The Financial Ignorance of Religious Texts

Among the many other prohibitions in the Old Testament, there are several verses that prohibit charging interest on loans (at least to one’s fellow Israelites – foreigners are apparently OK to gouge). Some of them are:

“You shall not lend upon interest to your brother, interest on money, interest on victuals, interest on anything that is lent for interest. To a foreigner you may lend upon interest, but to your brother you shall not lend upon interest…”

—Deuteronomy 23:19-20

“And if your brother becomes poor, and cannot maintain himself with you, you shall maintain him; as a stranger and a sojourner he shall live with you. Take no interest from him or increase, but fear your God; that your brother may live beside you. You shall not lend him your money at interest, nor give him your food for profit.”

—Leviticus 25:26

“If a man is righteous and does what is lawful and right – if he does not eat upon the mountains or lift up his eyes to the idols of the house of Israel… does not lend at interest or take any increase… he is righteous, he shall surely live, says the Lord God.”

—Ezekiel 8:5-9

The New Testament, meanwhile, is more ambiguous on the subject. Matthew 25 and Luke 19 contain the parable of the talents, where a wealthy landowner gives money to his servants and rewards the ones who invest it and return him a profit. But this is most likely intended as a moral lesson about developing one’s god-given talents, not as financial advice. Luke 6:35, however, is more explicit: it instructs Christians to “lend, hoping for nothing again”.

The Qur’an, meanwhile, contains similar injunctions. Sura 2:275 says that Allah “permitteth trading and forbiddeth usury”, and 3:130 and 30:39 similarly warn believers not to lend money in the hope of “increase”. These rules, like other vague guidelines in the Qur’an, have been expanded in sharia law into a total prohibition of charging interest that’s widely observed in Islamic countries (as opposed to the Jewish and Christian response, which is to largely ignore the inconvenient commands).

You might be wondering how you get a mortgage if you live in Malaysia, Saudi Arabia or other Muslim theocracies. The answer is that Islamic banking companies have invented a concept called sukuk to get around this prohibition, which would otherwise make it impossible for them to do business. In essence, rather than you buying a home with money borrowed from a bank and then repaying the bank with interest, the bank buys the home outright and then permits you to live there for a fixed period, paying rent to do so, while at the same time you slowly acquire ownership of the property by paying back the bank’s principal. If you think this sounds like a legalistic fiction, invented to technically comply with the prohibition on interest while exactly reproducing its legal structure, you’re right.

As the tortured reasoning that created sukuk shows, regardless of what originally motivated these prohibitions, in the modern world they’re archaic and irrational. Interest isn’t always a cruel imposition by wealthy lenders (though it can be) – in a capitalist economy, it serves several important purposes. It compensates the lender for credit risk – that is, the risk that the loan recipient will go bankrupt and won’t be able to repay. It compensates the lender for opportunity cost – for them giving up the ability to do something else, potentially more profitable, with the money that’s loaned. And it compensates the lender for inflation – the fact that money becomes less valuable over time as a society becomes more productive and prosperous and the money supply increases.

The charging of interest has transformed lending from an activity that’s the largesse of a few wealthy elites, to a bona fide profession whose benefits are available to everyone. Interest has made it possible for tens of millions of people to buy a home, start a business, or finance anything else that they couldn’t have paid for up front and out of pocket, and it’s enabled the global capitalist revolution that’s lifted hundreds of millions out of subsistence and poverty. If we had obeyed the prohibitions of religious texts, none of this would ever have come about. However well-meaning these rules originally were, their existence shows that the texts that contain them were authored by fallible humans, ignorant of the mathematical and economic arguments that would propel the human species to prosperity.

About Adam Lee

Adam Lee is an atheist writer and speaker living in New York City. His new novel, Broken Ring, is available in paperback and e-book. Read his full bio, or follow him on Twitter.

