Usury as a religion

The bailout of the European banks, like the bailout of the U.S. banks, shows that society has assumed an obligation to the banking system that takes priority over all other obligations.  The Greek government did not default on its debts, nor did the governments of Portugal, Ireland, Italy or Spain.  The crisis arises from the fact that the big bankers feared Greece might default on its loans, and jacked up interest rates accordingly. This of course increases the risk, which is further increased by speculators betting on default. The rescue operation being undertaken by the European Union and the International Monetary Fund is not a rescue operation of the people of Greece, who are likely to have to endure high unemployment, lower wages and worse public services, but a rescue operation for the banks.

So the obligation to repay loans takes precedence over all other obligations.  And the nature of compound interest is such that the burden of a debt can increase without limit.  If you have a potentially infinite obligation that takes precedence over all other obligations, is this not the equivalent of a religion?

When I studied history and economics in college, I was taught that the traditional Jewish, Christian and Muslim teachings about usury were one of the chief obstacles to modernity and progress. Some 50-odd years later, seeing the stranglehold the financial system has over the part of the economy that produces goods and services, I think it is time to revisit those teachings.

I recognize, of course, that someone who borrows money has an obligation to pay it back.  And I recognize that lenders have a right to be repaid for their inconvenience and risk.  The problem is the unlimited nature of compound interest – that someone can pay back the principal of a debt many times over, and still be deeper in debt than before.  This was the basis of debt slavery in the Roman Empire and of slavery in many parts of the world today; it was the basis of indentured servitude and the old-fashioned company town.  It is the plight of poor countries to the International Monetary Fund and the international banking system.

I am intrigued with the idea of Islamic banking, which sets a cap on compound interest. This is done through various mechanisms. In one of them, the lender theoretically “buys” an asset or an interest in an asset that is being pledged for security, and then allows it to be bought back in installments at a greater price but a fixed price.

I do not think Islamic-type banks will compete successfully in the international marketplace, because their capital will increase at a slower rate than traditional banks.  But perhaps there could be a system for chartering banks organized on such principles, or for using such principles in student loans or other government loan programs.

Tags: Debt, Finance, Islamic banking, Usury