Usury Frustrates the Creative and Unitive Aspect of Commerce

To produce a book, I prefer to teach the topic, and work through the questions with students, in that way testing the ideas and growing the book.  This blog was associated with a class, but I could never get enough students through the schools to make the class a go.  I will proceed with the book, but sadly, uninformed by rigorous debate.

What Islamic scholars I have tried to engage are generally reticent for whatever reason, contrary to my experience of Moslem hospitality in general.  Perhaps the topic is too hot.

But I can engage Moslem scholarship, and I find a most excellent article here.

The rationale behind the prohibition of interest-based transaction is not beyond the common wisdom. If the funds are borrowed for consumption purposes, then charging of interest is clearly a sign of moral bankruptcy and inhuman behavior. In case the funds are provided for investment purposes, even then the prohibition is rational. It is obvious that such transactions involve a one-sided traffic. The entire burden of risk and uncertainty, being the norm of trade and business, has to be born by the debtor/investor. On the other hand, the creditor/saver is guarantied for a sure return.

I recommend this article for being succinct and comprehensive.

Although the rationale is not beyond common wisdom, there are also reasons beyond common wisdom to abjure usury, as I will note below.

Borrowing money to consume is to stay on a path of diminishing returns.  If you need to borrow money to live, then your life is not ordered to your best options.  Truly there are circumstances which are short term, or long term due to injustice, but to take a loan for consumption is to ignore the signal that something is wrong.  There is the term "deserving poor" in which a lender gives a hand to someone who has been in error and is reforming.  Charging interest distorts this person's recovery by making the lender's demands absolute while the borrower's recovery is relative.

Funds at usury are always available, for there will always be someone who can get more out of your life than you are willing to give, if only they can trap you.  Usury is a trap.  To refuse funds at usury certainly narrows the options for solving a problem, but it is within those very narrow options where one's unique talents are discovered, and the efforts at recovery are made on a most solid basis: you find where you are not only most productive, but where you are the best at what you do.  Usurious loans give a false sense of achievement (I got the loan approved!) versus the grueling trial and error of finding what talent you have which the world will reward.

Anyone making a loan ought to do so limited in scope to an act of charity.  As an act of charity, not only is there the loan, there is the opportunity of offering compassion in the form of advice from one who is doing well to another who is doing poorly.  If the loan cannot be paid back, there is even more opportunity for a charitable act, and that is to forgive the loan.  And non-forgiveness of a loan is a most mild rebuke to a borrower.  The only sanction is to not lend more.  The errant borrower is then obliged to go find another benefactor, from whom he will benefit from another round of instruction and bromide.  He who lent without being any help is improved by the experience that his lending in this instance did no good.

If it is easier to borrow than produce, few people will change their habits in order to be more productive.  Productivity is always measured to the degree you serve others.   "Welfare" is taking borrowed credit, credit someone else will have to pay at some time.  The state steps in and acts as usurer trapping the poor on one hand and obliging future generations with no say on the other hand to make good the loan.  For society to offer welfare is to lure incalculable potential into a dead-end, and leave the tab with lenders who have no say.  As Dorothy Day said, it is amazing hoe much you can get in the way of luxury if you just do without the necessities.  Simply compare the results of welfare when it was the job of mediating institutions with welfare as a state function, and the argument is done.

As to usury on a business loan, first we must follow Noonan in recalling all loans are an act of charity, and a business loan is a chimera.  The article on riba quoted above is correct, but to add to it, anytime "credit" is cheaper and easier up front than other means of finance, the moral hazard of taking easy or cheap or both in the form of credit will trip up the entrepreneur more often than not, and in any event, eventually.

Loans at interest are simply unnecessary to an economy.  The usury-free range of options are sufficient to the task of a prosperous economy.  And here again, the borrower's absolute needs become relative to the lender's desires.  Serving the customer becomes secondary to paying the usurer, this misallocating resources in the enterprise.

The article goes on to eliminate the arguments for usury.  I'll only add the pro-usury arguments depend on terms that upon which few agree, thus winning by obfuscation. Money, credit, profit, rent, capital,  are all terms upon which among economists there is disagreement, even within a given school of thought. Even if within a school there is agreement on the definition of some terms, there will be disagreement on another, making conclusive argument impossible. Since no one has the others understanding of the terms in use, it is not possible to make an argument one way or another.  The practice of usury remains like a evil redoubt, unassailable for a lack of martialing reason to the assault..

Apart from the major differences in sale and usury contracts, and in the nature and functions of physical and financial capital, Islam prohibited the transactions involving interest on moral and social grounds. This is because it develops miserliness, greed and a selfish attitude in the individuals, and destroys the high virtues of kindness, sympathy, help and mutual regard in the society. It create a tendency among the people to earn wealth by hooks or by crooks.... It diverts the flow of investment to the projects offering a high rate of interest irrespective of whether or not these are socially desirable.

These are the rationales not immediately apparent.  Usury frustrates the creative and unitive aspect of commerce, as noted in this paragraph in the forms of misallocation and malinvestment.  This aspect is little appreciated must must be highlighted.

If one steps back and observes, usury is a relatively small part of the economy, that is to say the vast majority of commerce is usury free, with equities and vendor finance taking up the lions share of commerce.  This proves usury is unnecessary.  At the same time, the destructive elements in the economy can be traced to the relatively small portion of the economy that is usury based.  Like an otherwise healthy adult, the body economic can become quite ill over a tiny virus entering the system.

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Housing Bust in Canada

Mish Shedlock is notable for getting credit as a component of a lack of hyperinflation in that great debate.  He is mystified as to how his predictions of a real estate bust in Canada have not yet occurred.

