Subject: Re: Economic Effects of interest Date: Mon, 12 Oct 1998 13:05:21 -0700 From: jim blair CC: wfhummel@mediaone.net Newsgroups: sci.econ, alt.politics.economics Michael L. Coburn wrote: > I object to interest on the basis that it must be paid whether the endeavor > undertaken is viable or not. ..... > I know that money market funds and > banks > >>pay interest to the saver. I question the validity of them doing so. ... > Oh. I will stay tuned, but I _think_ I have a reasonable grasp on how > things actually work. I just don't agree with how they work. .... ..... > > The answer to this question should be: If the banks create loans that do > not perform then the banks and all their depositors and all their officers > and employees should suffer the consequences. How a bank can possibly go > broke while loaning money on worthwhile endeavors is way beyond my powers of > comprehension. Bankers must be the stupidist or greediest people that ever > walked the planet. >William F. Hummel wrote in message ><361f9acf.6747372@nntp.we.mediaone.net>... >>When is money not at risk, but still rewarded? Money kept under >>the mattress effectively loses value at the interest rate on >>money. If the money is kept in a bank deposit at interest, the >>bank can use it to back loans. The bank is in effect investing >>the money in some enterprise on behalf of the account holder. >>Since the bank provides a service it should share in the gain >>with the account holder in terms of some interest rate >>differential between the loan and the deposit. Are you arguing >>that it is wrong to invest the money through a bank rather than >>directly with the end user? etc. Hi, Reading this thread over, my comments. Hummel is talking about how banking works, you are concerned with how it SHOULD work (in your opinion). And your views are essentially religious. So 4 thoughts and then a repost of a thread. Interest is what you pay to have something expensive (like a car or house or education) NOW, and not after you have saved up enough money to buy it. Banks, and especially Saving and Loans, loan deposited money for others to borrow to buy or build houses. These are relatively "safe" loans since the house exists and is worth something even if the borrower defaults. But they pay interest to the depositor, but lower rates than more risky investments. If there were no interest, no one could plan for their retirement since no one knows how long they will live. Now you can safely retire when you can live from the interest your saving pays when invested in the safest kinds of loans, like the S&L case noted above. Banks do "lose" on bad loans when the borrower defaults. That is why they screen applicants. And they pay lower interest rates than they charge, in part to cover those loses. As long as most of their loans are "good" they stay in business. And see also: Subject: SUPREME COURT RULES CHARGING OF INTEREST Date: Sat, 25 Mar 2000 01:10:29 GMT From: momina@my-deja.com Newsgroups: sci.econ, uk.religion.islam The highest constitutional court in Pakistan, The Supreme Court, in a recent landmark judgement has prohibited the charging of INTEREST on any financial transaction in the economy. This prohibition is based upon the KORANIC injunction banning interest (Riba' in Arabic) from the economy. The text of the judgement is available at: http://www.jamaat.org/news/SCRiba.html where you will find thinking like this: "The Council of Islamic Ideology in its report on the Elimination of Interest had approved the use of the mark-up system, bai mu’ajjal, to a limited extent in unavoidable cases in the process of switching over to an interest-free system and warned against its wide or indiscriminate use in view of the danger attached to it viz of opening a backdoor for dealings on the basis of interest. It is unfortunate that this warning was not properly heeded and the system of mark up adopted in January, 1981 did not conform to the standard stipulations of bai mu’ajjal. ..... The whole of section 79 is there fore held to be repugnant to the Injunctions of Islam. Section 80 Section 80 of the ACT of 1881 is almost analogous to section 79 . The learned Federal Shariat court has, therefore, subjected it to the same findings as recorded by it about section 79" ..... "Section 22(1) of the State Bank of Pakistan Act, 1956 has been scrutinized in paragraphs 325 to 328 of the impugned judgment and purchase of bills and other commercial instruments like Debentures, Bonds etc. on the basis of interest has been declared to be repugnant to the injunctions of Islam by the Federal Shariat Court." ..... "Except as authorized under section 7, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods or engage in any trade or buy, sell or barter goods for others, otherwise than in connection with bills of exchange received for collection or negotiation." And an earlier related thread: (note this is the sort of thing that the above Pakistan Supreme Court decision wants