. Seeing the wealthy get richer on the backs of the poor would make anyone sceptical about the rightness of levying interest on loans.

However, the expansion of international trade could occur only if interest could be charged on loans and only when there existed a system of accurately recording the debt and interest payable. This occurred from the Fifteenth Century in Europe with improvements in ships and the adoption of double entry bookkeeping which basically vouched for a merchant’s honesty. Thus interest and its accurate recording were necessary corollaries to the development of trade on credit.

The ambivalence to charging interest is well expressed by Blackstone in the Eighteenth Century who said in his Commentaries on the Laws of England that "When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not". Blackstone went on to analyse usury as an exorbitant increase in the amount of interest charged. A rule of thumb applied at the time was that anything over the statutory rate of interest charged by the Crown could be interpreted as usurious, even when that rate changed considerably. Thus an important principle was that a usurious rate of interest was variable and contextual.

What is making people angry today is the realisation that credit, at even very low interest rates, directed mainly at funding the acquisition of non-productive assets (houses with loans in excess of 100 per cent and shares acquired with margin loans), could only be repaid if the value of those assets rose. This could happen only if there was an increase in demand for those assets fuelled by more credit. What they were not told was that asset values could fall and that such a fall was increasingly likely. Hence we had all the makings of a typical bubble.

So why didn’t the bankers refuse to provide the credit? Mainly because they and their employers could earn significant fees in the short-run while the value problem was seen as a long-run problem of no immediate concern. So why didn’t the economists and financial advisers warn of the coming problem? Some did, but not the mainstream advisers who had too much to lose in fees by such contrarian advice. The fees charged and interest on loans given, in hindsight, seem usurious, in that too many people were inveigled into credit-fuelled acquisitions that could not be repaid when the bubble burst and property and share values declined.
It seems like a simple problem of self-interest versus the common good with self interest winning by a country mile, however the solution is not likely to be simple. The developed nations are trying to solve the problem by getting lending going again.

Governments are throwing large amounts of purchasing power at consumers, but consumption patterns have now fundamentally changed and it is unlikely that such activities will have the desired effect as people eschew unnecessary consumption. Japan is testimony to the potential futility of this action. The problem is not insufficient consumption but excessive debt. It is not possible to kick start the first without first dealing with the latter, whereas government solutions are to increase consumption by increasing national debt.

Can the Bible help us here? Niall Ferguson, an economic historian, says that that one way to solve the current situation is to cancel debt. He cites Deuteronomy (15:2) which states that every seven years creditors should grant their neighbours (other Jews) remission from all debts. Note that this did not preclude enforcing debts on non-Jews.

For the average retiree this must sound alarming. Ferguson asked how a modern society could function if it cancelled debts so often? Yet from ancient times loans were often cancelled by royal edict. After the First World War Keynes repeatedly called for a general cancellation of the war debts and reparations imposed by the allied powers. The rise of Nazi Germany could be seen as one consequence of not doing this. More recently governments have been asked to cancel debts (jubilee) of impoverished third world countries, as too much of their GDP goes to servicing interest payments. So cancellation of debt is not such a far-fetched concept.

Debt forgiveness makes sense in communities where a balance is needed for social cohesion, with a limit being put on the disparity in wealth between the rich and the poor. A systematic purging of bad debts goes some way to redress the balance between rich and poor. In recent years, reducing income taxes, especially on the rich, and the reduction or abolition of death duties have all allowed the rich to get richer. Debt forgiveness is a quick way of redressing the social balance between rich and poor for the benefit of society in general.

Such debt forgiveness can only be achieved with the banking sector being placed largely, even if temporarily, in public hands. We are now seeing that credit is too important a commodity to be left to an unregulated private sector alone, just as water and electricity are regulated.

Concurrently I have been reading a book about Keynes which cited Roosevelt’s inaugural address in 1933 where he draws on the biblical narrative of Jesus overturning the tables of the money lenders in the temple ((Matthew 21:12). Roosevelt fulminated about the “money changers fleeing from the high seats in the temple of our civilisation. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.” Roosevelt’s targets were the bankers of the day who in the face of an unwillingness to lend, offered no solutions which they could not profit from.

It is easy to see that the bankers whose only guiding value is make money have no conception of the victims of their actions, those “others” who are unknown to them, just numbers in a ledger. Yet all those home owners whose homes have been repossessed and the retirees whose pension nest eggs have been trashed, are people whose lives have been often shattered by the greed of a few.

Capitalism deserves better. It has been the driving force of our economies and societies and it serves us well when profit is the outcome, not the goal. When bankers turn out to have feet of clay it takes a herculean effort to recapture the trust in the capital enterprise system that is being lost at present. Some form of debt forgiveness by the banks may become a matter of some urgency if the recession does not end soon.

 



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