  • L.Long

    The whole purpose of the rules were to help your ‘brother’ either actual or religious with out taking advantage of the situation. I believe the culture also dictated that the ‘brother’ was not suppose to be a ‘sponge’ either. And many people still do this today, I have also done this to the limit of my finances.
    The problem, again as always with religion, when this is expanded to cover the entire ‘religion’ or ‘cultural group’ you get difficulties that are obviously silly, so even sillier rules are invented. But the Islamic method does not seem that odd. Isn’t that exactly what is done here? The bank gives the money for your house and you are ‘essentially renting’ it from the bank until paid off or sold. We just admit that interest is involved rather then ‘making believe’ there isn’t and hoping an all-knowing god doesn’t figure it out!

  • jemand

    well, these texts probably do seem to know without loans available people will be destitute, and without interest loans won’t be available. Therefor, large portions of the text are all about how to sell yourself into slavery, how to treat your slaves, which ones you have to release, which ones you can kill, etc.

  • The Vicar

    Strictly speaking, Christianity also has at least one direct injunction against attempting to get rich, period. (Matthew 6:19, “Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal”). If all Christians — or even a majority of them — actually followed through on this, then they would not need to charge interest anyway — there is theoretically enough money in the global economy for the rich to lend to the poor at no interest.

    That is to say: it isn’t interest itself which makes a modern economy possible, interest merely entices greedy people into permitting the loans which make the economy possible, which is not really the same thing. There are other mechanisms which could compensate for risk other than interest. (For example, it would be possible to have a no-interest mortgage in which, in the event of a default, the lender would take ownership of the house, sell it, and return any difference between the amount of the loan plus any overhead and the total of payments and house price.) This would require non-profit lending institutions, but so what? There’s no reason why a non-profit lending institution can’t exist — it isn’t a contradiction in terms — we’re just used to not having any around.

    Of course, if Christians actually followed every single command in their holy texts, they would probably end up dead within weeks, so this line of argument is probably moot.

  • Monty

    And yet you always see televangelists promising financial prosperity if you do what God says. Or, y’know, what they believe God says. Because of course they can’t be wrong.

  • http://www.kurmujjin.com kurmujjin

    Leave us not throw the baby out with the bath water here! Maybe I’m saying this becuase I’m so friggin’ fed up with banks and lenders right now.

    Debt can be debilitating. And the problem with debt is that even in the BEST plans, a simple miscalculation can result in catastrophe and extreme difficulty in getting out of debt.

    One two-day late payment can drive your interest rate to 30%.

    So, I can imagine that as an ideal, economy without debt is a good thing. If you can’t afford it, save. No financing wars with borrowed money! No adding cost to the system without adding value (don’t get me going about Wall street and our financial “elite”). No Quantitative Easing II or III or whatever from the FED (There should be a scriptural injunction against the Fereral Reserve…) while we lament China’s currency manipulation. Gads, what hypocrites we are!

    Imagine an economy where entrepreneurs actually have to provide a product or service in order to make money. What a concept.

    I don’t take any scripture literally because I don’t believe they are inspired works in that way. That doesn’t mean you can’t find nuggets of high truth in them… And I believe the rather strong prohibitions on debt are among the better ones.

  • http://www.punkassblog.com Antigone

    This is actually where I sort of like the “liberal” (IE, not really Christian) interpretation of usury. Fred Clarke did a good post on it a while back.

    http://slacktivist.typepad.com/slacktivist/2010/05/sex-money-part-1.html?cid=6a00d8341c582a53ef0147e225c9d5970b

    Though, I really do like that “non profit lending” thing. But, of course, we can’t do that because it doesn’t screw anyone over. It baffled me when the real estate market fell out why banks didn’t just renegotiate the loans. If they were going to be stuck with increasingly devaluing houses that they couldn’t afford to maintain, that were pulling the prices of all the houses down around them, why wouldn’t it have made more sense to go “Stay in your house, pay the interest for right now, and we’ll extend your mortgage” or “We’ll lower the interest so you can still pay on a temporary emergency basis but in three years we’ll raise it again”? I mean, true, they wouldn’t be making AS MUCH money as they would have had everyone been able to afford the high interest rates, but they would be making money, as opposed to just having a cost on a ledger sheet and shooting themselves in the foot.

    Similarly, I don’t know why the bank bailout wasn’t “We’re going to give all the people who can’t afford their mortgages a low interest loan, they’ll pay you, everyone gets to stay in their house, banks don’t collapse, we get the money back”. Good for the tax base, good for the banks, good for the people still living in their houses, cheaper for everyone. But, I haven’t finished reading “Economics for Everyone” so maybe there’s this really important point that’s going right over my head as to why giving money to the rich and screwing the middle class and poor was just the awesome-st solution.