to stop) Subject: Re: Economics: The Islamic Approach Date: Thu, 05 Feb 1998 08:21:07 -0600 From: 798@email.ksc.net Organization: Deja News Posting Service Newsgroups: alt.politics.economics References: 1 , 2 In article <6bantc$26v@camel20.mindspring.com>, lovebamboo@mindspring.com wrote: >> I do have one little question. Is it true that it is against Muslim >> religous law to earn money through charging interest? Ted? >Yes. I work for a bank that has gone to great lengths to structure >loans in such a way that they do not technically violate Islamic law. ..... jim blair: Hi, Recall that collecting interest on a loan is/was also a violation of Christian law. It was the sin of usury. During the middle ages (a time of great Christian Church influence) it was forbidden for Christians to collect interest. So Jews became the money lenders. And since everyone loves to hate the people who load them the money they borrow, this became one sourse of the anti- Jewish attitudes in Europe. This situation is part of the background of the "Merchant of Venice" of Shakespear. From: http://www.newadvent.org/cathen/15235c.htm QUOTE: Nevertheless, the 12th canon of the First Council of Carthage (345) and the 36th canon of the Council of Aix (789) have declared it to be reprehensible even for laymen to make money by lending at interest. The canonical laws of the Middle Ages absolutely forbade the practice. This prohibition is contained in the Decree of Gratian, q. 3, C. IV, at the beginning, and c. 4, q. 4, C. IV; and in 1. 5, t. 19 of the Decretals, for example in chapters 2, 5, 7, 9, 10, and 13. These chapters order the profit so obtained to be restored; and Alexander III (c. 4, "Super eo", eodem) declares that he has no power to dispense from the obligation. Chapters 1, 2, and 6, eodem, condemns the strategems to which even clerics resorted to evade the law of the general councils, and the Third of the Lateran (1179) and the Second of Lyons (1274) condemn usurers. In the Council of Vienne (1311) it was declared that if any person obstinately maintained that there was no sin in the practice of demanding interest, he should be punished as a heretic (see c. "Ex gravi", unic. Clem., "De usuris", V, 5). UNQUOTE: Clearly, if there is no interest on loans, modern finance and busness could not function. Why would anyone MAKE a loan in the first place? So your "not technically violate Islamic law" must mean some way to collect "interest" without CALLING it that. Some accounting trick? >... The main idea is that the investor should share the >risk. If the business deal fails "principal plus interest" >would be lost also. >In this way the lender would also take more care. What >happened now in South East Asia would not have happened >if no interest would have been involved. > Regards. Why would a lender give out money if they get no interest but share in the risk? Sounds like you are talking about making "banks" into some sort of mutual fund system. But banks do serve a role. I mean, if I want to start a business, I don't necessarily want the banker to by my partner. Without banking there may not have been the current collapse, but neither would there have been the big gains of the past decades. COMMENTS: From: (Ted W) Organization: MindSpring Enterprises, Inc. >So your "not technically violate Islamic law" must mean some way to >collect "interest" without CALLING it that. Some accounting trick? > I think the basic idea is that technically the bank makes an equity investment in the firm, which the firm agrees to buy back on a set schedule. g.sande@worldnet.att.net (Gordon Sande) Organization: Sande & Associates, Inc. When foriegn trade is involved one can arrange the exchange rates. I recall essays describing this as a medieval practice at the trade fairs. It is also possible to mix insurance and interest as was the old practice on shipping, according to other essays I recall. From: Rick Monihan Reply-To: rmonihan@ix.nospamnetcom.com Organization: Netcom Newsgroups: alt.politics.economics, sci.econ, soc.culture.thai, soc.culture.indian, misc.invest.stocks References: 1 , 2 , 3 , 4 , 5 That's correct. There is an investment made which the firm is liable for...it is revalued from time to time based on the success or failure of the firm, however, so the bank can LOSE money on the deal. It is a similar arrangement for Islamic mortgages, in which the house is reappraised and the payments redefined based on the value of the house. The bank owns a portion, which is paid back over time. It can be very lucrative, but the bank must bear some level of liability in the process in order to avoid the charge of usury. From: Rick Monihan Newsgroups: alt.politics.economics, sci.econ, soc.culture.thai, soc.culture.indian, misc.invest.stocks References: 1 , 2 , 3 , 4 , 5 , 6 , 7 Yes, but the interesting thing about Islamic banking is that all capital ventures are venture capital...the bank stands to gain or lose based on the success of the