October 10, 2008

Secretary of the Usury

One of my first jobs ("between engagements" as a budding New York actor, back in the early 70s) was working as a "pit clerk" in the NY Mercantile Exchange. These were the primitive days of slips of paper and chalkboards, with one lonely video monitor in the corner. As pit clerk, I would stand in the hole in the center of the table, and when a sale in a futures item (Argentinian Beef and April Potatoes were big, I recall) the broker would scrawl it on a slip of paper, and I would grab it and time-punch it, and hand it to another clerk outside the table to post on the blackboards. The point, as I soon learned, was that no one really wanted to end up with the Argentinian Beef or the April Potatoes. They were dealing in futures, not the actual cattle or spuds; they wanted to make a profit on the potential commodities, and had no interest in getting stuck as butchers or greengrocers, to say nothing of making a stew of things. Of course, someone always did end up holding the actual product. But this was a market driven entirely by expectations, not realities. This is where I formed most of what I believe about economic theory. I say all of this just to lay my cards on the table, as having no other expertise in the matter.

O.K. So we're in a big economic meltdown. I, for one, am not surprised. And although I remain optimistic for the long haul, I am skeptical that any of the proposed Bail Out Plans or other efforts at manipulation will be of any help in settling the churning waters of the world economy. I say this for several reasons.

First of all there is the general idea that lending money at interest is bad. It used to be called usury, and was considered a very serious crime, and what's more, sin. Eventually, through the work of folks such as Adam Smith, it came to be seen that lending money to people to produce goods and services actually contributed to the "wealth of nations." So far, so good. The problems really started to arise, in the present instance, with mortgages: the idea that people should borrow money to buy a house. Unlike a factory or farm that actually produces goods or services -- and so contributes to the actual net real value of things -- a house is a house, and it will only increase in value due to extraneous factors, such as the neighborhood "improving" or the resident actually adding a dormer or a deck. In fact, left to itself, the average house actually begins to lose its value due to accumulating damage. The purported value increase is due to inflation, not a real increase in value. Even Baileys' Savings and Loan bought into this "increasing value" myth, and I suppose as long as it was small scale and operating as a cooperative venture for mutual small-scale benefit in a limited population, it could work.

But human nature being what it is -- which is to say, fallen -- greed steps in, and some are not happy enough to say "my money is in Joe's house" but want to make money out of money. You may remember Mr. Potter. They are not in it for the cooperation, but the profit. But there can be no real profit when there is no real increase in value. So this is where the Ponzi Scheme that is our modern economic world begins. We move from a goods market to a credit market: it isn't even about what money represents anymore (goods and services), it isn't even really about money simplex, but about the virtual money called "credit." And so we develop more and more virtual — and less and less real — vehicles for investment: futures, options, indexes; and then futures on indexes and options, and all sorts of other self-referential mechanisms further and further removed from any real value based on either labor or product. The juggler keeps adding to the number of things in the air all at once.

As the chaos scientists assure us, self-referential systems are prone to chaotic fluctuation, and small inputs can produce paradoxically large outcomes -- and vice versa. Such systems become literally uncontrollable: so all of the efforts to pump money into the most chaotic part of the system (mortgages and credit) may have little or no effect on our present or future situation — or too much, or contradictory.

I am no economist, but even I can see when things have gotten far out of hand. We need a major attitude adjustment. As with the whole insurance business (another area where the machinery is now geared to profit and the maintenance of a top-heavy institutional structure rather than the mutual sharing of burdens) we need a radical overhaul, to get away from the notion of making money by lending money, unless that money is used actually to produce some goods or services. We need to shut down trading in ephemera, and get back to reality.

I realize this radical proposal has all the chances of the proverbial snowball in Sheol; but I offer it nonetheless. I have stood in the Pit, and seen how and when it went wrong.

Tobias Haller BSG

14 comments:

klady said...

I have been puzzling over this for some time, myself. I know next to nothing about economics (though was exposed to some aspects of regulation in law school in courses on taxation, corporations, anti-trust law, and a seminar on regulation of public utilities). There's a lot of intuitive appeal to making the relationship between goods and transactions simpler, more visible, and closer to reality. But I wonder if many of us fully appreciate and understand the good that can come from practices that involve some sharing of risk and insulating people from disaster. Is it a problem of kind or degree? I honestly do not know.