No one knows for sure precisely when any bubble will burst. I got the US housing bubble correct but missed Canada by a mile.Read more at http://globaleconomicanalysis.blogspot.com/#QMR6i3beHYGO4FFu.99

This is easy: Canada requires a 20% down payment and there is no mortgage deduction on Canadian taxes.  So those seemingly insignificant points actual have profound effects.

For a decade most homes in USA were bought with nothing down, sometimes even negative LTV, but in Canada someone actually had to demonstrate enough discipline to save a down.  A much more responsible customer base.

Next, with mortgage interest deduction on taxes in USA, buying a house is a tax dodge, making the reason for having a house to that extent abstruse.

When it comes to usury (interest) even slight rules can have large effects.

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Mish on The FED Dual Mandate

Mish Shedlock Gets This Exactly Right:

Dual Mandate Equals Mission Impossible

Here's the deal.
1. The Fed can control money supply but it will have no control over interest rates (or anything else).
2. The Fed can control short-term interest rates, but then it would have no control over money supply (or anything else).
That is the full and complete extent of the Fed's "control". Note that neither price stability nor unemployment is in either equation. The reason is the Fed controls neither.
That is a mathematical certainty, yet people have preposterous beliefs that the somehow the Fed can not only control inflation but also unemployment.
If the Fed, the Bank of Japan, the Reserve Bank of Australia, the ECB, or the Bank of England, or the central bank of China could control the unemployment rate, rest assured they would have done so long ago.
The economic illiterates will point out the unique nature of the Fed's dual mandate, but I will counter with the mathematical stupidity of such an idea.
At best, the Fed can control (using the word loosely) a maximum of one thing at at time, and employment is not one of those things.

He does a very good job defending deflation (properly understood). Then he flubs this a bit...

Lower Prices Spur Sales 
People hold on to things when replacement costs are high. Lower prices, not higher ones, spur sales. Sales spur employment!
Think about cars. If prices dropped 20% would that spur cars sales? I think so. If you could replace your aging car 20% cheaper and it had more features, would you do so?
What if they rose 20%? My guess is that, all thing being equal, car sales would plunge.

Well, I watched auto prices rise 20% ...  and houses 50% over a short several year period, and sales of both jumped up.  So is he wrong, well, no because he added "all things being equal.."

What also changed was usury, "cheap interest rates" distorted a market already distorted by usury itself, in which one who could afford the payment on a $200,000 at 9% could afford the payment on a $300,000 house at 6%.   What happened (new market entrants, over time) is such people merely paid $300,000 for a $200,000 home.

Once the camel's nose, in the form of usury, is in the tent, the loan sharks then can do what they want, there are no rational limits.

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Why 48% of Home Sales Are All-Cash

Because bankers are buying up homes with debt.

Mish Shedlock has outlined how Blackstone investments and a German bank have put together a bond that is predictably a bad investment.  Since usury is legal, bad investments crowd out good as promises of something for nothing (you can retire on worthless investments) cause people to make bad decisions.

Blackstone Group LP, the world's largest private equity firm, became the largest owner of rental homes in the U.S. , acquiring 41,000 homes in the past two years. In October, Blackstone offered the first-ever "rental-home-backed" security on Wall Street. The bond is backed by just a fraction — 3,207 — of the rental properties owned by Blackstone. Monthly rent checks from the properties will be used to service the $479.1 million security.

All of this is legal, and there would be no need to ever make it illegal.  What is necessary is to stop destroying other income opportunities for people, by ending the subsidies for the rich bankers.  The banks are back at these crimes because we bailed them out.

Next, if this goes bad and people decide not to pay up, they can be legally brought to law at the expense of the rest of us.  Shunning, or not, is sufficient sanction for wrongdoing.

We do not need laws, but we do need to end privileges.

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Ben Franklin on Interest

Usury is wrong because it does damage, and Ben Franklin points out man-made laws do nothing to curb usury.  He goes on to note specific damage done by usury:

And here it may be observed, that it is impossible by any Laws to restrain Men from giving and receiving exhorbitant In terest, where Money is suitably scarce: For he that wants Money will find out Ways to give 10 per cent when he cannot have it for less, altho' the Law forbids to take more than 6 per cent. Now the Interest of Money being high is prejudicial to a Country several Ways: It makes Land bear a low Price, because few Men will lay out their Money in Land, when they can make a much greater Profit by lending it out upon Interest: And much less will Men be inclined to venture their Money at Sea, when they can, without Risque or Hazard, have a great and certain Profit by keeping it at home; thus Trade is discouraged

 If this is true, then land is expensive right now, relatively speaking, since interest rates are being forced down.

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Violating Loan Covenants

Usury was not allowed until the Church began to tolerate the State, and its penchant for promoting usury.  A banker once told me "show me a successful SBA loan recipient and I'll show you a case of bank fraud."

See, it seems that on paper loans at usury are putatively carefully controlled to keep from having the money wasted.  This is contrary to the real world where constantly changing circumstances require constantly changing allocation of resources.

If your "partner" is a state agency who has lent you money, this flexibility is not possible.  If you manage to survive and repay the loan, necessarily you managed to survive by breaking the rules.  Most do not manage to do so.

Earlier this year, reports came out that Fisker had violated its loan agreements multiple times before being cut off by the Obama administration in 2011. Bloomberg reported that Fisker’s technical defaults began in 2011 partly due to “lower-than-required earnings before interest, taxes, depreciation and amortization, and failing to meet a production milestone of at least 11,000 vehicles sold to dealers for an average of $87,500 by Sept. 30, 2011.”