firm. Therefore, the bank has a much greater interest in making sure the firm succeeds. I'm not really a fan of this, but it has merits. And from Stewart Goldwater : This little snippet of 'Nature of Society' by Leon Maclaren won't be out of place here - "It is not surprising to find, therefore, that following the large enclosures of land, which took place in Europe during the 15th and 16th centuries, a substantial change came over the general attitude to moneylenders. Prior to these enclosures, the Christian Churches had successfully condemned money lent at an increase as sinful, and the practice was prohibited by law in most countries. Following the enclosures, however, the prohibition failed in practice. The new method of financing industry became an economic necessity, and on these grounds Francis Bacon defends usury in his famous essay on the subject. In face of the facts, the laws on usury were either relaxed or allowed to fall into disuse, and finally governments themselves incurred national debts." Readers may like to consider why the new method of financing industry became an economic necessity. -- Stewart Goldwater a2077080@infotrade.co.uk Running on a RiscPC Technical author for hire! Hi, Thanks. And for some explanations (rationalizations?) of why the Church, when it stopped considering charging interest to be sinful, didn't really change its position, see: http://www.catholicculture.org/docs/doc_view.cfm?recnum=646 and http://www.cpats.org/CPATSAnswerDirectory/Answers_to_Questions/2000_08AugustQuestions/2000AugTheIssueOfUsury.cfm -- ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834 "Michael L. Coburn" : OUCH!!! But I must agree that any opinion about how things SHOULD be is based on opinion and all opinions not supported by irrefutable facts and evidence are beliefs and all beliefs are religious. I "believe" that usury, IN MANY CASES is, wrong because it is unjust, and that it is unjust because the benefit of such is not disbursed to the community at large but to an individual who created the money from thin air. As I have said, It is my opinion that the benefit of usury to an individual MAY sometimes be righteous but certainly the benefit of usury inuring to one individual or a particular group of individuals who create money from thin air is not. IN the case of a consumer loan the enterprise is past tense and the so to should be the money. The car already exists and can stand as collateral against the loan. Interest is the price we pay for enjoying the car now instead of waiting until we've actually earned it. This is not the case when money is created in support of building new cars. If the money so created is soaked up by consumer purchasing of new cars then there is no inflation and all is well. If the enterprise to build cars fails than the there is more money in the economy and no new cars to spend it on. This causes inflation (i.e. a tax on money). The bank should not be rewarded for causing inflation and the bank should certainly not receive additional money in the form of interest on other loans, or be bailed out by a loan from the Fed. >Banks, and especially Saving and Loans, loan deposited money for others >to borrow to buy or build houses. These are relatively "safe" loans >since the house exists and is worth something even if the borrower >defaults. But they pay interest to the depositor, but lower rates than >more risky investments. > This MAY be an example of acceptable usary. To the extent that usury is employed on loans to individuals who wish to consume or utilize that which is purchased for PERSONAL gain (i.e. a house, a car, a boat, or any other thing which is not strictly for business), and to the extent that the proceeds of usury are employed to pay for the services which may be rendered in the activity of managing such loans and financial transactions (this would include the foreclosure and sale of real assets used as collateral in the recovery of loaned amounts on non performing loans), and so long as the creditor and his minions must draw upon the output of previous enterprise (e.g. savings), and compete with other creditors and their minions and therefore keep the costs imposed by usury in the realm of acceptability, then I have no problem with usury. However, when the money being loaned is NOT the output of previous enterprise (e.g. savings), and when the collateral against the loan cannot be liquidated to dissolve the non-performing loan and dispose of the debt, and that the only discharge of the debt is by virtue of printing more money (which is a tax on current money), or taxing the community based upon their incomes, then usury is merely fraud perpetrated upon the community in respect of those who create and loan money. And you are correct: It is my religious conviction that fraud and theft are wrong and that justice is right. I can't prove that my position is correct. Maybe fraud and theft are ok. Ergo, tis a religious position. AND THIS: From: Edward Flaherty