I'm wondering if maybe we should begin with cooler heads and look carefully at what may have gone wrong. On the mortgage part of the crisis, there were significant problems that arose with the privatization of Fannie Mae and Freddie Mac. Also, I recall hearing on the radio early on this recent crisis that European banks do not sell their own mortgages (just unfortunately may have purchased securities backed by ours). So it may have been that if we had taken some prudent, obvious precautions like prohibiting this kind of trading from the get-go, we'd have been better off.

I'm also recalling my anti-trust law course in the early 1980's, taught by a Republican lawyer who had served in the Nixon-Ford administrations, who was appalled by what Reagan was doing to eliminate virtually all anti-trust regulation, both de jure and de facto by not enforcing what laws remained. An example, perhaps, of the kind of thinking that, in the desire to keep things simple, wants to throw the proverbial baby out with the bathwater.

And as far as religious and moral principles go, it may be that we should all embrace a radical vow to live not only within our means but also to refuse to take and consume more than the bare necessities of life (hard to define, I know). Maybe we can't all embrace poverty, but we could and should cut back considerably.

BUT... and here's my real concern, I think we are naive if we think that simplicity or transparency or giving up market economy is going to make people more honest and less greedy. I read a great book review not long ago, "The Consultants' Republic" by Douglas Kysar at http://www.harvardlawreview.org/issues/121/june08/kysar.shtml.
Kysar writes:

"As economists such as Professors Thorstein Veblen,29 Robert Frank,30 and Juliet Schor31 have argued, many individuals in consumerist societies seem compelled to rely on greater and greater levels of expenditure and debt in order to maintain their relative social status. Consumption thus becomes, at least in many contexts and for many goods, a positional game, such that the steady increase of wealth ine-quality in America over the last three decades may have left people feeling more status insecure, even as their absolute material position has improved, a phenomenon that Nordhaus and Shellenberger term
“insecure affluence” (p. 14). The authors believe that, under such conditions, the “[m]aterialist liberalism” of the New Deal and the postwar period is simply an outmoded language (p. 171). It provides, for instance, “no framework for understanding or addressing problems like obesity” (p. 171), since it can only implore citizens to abandon the prevailing individualistic, consumerist, and transactional mindset, rather than appeal to them from within that mindset (p. 176)"

Isn't it always about relative social status no matter what kind of economic structures are involved? I seem to recall from anthropology classes that in some Native American culture in the Pacific Northwest, social status was achieved by competing to see who could give the most property away ("potlatch"?). Can or will people really change for the better in their transactions with one another simply by changing economic structures? Won't the desire for superior status always prevail? And isn't it just as risky and selfish and prideful, at times, to blow it all away and/or choose to live on the edge?

I recall stories about the Great Depression and how my in-laws' parents, who lived a few miles apart in south-central Illinois, dealt with hard times. One Grandpa was a frugal and very successful farmer, who bought little for himself (he had two dress shirts and he and Grandma both had very simple, spartan tastes -- except he later loved the newest and best-equipped farm equipment, complete with AC and radio), he tithed at the local Methodist church, but he also knew how to manage his farm business and deal with commodities markets, and ended up leaving a modest fortune to his children. Then there was the other Grandpa, a German Lutheran, who had a large family, ran the local general store, loved to sit and play checkers with his customers, could not turn anyone away, whether it be people passing by begging for food or customers asking for yet another extension of credit, while he had difficulty feeding and clothing his own family (my m-i-law, his eldest daughter, was almost bitter about this, while my husband, who loved this Grandpa best, idolized him). He was pretty much a failure as businessman, though he hung on somehow through the worst of times. I honestly don't know who, if anyone, was the good or bad guy between them. The frugality and prudence of the one and the generosity of the other were both part of a mix of selfish and unselfish motives and values.

Most human beings are not greedy monsters (though times of scarcity can bring out the worst in all of us), most will do what it takes to be "well-liked," but will also take care of their own the best they can. And capitalists and investors and their transactions can be just as difficult to pigeonhole. Aside from the very wealthy who give to charity and some who actually engage in humane business practices along the way, there are smaller businesspeople, including those who buy residential housing as investment, not just McMansions, but also apartment buildings or office space. Is the problem really that some can borrow to buy more property or rather how they use the property they acquire? Is it really a matter of loans, interest, and profits being bad or rather the folly of those who would not seek to regulate human behavior as best as possible, all because we either don't trust the regulators or because we like the idea of people being free to make as much as they want any way they can and hope that freedom and innovation will bring more good than harm?