  • http://www.kurmujjin.com kurmujjin

    Antigone, I’m with you!

  • http://kagerato.net kagerato

    Ebonmuse, this is one case where you’re completely, even perilously, wrong.

    Interest is not some kind of economic savior. It’s a tool invented by the rich to become richer (and subsequently, more powerful). Claiming that interest is somehow necessary or proper because of the existence of inflation is crazy. Inflation is a suboptimal monetary state caused by much the very same banks and governments that promote interest making. You write as though these things were laws of nature, as fixed and obvious as gravity.

    Thanks to the powers of inflation, interest making, and outright deception, 400 Americans have greater total wealth than the entire bottom half of the economic ladder combined. That’s 400 versus 155,000,000. The top richest 10% have 70% of the nation’s wealth.

    The idea that banks somehow create growth and prosperity is laughable. Banks are social and economic regulators, nothing more or less than that. New development and meaningful prosperity are created by innovations that lead to new tools, methods, or other technology. The role of banks and governments is, and always has been, to play king-maker in this game. They choose who succeeds and who fails based upon their own judgment and their own prejudices. They decide which ideas receive essential resources and which languish out in the cold.

    This process is not democratic. It is plutocratic and oligarchic by its very nature, representing only rich, established powers. A system built on these foundations will never achieve justice; it is able only to look toward the past.

    We are gradually regressing in this country into a neo-feudal state, where the rich own everything (including the political process) and the poor have not even the right to protest. The evidence is everywhere:

    (1) Labor unions and membership are on continuous decline since the 1970s. Now even the right to organize a union is in jeopardy.

    (2) Real worker wages decline, yet corporate profits increase.

    (3) Corporations gain the power to spend unlimited amounts of money on political campaigns, under the guise of “speech”. Last I checked, corporations don’t get a vote, though that may be about to change.

    (4) Effective tax rates on the rich fall off dramatically, while total taxes on the poor and middle class continue to rise.

    (5) Government services (and their corresponding jobs) are slashed across every state.

    (6) Banks pull one of the largest scams in history with the sub-prime mortage crisis, which they intentionally created and manipulated themselves. Then, they feign ignorance and blame the poor. The government hands them buckets of cash. Not a single banker is jailed for even a day, even in the face of obvious fraud.

    (7) Oil and gas companies collude to prevent the emergence of any significant competition from other energy sources. The entry of any new competitors to the market is seen as an existential threat to be crushed.

    (8) The federal deficit is used as a hammer to gut programs en masse in the national budget. When cutting (or eliminating) these programs is inevitably not enough, as their size is typically trivial, the publicly telegraphed next step is slashing Social Security and Medicare. For the future, you see. For the children. Hardly anyone mentions that any federal deficit represents a wire transfer from the public sector to the private sector. The deficit is the exact fiscal equivalent of printing money, except instead of dumping all the new cash off at a bank, we pick and choose how to deploy it.

    (9) Essential future infrastructure programs are stalled, delayed, or canceled outright under the guise of crisis. See high-speed rail projects in the Great Lakes region and Florida.

    (10) Oil speculators collude to raise the price of fuel, under the guise of a restriction in supply caused by revolution in far-off nations. When one bothers to check whether any proportional fall in supply has occurred to match the rise in price, is isn’t there.

    (11) The nation’s legislators decide to implement only the most minor, trivial reforms after the second-worst financial crisis in the country’s history. No will is shown to break up or otherwise dissolve “too big to fail” banks. No taxes are levied on speculation, day-trading, or other activities essentially useless to the economy. Raising the capital gains tax is considered out of the question. Banks are given a stern finger-wagging about how they shouldn’t lie to their customers.

    I don’t feel the need to list any more, though there are undoubtedly substantial items I’ve missed.

    It’s time to give up the ghost on the capitalistic, purely profit-driven system. A free market will never exist where it is possible for some actors, with their disproportionate wealth and influence, to stifle and disrupt the activities of others.

