Usury

Some time ago, I read a book by either Mr. Chesterton or Mr. Belloc decrying usury, and the problems it poses to society. They looked primarily at the immorality of certain loans though, because in the world as they viewed it, immorality of interest rates was not as big a problem. Instead, the author looked primarily (as I remember it) at the distinction between a "productive" and "non-productive" loan. That is, between a loan to enable someone to make money, versus a loan to enable someone to obtain a necessity (housing).

Mrs. Elizabeth Warren and Mrs. Amelia Tyagi, in their book Two-income Trap : Why Middle-class Mothers and Fathers Are Going Broke take a different look at the same topic.1 They start with the reality of more bankruptcies, and found from the data that the mortgage industry in particular, and the credit industry in general, are the primary cause, with the move to having two incomes as the norm being a secondary cause. With credit as the primary cause, they correctly label the problem what it is: usury. They do not look at the difference between productive and unproductive loans, but rather at what has changed in the last 50 or so years to bring about bankruptcy.

According to this book, sometime in the 1970s, the federal courts drastically changed the lending landscape, allowing out-of-state loans for the first time. They also say, as an aside really, that the S&L failures were because of failures to realistically regulate interest rates. Before the federal decision, each state regulated interest rates fairly drastically, but did so in terms of static numbers. To make an example with totally fake numbers, the state might say that you can have up to three percent interest on a loan. If the inflation rate goes above three percent, the bank (or S&L) effectively loses money even when everyone makes all their payments on time. After the federal decision, states still restrict interest rates, but in a much more relaxed way, as the incentives have changed. Now banks are not primarily gouging the state legislature's voters, but rather charging these interest rates to citizens of other states, and thus to non-voters. The state legislature sees profits to be taxed, more than they see pain and risk to voters.

This is an unconventional look at why bankruptcies happen, and so the authors spend the bulk of the book demonstrating why over consumption, reckless spending on non-essentials, and similar things that we all typically blame when we hear about bankruptcy, are not in fact still the primary cause of bankruptcies. These things do happen, but the real change that has lead to increased financial troubles are the changes to lending.

So the first book I read would solve this one way, by banning interest on unproductive loans. Effectively this would mean that banks could not loan money to individuals except to start businesses, and that nearly all loans would be to businesses. To do this would have tremendous costs. All of us would become stuck in our houses, unable to sell for what we owe, because no one would be able to get the loans to pay the prices we paid. New housing would also be hit, as the number of people able to pay what it costs to build a house, much less the inflated prices the market currently demands, would be radically smaller.

This book has a more realistic approach. While it may be immoral to charge interest at all on an unproductive loan, we cannot achieve that from where we are without some intermediate step. Mrs. Warren and Mrs. Tyagi suggest instead that we either return to restricting lending to within a state - to use the federal power to regulate interstate commerce by banning such commerce, or that we use the same power to impose limits on what rates banks and other institutions can charge. These restrictions should be tied to the inflation rate, rather than being fixed, so that they can go up, preventing banks from losing money even when everyone pays (and thus avoiding the S&L disaster), but ensuring that they go back down when inflation does. The restrictions should cover all the fees and rates, so that banks are once more motivated to grant only those loans that the family can reasonably expect to pay back. We ought to, at least as a first step, prevent banks from making the bulk of their profits off of those who have unexpected things happen (medical problems, unemployment), and end up spiraling out of control because of the "Two Income Trap."

Short of that necessary reform to our legal landscape, the answer is one I already knew: do not depend on two incomes, use any second income only for "extras," and not for things you need week to week. The answer is unpalatable, in that housing prices will continue to be unrealistic indefinitely, but does mean that we do still have some control over our destiny. We need not be caught in the "Two Income Trap."

The problem is not restricted to individuals, nor to our country. As President Bush pledge \$674 million of aid to Africa back in 2005,2 I could not help but wonder how much of that could be provided in a more permanent and more effective way by simply forgiving their debt. The Church has been calling for debt forgiveness for the third world for some time, long enough and consistently enough that even though I only recently started paying even sporadic attention to the news, I am aware of it. It is not right to saddle these struggling economies with interest bearing debt. This is something we looked at for approximately 18 countries in 2005.3

The problem with straight forgiveness is that it does not address the root causes of the problems that made these countries susceptible to these usurious loans. That money came from somewhere, and when those loans are not repaid, the impact will be felt somewhere. I cannot prove it, but my gut instinct from what I have read is that these unpaid loans will be "paid" by the US taxpayers in the form of higher inflation and higher deficits (which in turn lead to more inflation). Just as we do with individuals, we need to work on root causes. In the case of governments, this is deficit spending and corruption. It appears that the 2005 plan referenced above at least attempted to look at that.4