Organization: College of Charleston Newsgroups: sci.econ Applying Jesus' ban on interest to a modern economy is to take his advice completely out of its historical and economic context. This piece of advice has little or no relevance to a modern economy. In Jesus' time there were no capital markets, no venture capitalists, and no entrepreneurs. People borrowed money in those times only to help themselves through a crisis. If this were the only demand for loanable funds, then an ethical argument against interest could be made. It could be seen as the lender taking advantage of another's misfortune. In Jesus' time such a prohibition on interest was reasonable. Those ethics aside, clearly this historical context has no relevance today. People borrow money today to put it at risk in business ventures. The lender must bear the risk of borrower default. If the borrower employs the capital successfully and earns a profit, something that would not have been possible without the lender, is it not just that the lender be rewarded in some fashion? "But for my seed capital," the lender can argue, "your business and profits would not have been possible." He has a good case. On a more subtle note, those against lenders charging interest ignore the fact that all transactions are voluntary. It is equally correct to say that the borrower offers interest to the lender in exchange for his financial capital. To be fair, Jesus should have stated that it is unjust for a borrower to offer interest as well as for a lender to charge it. Jesus was a better moralist than an economist, I suppose. Also, I have never seen anyone of the anti-interest camp explain how to allocate scarce capital in a no-interest economy. How does a no-interest financial system compensate lenders for risk? If you have some excess cash, what is your incentive to lend it to me and bear the risk of my defaulting on the loan when you get no reward for bearing the risk? You could get the same reward, zero, and not bear any risk by simply keeping the money. Putting the risk issue aside, in a no-interest financial system how would we prevent potential borrowers from offering interest to potential lenders? Borrowers would discover very quickly that they could induce much larger loan packages by offering some form of compensation to lenders. They could call them "fees" that would be based on the term of the loan, its riskiness, and even its size. This is nothing more than interest by another name. Trying to ban interest is, frankly, a stupid idea. While were're at it, why don't we ban all prices? -- Edward Flaherty School of Business & Economics College of Charleston Office: (843) 953-7166 Fax: (843) 953-5697 Web site: http://www.cofc.edu/~flaherty AND: From: "Steven" Organization: MindSpring Enterprises Newsgroups: sci.econ References: 1 , 2 , 3 Edward Flaherty wrote in message news:3677F73D.17A1ADC3@cofc.edu... >> Edward Flaherty wrote: >> >> > Applying Jesus' ban on interest to a modern economy >> > is to take his advice completely out of its historical and >> > economic context. This piece of advice has little or no >> > relevance to a modern economy. Jim Blair: Hi, Good post. But it should be noted that it is not clear that Jesus DID oppose interest. The "quotations" I have read on this are ambiguous and taken from writings that were over 30 years after his death. The gospel of Matthew for example, has variously been translated as concerning debt, sin, tresspass and transgressions. And even if the "debt" version were to be accepted, is is not the "interest" that is asked to be forgiven, but the debt itself. So it would not be a call to abolish interest, but to abolish loans: they should be donations. Edward Flaherty: >I was not aware of this interpretation. I was aware, however,of an >ancient Jewish tradition in which every 50 years all debts >would be completely forgiven. I don't know of any details >on how this amnesty was administered, but the effects of such >a plan on a modern economy would be most interesting. > >For example, suppose that as of Jan 1, 2003 (about 5 years >from now) all debts will be eliminated by government decree. >No one would be able to borrow money and no one would >be willing to lend money for any period of time longer than >5 years. Capital projects requiring financing for, say, 15 years >could not be funded with debt. Anyone wanting to arrange >such financing would have to wait until after the amnesty >to arrange the sale of a 15 year bond that would mature >prior to the next amnesty. > >Also, to decree that all debts would be eliminated would >immediately destroy any consumer deposits in the banking >system since those are liabilities on bank balance sheets. >The money supply would shrink drastically unless the Fed >and consumers took counter-measures. > >As we got closer to the amnesty the market value of any >debt instrument would plummet and interest rates would >sky-rocket. > >The whole concept is a fascinating mental