    Rather, a stable economic system begins with the realization that inflation (and its equally evil cousin, deflation) must be strictly controlled with the ultimate goal of eliminating any changes in the money supply unjustified by public need. Likewise, interest and profits generally must be held within sane limits. Compounding interest (adding interest back to the principal such that it earns interest itself) should be abolished outright, and the maximum rate of interest should be capped at the more-than-fair ten percent. Profiteering can be further controlled by far more progressive income tax than what exists, and the elimination of all complex tax exemptions and bizarre loopholes.

    We have a huge number of problems in front of us. We’re not going to solve any of them by mocking prohibitions of usury or encouragement of honest, fair trade.

  • http://www.punkassblog.com Antigone

    kagerato-

    Regarding number 9: It isn’t just new high speed rail projects. It’s our roads, water infrastructure, and electricity. We are seriously in need of some internal maintenance, not just improvement.

  • Jormungund

    Interest is not some kind of economic savior. It’s a tool invented by the rich to become richer (and subsequently, more powerful). Claiming that interest is somehow necessary or proper because of the existence of inflation is crazy.

    Ebonmuse does seem confused as to the nature of inflation, but I don’t think that he claimed it is the one reason that interest exists. He did a fair job of clearly explaining why interest is necessary for loans to exist.
    Interest is necessary and proper in our economy. It does make the rich richer. It also makes the poor and middle class richer. It allows people who want to start a small business able to do so without first saving large sums of money, for instance. Sure, that small business owner has made the bank some profit and some very rich people are getting richer off of that profit. I’m not against that. Also, that small business owner who started their business with a loan is also richer. You make interest sound like an evil bogeyman. It isn’t.

    profits generally must be held within sane limits

    You are advocating a ban on too high of profits? Why? What kind of limit or restriction would you want?

    the maximum rate of interest should be capped at the more-than-fair ten percent

    That means that lending institutions wouldn’t lend to certain people. They analyze your credit risk and give you a rate of interest that makes it profitable for them to lend. If they determine that lending to a certain group of people would only be profitable if they charged 11% thanks to some of those people likely not paying back their loans, then they would refuse to lend at all if they were capped at 10% interest.
    I tried to look up usury laws, but it turns out that banks are exempt from them. For instance: my state actually has a maximum allowable interest of 10% on private loans. Banks and credit card companies are exempted from that limit and can go higher if they want to. I’m unclear as to how high their interest rates can go. For some reason I thought that usury laws extended to lending institutions. Perhaps there is some separate class of usury laws that my brief internet search missed.

    We’re not going to solve any of them by mocking prohibitions of usury

    I think it is correct to mock a total ban on interest, which is what the Biblical usury bans are. There is a reason that the Jews were the only lenders in Europe for a quite long time.

  • http://www.WorldOfPrime.com Yahzi

    Kagerto said: “Ebonmuse, this is one case where you’re completely, even perilously, wrong.”

    Um. No. Just… no.

    I realize you think that abolishing Captialism and Rich People would fix all the worlds problems and we would live in peace and plenty with puppies and kittens for all; but that’s not how it works.

    As Ebon clearly points out, interest is payment for risk. If you are expecting people to take risks for free, then you are as deluded about human nature as the Marxists. And if you are expecting economies to function without risk, you are as deluded as… well, I can’t think of anybody that silly.

    This kind of economic fantasy is essentially religious in nature: the invention of an ideal world that operates off of naively simple principles but bears no relation to the empirical world – yet the believer insists on reinterpreting everything as a function of the imaginary ideal. It’s not amusing or helpful when religious people do it, and it’s not amusing or helpful when economic cranks do it.

  • http://www.WorldOfPrime.com Yahzi

    kurmujjin said: So, I can imagine that as an ideal, economy without debt is a good thing.

    No, it isn’t. We’ve had economies without debt, and they sucked. See: Stone Age, etc. That’s why we invented new economic technologies: to make our lives better. The fact that debt and interest can be used to oppress people is no more meaningful than the fact that guns can be used to oppress people. They can also be used to liberate people. Eliminating guns would not eliminate crime, but it would make dictators more secure; eliminating debt would not eliminate poverty, but it would make us all poorer.