On the other hand, if your partner is someone who has not loaned you money, but invested in your business, you have the benefit of the advice of someone who knows how to make money.

Usury leads to terrible misallocation of resources, which usually ends up in the hands of abusers.

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Usury and the Catholic Hierarchy

All popes, cardinals, bishops, abbots, priors and so on are sinners.  They will be the first to tell you that.  In what way do they sin?  Probably in the most mundane ways.

Is it possible they sin in remarkably similar ways?  Probably.  For example, the selling of indulgences was a widespread and lamentable practice.  It motivated Luther to divide the Church, and Pope Adrian confirmed the error of the Churchmen in a letter to Luther.

Is it possible that the Churchmen today are engaged in a similarly widespread odious practice?  Yes, we can see plainly they do in regards to usury.  Although the church professes explicit rejection of usury, the practice is widespread.

With remarkably little sophistry, the practice is given a pass.

Usury, the taking of interest on a loan, is strictly forbidden because it does harm.  It is expressly how the powers that be, the ones devoted to doing evil, aggregate the power they need to literally call the shots, advance the greedy agenda of accumulation, theft, misallocation, war and so on.

A loan, properly understood, is a charitable act if given outside of commerce, and a mutually beneficial act if given inside commerce.  Under no circumstances can any fee be attached to a loan.  One can argue that it is not a fee, or it is not a loan, or the world is different now, and such arguments offer widespread comfort.  So did the arguments for selling indulgences.

You make a loan to someone who is in a jam, and will be helped.  (You do not loan money to people who will not be helped). The charitable part may get intense if the party to whom you made the loan in fact cannot pay it back.  It becomes alms.  If you demand interest, you are exploiting someone in jam.  Numerically, most loans carry no usury, although the IRS will penalize the practice of no usury.

As a kid my parents would send me to the corner store to get “one pound ground round” and the proprietor would ring it up, write my family name on the receipt, and throw it in the till.  I never paid anything at the store.  Same at the drug store a block away. My father got paid once a month, and went in to pay his tab where he ran them up.  My dad gave his employer credit ( a loan - the time my dad waited to be paid), the grocer gave my dad credit, the wholesalers gave the grocer credit, the manufacturers gave the wholesalers credit and so on.  No one charged anyone interest (usury).

In 1971 the last vestiges of a gold standard were wiped out in USA, and this world disappeared into a system that shifted from human relationships to corporate relationships. All such transactions went through banks (credit cards) where interest could be applied and taxes mulcted.  We did this to win the Vietnam War, and to finance the great war on those in poverty.

Now you could take on debt unto the 3rd and 4th generation and pay only interest (with a tax deduction!) E Z.  Rare is the Bishop who could pass up a new cathedral made possible by the promise of interest on a loan based on collection basket projections.  This is just the modern version of an appallingly widespread abuse.

The Council of Trent was convened in part  to address the widespread selling of indulgences.  Selling indulgences was expressly prohibited already at that time, as usury is today.

But desiring that the abuses which have become connected with them, and by any reason of which this excellent name of indulgences is blasphemed by the heretics, be amended and corrected, it ordains in a general way by the present decree that all evil traffic in them, which has been a most prolific source of abuses among the Christian people, be absolutely abolished. Other abuses, however, of this kind which have sprung from superstition, ignorance, irreverence, or from whatever other sources, since by reason of the manifold corruptions in places and provinces where they are committed, they cannot conveniently be prohibited individually, it commands all bishops diligently to make note of, each in his own church, and report them to the next provincial synod. (Sess. 25, Decree on Indulgences)

Perhaps some day the church will issue something similar in regards to interest (usury).  “Dear Lord, give me chastity, just not right away.”

Sin makes one dull, and this sin has obscured a parallel that needs highlighting.

We all know the church teaching on contraceptives, which forbids the use thereof, for contraceptive violate the creative and unitive aspect of sex within marriage.

This teaching is lost on very many people.  What is the difference between NFP and ABC when the goal is the same?  While the subtlety is too fine for many minds, without culpability, no Bishop could possibly claim to be obtuse on this point.

Usury likewise destroys the creative and unitive aspect of commerce.  Investment in enterprise is to participate in some way, bringing together time and talent and treasure, to the benefit of all.  What mistakes are made redound to the people immediately involved.  What success they have is directly related to fine tuning their offer to the customers immediately at hand.  The outcome is creative, the process is unitive.  New and better is created, the new and better bring people together.

In a market free of usury, people with innovative offers find participants with time talent and treasure to share in the introduction.  Naturally these are small businesses who introduce a marginally attractive product or service, and over time, by means of customer feedback, ever improve their offer and thus widen the market.  They spawn imitators and at some point come to the attention of large firms that take the idea and apply large scale economies of scale in manufacturing, finance and distribution, among others, to lower the price to the point where virtually everyone has access to the good or service, with their own money.

This is the proper understanding of wealth, not how many billionaires we have, but how many people can access how wide a range of goods and services with their own money.  The market described above is necessary and sufficient to create a world in which that range is widest.  A world in which one can afford his own range of needful things is one of peace and prosperity.  No better guarantee of justice.

Usury is contrary to that creative process, that unitive process.    Usurers hate this process, and proscribe it with such policies as "get big or get out!"  

To loan money at interest is to asymmetrically advantage the lender.  He is able to accrue money and thus power that is exceptional.  Whether loaning at interest to someone in a jam, which is exploitative, or loaning easy money to someone with a winning proposition, the result is contrary to creativity and unity.