Those are just a few of my thoughts. Sorry to ramble... no time to do more, I'm afraid. I just continue to be quite skeptical of calls for spiritual reform as a way out of this crisis when what is most needed, I think, are people who know how to best mitigate the suffering for those least able to bear it, to make sensible rules and regulations. Human nature is, I think, far more intractable than many of us care to realize, and simple solutions often overlook the complex ways that forces of both good and evil can operate. I know that you and others who are looking at the spiritual dimension to all this are not all or necessarily arguing for simple solutions, but I really wonder if this kind of discussion takes us away from the tough decisions that are going to have to be made about who all are going to be left taking the fall and what governments should do to cushion that fall and, at the same time, sanction those persons and practices that got us into the mess so as to avoid further problems (impossible, perhaps, do do both well). Transparency, braking mechanisms, oversight, yes, but give up the market and all abstract transactions? I don't know.

Dan said...

Not being a Biblical scholar, I can't authoritatively pronounce what was meant by the prohibition upon usury but I suspect it was a bit more nuanced than "lending at interest." If I loaned money to you and did not charge interest, but you failed to pay me back, you became my servant until the debt was repaid or until released by the calendar. Adding interest to the debt would have resulted in increased numbers unable to repay their obligations and so forced into servitude. Even where the prohibition on interest is still observed, such as in orthodox Jewry, they routinely circumvent it by enganging in fictional partnerships such that the lender/partner receives "interest" defined as a share of the "profits." Finally, didn't Jesus himself suggest that using money to make money was acceptable in the parable of the talents.

Tobias Haller said...

(posting again to correct typoes!)

Thanks for the comments. I'm not really trying to begin a revolution in the markets, or even banking -- just pointing out part of the reason we are where we are, in particular due to the lack of connection between some of these investment instruments and any real world productivity.

Dan, the biblical view, which came to be enshrined in the Christian tradition as well, was that any interest at all was usury. I know this later morphed into "excessive" interest, but that is a somewhat subjective notion. I'm also well aware that Jews and Muslims have found ways around the prohibition through the contractual arrangements you describe.

But using the parable of the talents as a defense for money lending misunderstands its point. What the rich man suggests is illegal -- and his servant knows this man is a crook, a shifty dealer who gathers where he does not scatter, etc. The point of this parable is found in the notion, "If the people of this world behave in this way, how much more ought the righteous do what is right." (Compare with Luke 16:18, for example). This is a parable of the "if this / how much more" type, not an allegory -- and it is dangerous to see the crooked and greedy rich man as if he were God. The KJV intro, "The kingdom of heaven..." is not there in the original language. (Note as well the KJV uses "usury" not "interest" which must have made the point in the early 17th century. (Matt 25:27)) I think it would be a mistake to see this as Jesus endorsing lending money at interest. Rather, I think he is saying, "If the worldly are this shrewd and productive with the things of this world, ought not you be as as much or more so with the things that really count?

John-Julian, OJN said...

Tobias, your words are utterly radical and totally true!

Only a few hundred years ago, money represented goods and was used as a medium of exchange. And then gradually it reversed itself so that now goods represent money and objective "value" no long exists. Further, money itself became a commodity which is now bought and sold.

The value of anything now is merely what the market will allow, and it rises and falls with no reference to need or inherent worth.

I think that behind all of this problem is the need for clarity about a basic theology of work itself. What is work for? What is the goal of human work?

I grew up under an old-time Catholic Sociologist rector (in England it was usually called "Christian Socialism"), and I remember clearly his preaching that to work WITH a profit was entirely moral, but to work FOR a profit was morally indefensible. The purpose of work, in his understanding, was that a person worked in order to house, feed, clothe, and educate one's family and have a little left over for occasional luxuries. If one was earning more than that, it should either be given away, or one should work less.

As you are well aware, there is little chance of anyone taking such ideas about economics seriously...but they should still be expressed, and maybe one or two will hear it. Stick with it, Brother.

Bruno said...

We need to shut down trading in ephemera, and get back to reality.

This line of yours goes beyond financial matters,
Dealing with reality is living with God, the human challenge is to have great thoughts and philosophies, big ideas and hopes, dreams and desires and still work in the reality that is creation.

Perhaps the "crisis" we are in is an opening for the faith traditions. In the Episcopal church we are approaching stewardship season. What does that mean being a church? a community of people of various means and abilities? We can go back to the "acts of the apostles" to see earlier examples of what this may have meant.