exercise in what >not to do to a modern economy. But it might have been >a good idea to a pre-capitalist system such as ancient >Israel. I wonder if there is any documentation from that >era to give us clues as to how ancient borrowers and >lenders behaved just prior to the amnesty? shales@pipeline.com: If I might butt in here, I've been doing it lately of little avail, but here goes: The eighth commandment is the "Right to Private Property" Commandment and is discussed at great length in the books of the Old Testament. And if one follows the prophets in Exodus, Deutoronomy and Leviticus one finds a finer and more detailed clarification of "forgiveness of debt" and the emergence of the concept of the Jubilee. There are digressions on usury and lending and borrowing but the bans and strictures tend to be placed upon the Hebrew's relations with outsiders in terms of not borrowing from outsiders but lending at interest to them but not lending at interest to other Hebrews. The emergence of the Prophets is an interesting story because it came at a time of increasing concentration of wealth in Judea. The building of Solomon's temple had extracted enormous taxes from the people and its support after Solomon's death extracted further taxes and those unable to pay had to sell their property and this taxation led to the concentration of property among those who purchased at fire sale prices. Those former owners became much like "share croppers" and were in perpetual servitude and still had to pay rent to the new landowner as well. Well enter the Prophets and the codification of Jewish Law in the books of the Old Testmament. This Law centered around the detailed interpretation of the 10 commandments and gave form to the Hebrew tradition whether they were free or slave or under the authority of some other ruler. It was a tradition that depended neither on property or power to maintain an identity and unity. But this codification would not have taken place if not for the concentration of wealth and the pursuit of more wealth and the enormous suffering that resulted directly as a result of the temple priests authority to tax the populace. (It is interesting to note that the priestly class was not allowed to own property so their only support was through tribute and taxation.) So in that codification we have numerous economic references and proscriptions to avoid in the future such concentrations of wealth from occurring. The progressive clarification in the Old Testament can be found first in Exodous 21: "When you buy a Hebrew slave, he shall serve six years, and in the seventh he shall go out free, for nothing." And in Deuteronomy 15 we have: "At the end of every seven years you shall grant a release: And this is the manner of the release: every creditor shall release what he has lent to his neighbor; he shall not exact it of his neighbor, his brother, because the Lord's release has been proclaimed. Of a foreigner you may exact itk but whatever of yours is with your brother your hand shall release." The clarification is carried further in Leviticus 25 as if Yaweh's message had come down a little muddled and since the seven year proscription had been a little too severe it was increased to the fiftieth year, derived by multiplying the former 7th year release by itself to arrive at 49 years of profit and in the 50th year, release or more simply the Jubilee year. Leviticus 25 is a great read for its detailed proscriptions, here's a bit of it: "...And you shall hallow the fiftieth year, and proclaim liberty throughout the land to all its inhabitants it shall be a jubilee for you, when each of you shall return to his property and each of you shall return to his family." There are distinctions in Leviticus of different kinds of ownership and what property shall be allowed to be redeemed by former owners and at what price and how that price will be calculated as in, "If your brother becomes poor, and sells part of his property, then his next of kin shall come and redeem what his brother has sold. If a man has no one to redeem it, and then himself becomes prosperous and finds sufficient means to redeem it, let him reckon the years since he sold it and pay back the overpayment to the man to whom he sold it; and he shall return to his property. But if he has not sufficient means to get it back for himself, then what he sold shall remain in the hand of him who bought it until the year of jubilee; in the jubilee it shall be released, and he shall return to his property." There is no evidence that any Jubilee ever took place but it seems that in the context of the clarification of private property rights in the Old Testament many rights of redemption were allowed regardless of whether or not there was a Jubilee. This would tend to somewhat avoid the problem of concentration of property in the hands of a few as had happened since the time of Solomon. Interesting reading to be had in the Old Testament for economists. Regards, Steve.