It is contrary to creativity because the easy money proposition collects time and talent that would be otherwise available in the market for projects closer to what customers want. It misallocates resources.

It is contrary to unity because the result is the rich get richer and the poor get poorer, denying a natural distribution of goods and services.  The have-nots rightfully resent the haves, even if unaware of their own contribution to the problem, by paying usury.

The solution is not to outlaw usury, only to make it unenforceable, like a gambling debt.  Then the practice would wither away.  No sanctions for failing to pay interest, no debtor's prison for failure to pay a loan.

We will in time see a reinforced statement against usury like we did against selling indulgences at the Council of Trent.  This must occur, for the only alternative is the Church disappears.  There are no other options.  But since the gates of hell will not prevail against the Church, it is only a matter of time before there is a Trent-like emphatic condemnation of the practice.

Let’s just hope the bishops get around to it before there is another split in the church.

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In Banking They Keep the Profits, We Pay the Fines

Cross-posted at hbh...

As soon as I heard regulators and Chase agreed to a $13 billion fine for, well whatever, my first thought was how were we going to pay for it?

JPMorgan Chase has come to a tentative agreement with the U.S. Justice Departmentto pay a record fine of $13 billion in a settlement with state and federal regulators. The bank still faces a U.S. criminal probe into its mortgage bonds along with more than a dozen probes globally.

One thing for certain was Chase itself was not going to pay it, no one at any corporate, decision making level was going to pay it, and certainly the effects of criminality in the banking system was not going to show up in the paychecks or bonuses of those responsible for the criminality.  Their sinecure was going to continue, since that is how capitalism works.

Mish Shedlock, reporting in another context, explains exactly how we will pay Chase's $13 billion dollar fine.  Mish does not relate his story to the fine payment, but this is how the "watchdogs" in government on one hand pretend to punish a wrongdoer, and on the other hand make the rest of us pay.  Until the $13 billion dollar fine is paid, you'll just have to do with less.

The reason usury is forbidden is because it does damage.  The amazing part is we need absolutely sero usury (interest on  loans) to make a modern economy work.  Usury is no more necessary to business than gambling is to enjoying life.  Yes, some people believe thay cannot be happy without gambling, but there is another area where participation presents only downside to the players.

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Usury, Japan & Germany

The tension between "church and state" (or should I say Mosque & State) is in more active tension in Islamdom than in Christiandom.    Although I think anti-usury, pro-prosperity argument is on the ropes in Islamdom, not doubt it has been knocked out and dragged off the deck in Christiandom.  My course received one enrollment this quarter, and upon examining the materials, the enrollment was cancelled.  No-usury is a hard sell.

The problem is to believe in the unseen.  In the Catholic Mass, there is a profession of faith in which the visible and invisible is cited.  Bastiat talked about the unseen in economics.  Prosperity has at its root the word "hope" and that is for something imagined, but by definition not yet seen.  all of the good we can have necessarily comes from that which we cannot yet see, yet to be discovered.  that takes freedom to discover, freedom from force and fraud.  The state can only count and measure what is, and then uses force and fraud to advance its agenda.

Instead of freedom, we let usury flower, damage follow, and then attend only to the seen, the damage done.  All of the news is about the politics of attending to the damage done by usury.

Mish Shedlock summarizes the problems in Japan, masters of modern banking:

Some of the reasons for lower family formation are universal, others like nuclear waste are country specific.
Inflating money increases asset prices (until the bubbles pop) but that does not help those fresh out of college with no assets. Pumping up home prices helps banks stuck with housing inventory, but it hurts those seeking to buy a first-time home.
Easy money policy is to the benefit of those with first access to money: the banks and the already wealthy. Easy money is to the detriment of everyone else. 

Yes, usury leads to nuclear waste, because such monstrosities cannot be financed without cheap money to make them viable, government power to make them not liable, and further usury to make them attractive as an investment.

Mish cites an article from Germany on the German family:

Euronews spoke to Udo Drews and Sabine Radtke who had still not been allocated a place at a day care centre after more than a year. The delay meant they had to choose a private one – which was more than twice the cost of a public facility. A full-time place there costs more than 1,000 euro a month.

So let's have mom have a career so she can pay someone to raise her kids?  Has anyone thought this through?

The solution is freedom, something both Jesus and Mohammed preached, and lived radically.  That the religious leaders gave the secular powers a pass to advance usury is how this problem entered our economies.  I am not calling for Imams and Bishops to raise armies, only to teach the truth, that usury is wrong, because it does damage.  And then to stop engaging in usury themselves.

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Verizon: Biggest Bond Issue Ever

Bloomberg reports:

Verizon Communications Inc. (VZ) sold $49 billion of bonds in eight parts in the biggest company debt offering ever.

The reason for doing this follows on the Fed policy to keep usury rates low.  Low usury rates mean people on fixed incomes get less resources.  The difference goes to Verizon, in a roundabout way.

Verizon is "selling rights to income stream in return for debt exposure."  Mohammed would reel!  Jesus would condemn it.

First, where is the money?  They can say 49 billion dollars all they want, but there is not a cent of money involved.  It is all notional.

The value here is based on what Verizon is worth, and Verizon has licenses to use public utilities to transport electric communications for its customers, who are all on limited contracts going out no more than one year, among all users of electronic media.  Can a company be more flimsy?  To sell the rights, let alone buy them, is too risky to be acceptable.  Can you say Enron?  Worldcom?

Next bondholders are superior to owners in case of default.  This violates the "skin in the game" necessary for a just economy.  Bondholders have incentives contrary to orderly commerce.  They say "die" when time would heal a company's problems.  Owners get wiped out today by bondholders who prefer to be paid now than await a workout.