Erika Baker said...

Am I the only one who is troubled in this whole conversation (not only on this blog) by the number of statements beginning with "Not being a theologian..." or "Not being an economist..."

Not being a doctor, I diagnose a certain lack of expertise matched only by a passionate belief in the veracity of ones perceptions.

Tobias Haller said...

Erika,
This gets us off onto a whole other area of concern, about which I was thinking of posting: the idolatry of experts. Somewhere, Hooker has a wonderful quote about how we should test the truth of a proposition not on the basis of who says it (his "expertise" or lack thereof) but on whether it rings true or not. I sense that many of us buy into a kind of positive ad hominem -- so and so is a good person, or wise, or an expert, and so must be correct. As one who is always challenging such "authorities" I have found that many experts are actually quite mistaken in their assertsions. So I've come to be very untrusting of those who preface their statements with "As someone who has studied X for years, I think..."

This is in part why I adopt the strategy of saying, "I'm not an economist (which doesn't mean I don't know anything about economics) but this is what I see happening." It is then up to others who think they know better to say where I've gone off the beam; and I will gladly listen to cogent thoughts -- but have little respect for someone who says, "I'm an economist and you are wrong." As the "experts" seem to be the ones who have contributed to our current crisis, I want to see more than expertise.

I share annoyance when someone prefaces a comment with something like "I really don't know what I'm saying" -- as when someone comments on a point of Biblical interpretation while confessing ignorance of the subject, and missing an obvious or well-known bit of information. When that happens, still, I will stick with the content, not the person: it is the truth or error of the proposition that is important. My point here is credentials don't guarantee accuracy, any more than the lack thereof guarantee error. Sometimes it takes the child in the street to say that the emperor has no clothes, while the tailors continue to praise the exquisite work of the hems and seams.

As it stands, in this instance, I believe that the development of derivatives and shady mortgage practices are a major part of our present crisis. Actually, I think many of the "experts" agree with me. I don't know if that means I'm correct or not, but an argument to the contrary would be interesting to see. If nothing else, as I say, these elements introduce instability and seem difficult to control.

John Bassett said...

I too, must plead my lack of authority in economics here, but based on what I do know, maybe we are blaming the wrong sin here. Maybe dishonesty, not greed is the problem.

As smarter people than me have explained it to me, the root of the current problem is that the mortgages were made by brokers and bankers who knew that they were probably troubled, but these were then bundled, rated, and sold as AAA securities. The banks and other groups and institutions who bought these securities did not have actual knowledge - though they might have had constructive knowledge - of how bad some of these loans were. Had they really known that these mortgages were mostly likely to result in defaults after rates adjusted, they presumably would not have bought them and we would not be in the problem we are in right now.

This gives me a sense of hope. If bad information is the root problem, then it actually is one which can be addressed by legislation and regulation. We can and do insist on all kinds of disclosure in other areas, and there are stiff penalties for nondisclosure. Markets can factor in and adjust to greed. But markets stop working when there is not sufficient information, or sufficiently valid information, to make economic decisions.

In traditional Catholic moral theory, natural law is not as rigorous and revealed law, though not contradictory to it. So, as Christians we must be opposed to greed, but as citizens of a capitalist society, we need only insist that information be accurate, timely, and available to all. Greed we can tolerate; dissembling we cannot.

Erika Baker said...

Tobias
I thank you.
I'm sorry, I probably made my comment at the wrong time on the wrong blog. I wasn't really commenting on your post, but on a general tendency. I had read your post after reading a whole series of statements, comments and insights from sudden experts on international finance, and the one thing that struck me is how many are so quickly willing to cast blame when they previously enjoyed the benefits of a functioning financial system, and how forcefully they judged the people and circumstances, although they had nothing to substantiate their views but a deep personal prejudice and our innate human desire to find a scapegoat.

It's a bit of a sore point for me, I confess. My father used to work in the nuclear industry in Germany at a time when it was highly vilified, and it was almost unbearable to see what kind of hate filled judgement people made about individuals they didn't know, simply because of their own political prejudice, which in turn was untainted by any actual knowledge about the complexities of the energy market.
And how anything the scapegoated people and those around them said was immediately discounted as special pleading, covering tracks, justifying sin (come to think of it, that reminds me of another very contemporary conversation).