The selling of these bonds is a misnomer, because no money changes hands.  Credit is traded for bonds.    If you read the entire article, there is a whole lotta shifting of other bonds around to make room for this bond.  It is all notations on balance sheets, who has credit in their own right, and whose credit is denominated on other's debts.  There is no way to accurately account for this, especially since there are no hard assets to link to the debts.

Credit is all fine and good in business.  It is why there is never a problem of a shortage or money, since people extend credit when there is no money.  But it is one thing to extend credit on a pound of bacon, another on a notional value of the Verizon balance sheet.  One is human, person to person, the other is devoid of humanity.  It is a lie.

Now bonds work backwards:  by borrowing money at low rates, a companies costs are lower, so its profits are higher.  (That is not to say more taxes are paid, the company will launder the profits overseas or otherwise spend the money on its owners.)

When Verizon is paying 6% on 50 billion, they pay 3 billion to the pensions in interest.  At 4%, they pay $2 billion, saving $1 billion.  Kaching!

So who loses?  Pensions buy these bonds.  At 6%, mom was getting $6,000 per year from her pension.  At 4%, she is getting $4000 per year.  Ouch!

(Now the deals are far more complex than this, but in essence, this is what happens.)

So what we have in capitalism is usury is protected by law.  Verizon can buy a whole lotta help from the state with just a fraction of the billion windfall.  Mom can get no help at all, and less so, when her income goes down.

Usury is not forbidden because someone says so, it is forbidden because it does harm.  When will Christians and Moslems begin to develop alternatives to a usury-based economy?

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The Nexus Where Usury Entered Western Polity

Usury, what we today call interest,  was an unthinkable crime for the first 1800 years of Christianity. Like murder and rape, it occurred, but its practice often carried the death penalty.  The reason is usury is forbidden is because it does harm - it allows the few to aggregate power unto themselves by means of lending at interest, and then you get people literally calling the shots, and war, famine, destruction, all of the things you see around the world today with unbridled usury.

When the church-state struggle began, the state sneaked in usury under the guise of charity, or Monte Pietas.  The state argued it was for charity, the church slowly said they had no say so in the prudential judgment of civil authority.  So the state introduced what the Church forbid, as long as it was "for the children."  Now comes the oldest of these charitable corporations, just as bad as any other...

Banca Monte dei Paschi di Siena S.p.A. (Italian pronunciation: [ˈmonte dei ˈpaski di ˈsjɛːna]) (MPS) is the oldest surviving bank in the world and Italy's third largest bank. Founded in 1472 by the magistrate of the city state of Siena, Italy, as a "mount of piety", it has been operating ever since. Today it has approximately 3,000^[2] branches, 33,000^[2] employees and 4.5 million customers in Italy, as well as branches and businesses abroad. A subsidiary, MPS Finance, handles investment banking.^[3] The bank's main shareholder is the Fondazione Monte dei Paschi di Siena.

As you see, now that it has gone mainstream, it too is failing to perform -

Recall that three weeks ago we warned that “Monti Paschi Faces Bail-In As Capital Needs Point To Nationalization” although we left open the question of “who will get the haircut including senior bondholders and depositors…. given the small size of sub-debt in the capital structures.” Today, as many expected on the day following the German elections, the dominos are finally starting to wobble, and as we predicted, Monte Paschi, Italy’s oldest and according to many, most insolvent bank, quietly commenced a bondholder “bail in” after it said that it suspended interest payments on three hybrid notes following demands by European authorities that bondholders contribute to the restructuring of the bailed out Italian lender.

Usury is wrong because it does damage.  There is no benefit to lending at interest to be realized, the only result, inevitably is chaos,poverty, war, destruction.  And there are alternatives that give us what we need without the damage done by usury.

We need to rediscover those, repopularize those.

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Three Examples of Usury & Greed

1. There is this curious problem of victims arguing in favor of their abusers.  Students are now the primary target for usurers, now with student loan debt more than credit card debt.

The White House and its allies said the new loan structure would offer lower rates to 11 million borrowers right away and save the average undergraduate $1,500 in interest charges.
"Finally, we are taking action on the pressing issue of college affordability," said Rep. Jared Polis, D-Colo. "We have to make sure our students are able to plan their futures."

What future?  A college degree no longer improves chances of getting a job, and now 1/2 of college grads do not find work upon graduation.  But to the point: the reason school is expensive is due to usury.  The "free money" or "cheap money" floods into schools and they raise prices to sop up that "money."  This bill does not help, it only makes things worse.  But the victims demand it!

2. Enterprise rent-a-car has a great reputation.  I have long liked them as a provider.  I like SuperCheap Rentals out of San Francisco airport best, but they are closed on Sundays, which is good.    This was a rare Sunday for my arrival.  So I went to enterprise.  I now only use debit cards, and Enterprise accepts them.  Of course, they take a hold over the rental amount to secure their asset, fair enough.  But when I brought the car back, they informed me they actually charge the security fee on the card.  Now, it is only $200, but it comes off my debit card, out of my account and into theirs.  And then return trip.  Well!  I try not to keep a lot of money in my debit account, so this requires I move things around, or, by the Grace of God make it home short of funds.  While I was on the phone with the bank moving things around, the banking rep I talked to said, "O yeah, we get so many complaints about the Enterprise policy charging debit cards."

Why would they do this.  Think 5000 transaction a day, say, at $200 deposit, for 3 days to refund it.  that is a float, an interest free loan, of a million bucks to Enterprise, continuously.    The number is probably much higher.  But see how the greed for interest-free, the flip side of interest, is hurting an otherwise attractive provider.  I won't be back.

It does not matter, that I am striving to be usury-free, the others are striving to be usury-advantaged.  tough to steer clear of them.

3. And here is a curious eight minute video.  A father led his family into "bankruptcy" speculating in beanie baby toys.  The hear to business is serving others.  This business was pure speculation.  it is painful to hear the father rationalize the activity, for he still regrets it did not pay off.  And read the t-shirt he is wearing.  He blames the toy, and not himself, for the "bankruptcy."



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How Banks Lending Credit Harms Small Business

What I like about Mish is his calculation of bank credit in the world of economics.  I think it is Mish's unique contribution to the Austrian School argument, if he is not original, he certainly is first to expound it well.  Here is is following a very important story, bank credit contraction in Spain.  What is happening is Spain will eventually happen here.

In analyzing any story, look to answer this question for yourself: are prices falling or rising?  Prices rising, bad.  Prices falling, good.    So when the story says "contraction" is that a result of, or the cause of prices going up or down?

The story is in relation to bank credit, so it gets tricky.  The less bank credit being used, the better, since bank credit is an accepted act of fraud on participants.  In this case the people not engaging in loans are consumers and small businesses.

Is that because they are cutting back on debt, or is it because they want loans and cannot get them?  Whatever the case, non-participation means less costs and less profits.  Less demand means lower prices, so this sounds good.

Let's step back and review something...  credit in history of commerce was one entity extending credit to another with four criteria:

1. Asset backed

2. Creditworthiness

3. Commerce related.

4. Short term or tenor (related to the flow of commerce).

For example, I give amazon.com time to pay me.  I give schools for whom I teach time to pay me.  I am extending credit to my customers.  The credit is asset backed, as Amazon.com has my books or revenue from the sale thereof, and the schools have the asset of the revenue from the course fees charged.  Whether goods or services, my extension of credit to customers is asset backed.

The creditworthiness of my customers is sterling, and I won't work with customers who cannot or will not pay, or whose own reputations are not first rate.

I only extend credit when it is overall commerce related, in the sense of "this side of the end user."  When I retail books off say my website, I do not extend credit.  End-users do not get credit because they consume the asset.

(Although it is true under the UCC that merchandise cannot be returned for credit unilaterally, the law actually converts assets shipped to cash due.)

How much time is relative short, and related directly to how much time it takes to ship and sell on goods.  Each industry has terms, such as Net 30, 30 days to pay or so.

Please note here the difference between asset-backed extension of credit in commerce vs a loan.  They are very different events.  Credit extension is grounded in the assets being traded. A loan is in infusion of "capital (money, credit?)" into commerce.

And then we have the ethical proscriptions on loans at usury, held by all major religions.  this proscription ought to cause us to pause and recall how those religions view a loan:

1. An act of charity.

2. Never at usury.

So what is being contracted in Spain is loans of fiat currency into 

Now the sketch above represents about 99.8% of the economic history of mankind.  Banks involved in lending credit is very recent and very narrow in scope.  Review the differences I have bee elucidating:

1. Money is usually gold or silver or both.

2. Almost no one ever uses money in history to pay for things (except at end-of-the-line events such as when Judas sold Jesus for 30 pieces of silver or the fall of the Ptolemys).

3.  What makes the world of commerce go around, in history is people extending credit, as I said above,

on the basis of

1. Asset backed

2. Creditworthiness

3. Commerce related.

Interfering in commerce by abusing the charitable act of lending in an act of usury was forbidden in ethical climes, often a capital offense.  But when the state emerged, religions receded and claimed ignorance of the damage done.  

With usury not forbidden, bankers began to lend money at usury.  Then they began lending currency (warehouse receipts for money) at usury.  Then they began to lend bank credit at usury, and then fiat bank credit at usury.  No matter what they were doing technically, to this day banks call it lending money, when it is no such thing.

This explosion of credit being lent caused a problem for the banks.  How to find customers for the credit being lent at usury? The concept of risk as an element in business was introduced, so people began to borrow money in speculative ventures, in a distortion of the business process.  Naturally people associated money with affirmation.  If you please customers you get money.  Pleasing customers  is what got you the money to grow the business.  

Think of what happened when banks began lending credit, and people with nothing could be instantly competing with people who had built a business over ten years.  When the bank extends credit to a business, it appears to the borrower his success is assured, since the bank has predicted success concretely in the form of the loan of bank credit.

Now the borrower can only compete by lowering prices in this uncreative process, so to the delight of the powers that be, both the borrower and the standing business both suffer.  The legitimate standing business now needs credit too to buy in larger quantities, and compete on price.  As bankers say to each other, KaChing!  Banks lending credit at usury inexorably harms the economy.

As legitimate business people found this credit so cheap they began to use it too, which allowed ever more risk plus it began to foment an unnatural degree of specialization among business people. Historically, a person might have 3 or 4 ventures in which they engaged, particularly adept people 7 or 8.  then came cheap credit at usury. By supercharging a particular business with an infusion of "cheap credit" management attention need be focussed on this galloping bull.

It all looks somewhat similar to legitimate business, but it is as far from it as prostitution is to married love.  Specialization is good for a given business, but not for a given businessperson.  Commerce invites innovation, but usury allows for unwarranted access to markets.

Now we have come full circle.  Either the banks cannot lend, or people do not want to borrow, and banks have this massive ponzi scheme set up that is now closing down.  It will get very ugly for all concerned.    Most of all, governments have been feeding off the taxes for which collection was made possible given bank record of credit deals made.   But tax revenue is derived from ersatz revenues or values, for example when a city appraises a house at a million dollars after the state boomed the prices up.  Good luck with that revenue stream.