And I'm seeing that repeated in the current discussion.

Ultimately, all anyone can do in our intensely over-specialised and complex world is to acquire a working knowledge of a subject and then crefully choose the experts they believe they can trust.

Tobias Haller said...

Thanks, John. I think it is a case of "both/and" when it comes to the greed/dishonesty mix. A certain amount of "self-interest" is a natural part of our human nature (whether one wishes to attribute this to "the fall" or not -- see my essays on the Golden Rule). I think it is when this crosses over into greed that it often begins to pack in a bit of the dishonesty factor: greed can have a kind of gravitational force that distorts reality so that one comes to see oneself as "entitled" to do things that the cold light of rational ethics would say ought not to be done.

My concern continues to be not just the dishonesty in overvaluing mortgage based securities, but the very idea of having mortgage based securities -- which depend on the "housing bubble" for their purported increase in "value." I note in passing, speaking of experts, that this is precisely one of the effects to which today's Nobel laureate in economics pointed some years back. This still strikes me as a kind of Ponzi Scheme which must eventually bottom out.

Which brings me to my concern with experts and tyros. I understand your point Erika, and certainly there is no need to invest ones opinions with invective: I am still thinking about writing something to that effect based on some recent exchanges on the House of Bishops / Deputies list in which a "liberal" excoriated a "conservative" with a stream of invective that I felt to be completely inappropriate simply because the latter did not buy into the "latest biblical scholarship" on the Gospel of John, and presented what I would call the "canonical" approach.

That being said, it is annoying when someone says, "I really don't know what I'm talking about" and then goes on to prove it. I recall the old saying, "God gave us two ears and one mouth." This is also one of the reasons I am sometimes slow to comment on current events, as I prefer to digest and reflect rather than issue a knee-jerk response. Particularly if that response is couched in language that attacks the person rather than the argument.

barbarab said...

Tobias,

Thank you very much for this post. While I largely agree with you, I would like to make two points.

First, a mortgage backed security is, in fact, backed by a real stream of payments. They were simply riskier than expected/advertised. Assessing responsibility for that lack of judgement will require some serious forensic accounting.

Second, there is a very legitimate use for some of these "ephemera". A futures contract can let a farmer lock in a price for her wheat, saving months of anxiety. The same contract can help a cereal producer control his costs and reduce his risk.
perhaps the moral is that all things can be either used or abused.

This latest round of madness was made possible, in large part, by the dismantling of the regulatory apparatus put in place after the great depression to stabilize the financial system. Then the catalyst was margin trading on stocks; now its irresponsible derivatives trading. The more things change, the more they stay the same.

Grandmère Mimi said...

Tobias, I wanted to post something half-way sensible here, prefaced, of course, by, "I'm not an expert on economics," but I found that it was difficult to get past the picture in my mind's eye of you in the pit. I find that picture hilarious. I laugh, even now, as I type. I don't know the reason for it - insanity perhaps.

The buying and selling of packages of mortgages, which process includes separating and re-bundling the mortgages, repeating the process over and over, and all the while people making profits on the sales makes no sense to me. I gather that in many cases, few estimates of the true worth of the packages was recorded.

I know folks who, within the space of a few years, paid their monthly note to 3 or 4 different banks or mortgage companies. At times, they were not even sure who owned their mortgage. That does not seem right, either.

Of course, I could be wrong.

Country Parson (Steven Woolley) said...

Dear Friends,
Wonderful comments all but I suggest that at a very pragmatic level the question is not what should we do, rather it is what can we do. That limits the field of possibilities to a limited number of marginally helpful moves that barely touch on the moral issues swirling about collateralized debt obligations. It appears to me that the governments of the world are doing what they can (not what they should) to craft some semblance of market stability, but that will not keep the Harvard endowment or California public employees retirement fund from trying to figure out the quickest way to recoup their losses in a way that closely resembles the old game called The Prisoners' Dilemma, and that is a very destructive game.
CP

JCF said...

Perhaps the "crisis" we are in is an opening for the faith traditions. In the Episcopal church we are approaching stewardship season. What does that mean being a church? a community of people of various means and abilities? We can go back to the "acts of the apostles" to see earlier examples of what this may have meant.

Amen, Bruno!

As with pacifism, the Early Church sold out (as it were) a LOT, when it became the Religion of Empire. IMO, bring back apostolic "all things in common" . . . locally-adapted, to borrow that wonderful phrase from The Quad.