So necessarily the solution to the problem for small businesses, return to what mankind did in 99.8% of history, will starve governments.  That will make for massive interventions which will be painful.  it will be hard on producers, but harder yet on non-producers.  The safest place to be in the next 30 years is self-employed, but get your money from customers, not credit from banks.

(cross posted at hbh.blogspot.com)

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Japan Day Trading

It seems day-trading has returned to Japan, which today promises fantastics returns.

The 34-year-old day trader first sold 50,000 shares at 558 yen ($5.70), then three more lots at 1-yen intervals as the stock dropped. He got out $2,500 richer, repeated the trade, and seconds later had $1,000 more. Within minutes of the market opening, the former water-purifier salesman had made more than the average Japanese person earns in a month.

The problem is this is a result of capitalism with its "no logical limits."  Tt will end badly, since love of money is the root of all evil.  But it takes revelation to warn people away from destructive behavior.  Perhaps Japan should consider Shariah-compliant finance before it is too late.

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Usury and Cascading Cross Defaults

Federal Reserve Chairman Greenspan introduced the term cascading cross-defaults.  The idea was should the failing system not be bailed out, rack and ruin would follow.  But we should know better.

The scene is after the Babylonian captivity, Ataxerxes has given Nehemiah leave to rebuild Jerusalem.  Reasonably enough, the peoples around Jerusalem are not pleased with this, and not unlike today, the Jews were half-armed and half-working.

Given these challenges and the wonderful opportunity at hand, what is the toughest problem Nehemiah faces?  Usury.  Nehemiah Chapter Five:

¹ And there was a great cry of the people and of their wives against their brethren the Jews.

² For there were that said, We, our sons, and our daughters, are many: therefore we take up corn for them, that we may eat, and live.

³ Some also there were that said, We have mortgaged our lands, vineyards, and houses, that we might buy corn, because of the dearth.

⁴ There were also that said, We have borrowed money for the king's tribute, and that upon our lands and vineyards.

⁵ Yet now our flesh is as the flesh of our brethren, our children as their children: and, lo, we bring into bondage our sons and our daughters to be servants, and some of our daughters are brought unto bondage already: neither is it in our power to redeem them; for other men have our lands and vineyards.

⁶ And I was very angry when I heard their cry and these words.

⁷ Then I consulted with myself, and I rebuked the nobles, and the rulers, and said unto them, Ye exact usury, every one of his brother. And I set a great assembly against them.

⁸ And I said unto them, We after our ability have redeemed our brethren the Jews, which were sold unto the heathen; and will ye even sell your brethren? or shall they be sold unto us? Then held they their peace, and found nothing to answer.

⁹ Also I said, It is not good that ye do: ought ye not to walk in the fear of our God because of the reproach of the heathen our enemies?

¹⁰ I likewise, and my brethren, and my servants, might exact of them money and corn: I pray you, let us leave off this usury.

¹¹ Restore, I pray you, to them, even this day, their lands, their vineyards, their oliveyards, and their houses, also the hundredth part of the money, and of the corn, the wine, and the oil, that ye exact of them.

¹² Then said they, We will restore them, and will require nothing of them; so will we do as thou sayest. Then I called the priests, and took an oath of them, that they should do according to this promise.

And where is the damage worse?  Jew on Jew exploitation.  That people sell their own down the river should be a given in all circumstances.  Jew v Jew, Christian v Christian, Moslem v Moselm, Irish v Irish...

So what is the solution?  General default.  Those who oppress lose only their power to oppress, and the oppressed regain their freedom.  The world does not end.

And what is the sanction for those who refuse to give up their usury?  Ostracization. Necessary and sufficient.  If you attempt to enforce usurious contracts, you'll starve to death.

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Usury & the Catholic Church

Vix Pervenit is the last official word on the topic of usury from the Catholic church, written in 1745 for Italy and affirmed in 1835 for the universal church.  I've demonstrated contrary to writers far and wide, there is nothing that overcomes the church prohibition on usury.  Catholics are obliged to familiarize themselves with the teaching, and assent to it.

And usury is what we call interest today.  I am quite familiar with the arguments on present value theory, natural rate of interest, Austrian economics on time-preference, and so on, better than most.  And I know the difference between money and credit, where most have not thought it through.

I am also familiar with the argument that the world is different now, and how we cannot have what we have without these modern financial instruments.  The arguments are DOA in regards to anything that is good or true or beautiful.  Further, we'll soon see what we "have" when in fact we have not paid for "it" nor is it possible to ever pay for whatever assortment we now "have."  Some reckoning other than payment is in our future, probably on us, but certainly unto the third and fourth generation.

Your credit cards, mortgage interest, auto loans, are all abominable according to the teachings of the Bible and the Church.  This is not debatable, because the law is clear.

So the question posed to me was:  "Is it possible that far and wide, from top to bottom, the entire church is permeated with cardinals, bishops, priests, abbots, etc, not to mention God-fearing parishioners, and the Knight of Columbus, all inculpably ignorant of the law?"  (Or consider the possibility of "invincibly ignorant.")

No.  What is likely is to whatever extent the usury has permeated the Church, it is not a matter of inculpable ignorance, but simple corruption.  There is plenty of precedent for this, starting with Jesus.  Judas handled the money for Jesus and his crew, and swayed by guilty wealth, betrayed all.

Another instance was the reformation wherein corruption, selling indulgences, etc, a corruption that spread far and wide, top to bottom.  Luther rebelled, and Pope Adrian replies directly to Luther:

 Pope Adrian VI (1522-1523), replies directly to Luther,

We know well that for many years things deserving of abhorrence have gathered around the Holy See; sacred things have been misused, ordinances transgressed, so that in everything there has been a change for the worse. Thus it is not surprising that the malady has crept down from the head to the members, from the Popes to the hierarchy.

We shall use all diligence to reform before all things the Roman Curia, whence, perhaps, all these evils have had their origin. Thus healing will begin at the source of sickness. We deem this to be all the more our duty, as the whole world is longing for reform.

Were not matters far worse back then, is not a little usury mild corruption in comparison?

Hold that question for a moment, as I take a profitable diversion.  As Benedict XVI retires from the papacy, the state owned media, which means all media, has returned to 24/7 coverage of "clergy child abuse."    I was there when these crimes were supposedly committed.  They did not occur.  Those who claimed they did are either lying for profit, or simply to do damage to a Church they hate.  If and when some crime occurred, it was reported quickly and dealt with thus. And within the Church such crimes occurred at a far lower rate than any other entity.  What is not true is any sense that the Catholic Church has a child-molestation problem more than any other human entity.  The point of this calumny is to divert the Church, which was anti-murder-for-oil from speaking truth to power.

One would think from the manufactured scandal the Catholic hierarchy is dirty old men sending altar boys around to each other, with compliments, for nefarious ends.  Under the self-inflicted zero-tolerance policy of the USA Catholic Church, a Cardinal finds himself bereft of faculties, and the idea of widespread child-molestation corruption finds affirmation.

Now, back to the question - were not matters far worse back in the pre-reformation times, is not a little usury mild corruption in comparison?  And compared to what the Church hierarchy is accused of, usury is downright laughable.

But the Church does teach usury is an abomination.  And when one Bishop finds with "modern finance" he can have a new Cathedral today if he will assign collection proceeds of tomorrow, plus interest, then the next bishop sees this and is encouraged to follow suit.  Then the provincial of an order sees that a school can be refurbished by similar means.  And so it goes, decade after decade, century after century, apparent progress proceeds in the great commission, with new churches and schools and hospitals etc.

Except, with such "EZ Credit" when was the last time a beautiful church was built?  Where have Catholic hospitals gone?  Where are the faithful, if not in church?  Where is the beautiful music and art? When was the last time a Catholic university produced a world class scholar? In particular the USA, why are church members citizens first and Catholic second?

What inspires us in Church art, architecture, music, theology and so on was all produced when usury (interest) was verboten.

Usury is forbidden not because someone says so, but because it does damage.  It took revelation from God and endorsement from Jesus to condemn it for the simple reason it is so very subtle, like a snake. Although a human mind can conceive of usury as the means to aggregate power unto himself, no such wit could apprehend on its own that it is wrong to do so.

Usury is the means by which the few aggregate power unto themselves, and promote an agenda of war, bailouts, eugenics, poverty, injustice, and whatever malady extent.  Usury, what we call interest today, is wrong because it does damage.  It is also very corrupting.

If one demon is cast out, seven return to take its place.  There is a task at hand.  Eliminate usury from our lives.  It will be tougher than just renting and cancelling credit cards and paying cash for your next car.  Those things are easy.  The hard part will to be to say no to the ephemeral advantages, the freedom to reject God for the ephemeral security of usury-won plenty, and to return to trusting God for all good things.

It only took one demon to keep you on the usury plantation.  It will take several to hunt you down once you gain your freedom.  Some demons are cast out only by prayer and fasting.

As the reckoning unfolds, we'll need people who are aware that usury is wrong, so they can build a more just society form the ashes.

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Rothbard on Usury

David Gordon has an excellent article on Marxism and Judaism, which touches on usury.  in part,

Rothbard remarks: “Calvin’s main contribution to the usury question was in having the courage to dump the prohibition altogether. . . To Calvin, then, usury is perfectly licit, provided it is not charged in loans to the poor, who would be hurt by such payment.” Rothbard continues about a later Calvinist, “The honor of putting the final boot to the usury prohibition belongs to. . . Claudius Salmasius,. . .who finished off this embarrassing remnant of the mountainous errors of the past. In short, Salmasius pointed out that money-lending was a business like any other, and like other businesses was entitled to charge a market price. . .Salmasius also had the courage to point out that there were no valid arguments against usury, either by divine or natural law.”

This needs to be challenged.  I've met and much admire David Gordon, but he does endorse these views.  I am eager to find the time to refute this.   Please feel free to share this post with three of your friends.

Trillion Dollar Coin

It is distressing when people with so much power spend time addressing such silly questions, in such silly ways.

In the USA, there is a putative debt ceiling.  Theoretically, Congress is supposed to be a check on runaway spending.

Debt is the borrower's side of a loan.  The government borrows credit which would be no problem, except the government does so and offers usury.  If no usury, no one would lend to the state.

The states power to borrow is related to its power to mulct money from unwilling citizens.

There is no money involved at any point in all of this.  So the terms are nonsense to begin with.

A debt ceiling has nothing to do with anything in particular, it is just an imaginary line across a continuous process of borrowing debt and using it to buy things we probably don't need, on credit.

So a trillion dollar coin may be of a nice metal worth say $2000, but it is not money.  It is just a token that says "this represents a trillion in currency."  And there is nothing wrong with that, except if it is not true.

And we cannot know.  We can only judge does the state have the power to borrow credit, trade it for money, and guarantee children and grandchildren will work for money to pay it back?  If and when borrowers begin to doubt that, money will get valuable, and currency will tank.

Important to know what the terms mean...

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