  • http://www.punkassblog.com Antigone

    Interest is payment for risk

    The only thing I don’t get out of this is the person who’s pulling the loan is taking an equal, if not greater, risk than the person who’s loaning the money. If I take out a loan for a small business, and the business tanks, sure I can declare bankruptcy (sometimes, and that doesn’t always mean that you don’t have to pay back some of it anyway), but my credit takes a hit and I didn’t make any money. If I take out a mortgage loan to buy a house, and can’t make the payments at some point, I’m out the house, and all the capital I put into it (and that capital is going to be more than rent payments, I guarantee it). It’s even worse for student loans- I took the risk that the diploma was going to be valuable, and now I’m out all that cash, plus the time I could have been cementing myself into a job before the economy tanked. And student loans have 0 risk- I can’t declare bankruptcy on them (at least not in the United States). So, a person who borrows money is putting in effort, time, and is taking a risk that it still won’t pan out. If it doesn’t pan out, the person may be in worse straits then before. The bank/ credit card company/ wealthy person is not risking not having a house.

    So, I understand why we have interest- rich and powerful people are not going to willingly part without any of the wealth or power unless a) forced to or b) they have a powerful economic incentive to do so (or in a non-zero number of cases, because they actually feel moved to improve the human condition, but that’s not near enough). But acting like it’s a moral good or completely neutral ignores the circumstances it operates in.

  • http://www.kurmujjin.com kurmujjin

    Yahzi,

    I am not suggesting that there be no investment (as an ideal). I would suggest that, as an ideal, material participation in the business is better than simply lending money alone in return for interest. You insert your capital in exchange for ownership and a share of the profit. That’s different. If the company fails, you make no money whereas, in the alternative, the lender can suck the life out of a company that otherwise might make it.

    We have an abysmal record with regard to the management of financial power so that everyone has ample chance to succeed. We seem to encourage predators rather than managing them.

    So the word to the wise is still to avoid indebtedness and loans if at all possible.

  • http://www.kurmujjin.com kurmujjin

    Hey Ebon, that AJAX comment editor sucks. I’m glad we at least have that, though it would be nice if it wasn’t jumping all over the screen.

  • HA2

    Just a note re: one of the comments:

    “It baffled me when the real estate market fell out why banks didn’t just renegotiate the loans. ”

    Part of the reason was because the system was even more horribly broken than you realize.

    In many cases, the banks that originally made the loans didn’t own them anymore – the loan was packaged up and sold to some other party, and packaged up and sold again, and again… so that in the end, the company who was receiving the payments was a few steps away from even knowing who was paying them and what their situations are. The banks made themselves into middlemen – they *couldn’t* renegotiate the loans because they had already signed them off to someone else.

    The system was broken all around. Maybe still is, I don’t know whether anything’s changed.

  • jemand

    Again…. in the financial world of the Bible, much text space is spent laying out the rules and regulations for slavery. I really don’t think that can be separated from the lack of loans available, or lack of interest, or even the debt jubilee ideas. These things sound good, at first, but clearly when societies TRY them, they end up with starving people and decide slavery is a good financial plan. THEN try getting any loan, when by just waiting a bit, the rich person can just buy you outright!

  • http://www.daylightatheism.org Ebonmuse

    well, these texts probably do seem to know without loans available people will be destitute, and without interest loans won’t be available. Therefor, large portions of the text are all about how to sell yourself into slavery, how to treat your slaves, which ones you have to release, which ones you can kill, etc.

    Hah. Good point, jemand. :)

    @The Vicar:

    There are other mechanisms which could compensate for risk other than interest. (For example, it would be possible to have a no-interest mortgage in which, in the event of a default, the lender would take ownership of the house, sell it, and return any difference between the amount of the loan plus any overhead and the total of payments and house price.) This would require non-profit lending institutions, but so what?

    I have to disagree; no lending institution could feasibly work this way. Your plan assumes that the asset itself is nonconsumable and of fixed value, so that if the bank repossesses my house, say, they’ll be able to sell it for at least as much as I originally borrowed from them to buy it.

    But what if there’s an economic downturn that causes property values throughout a region to fall? Then the bank won’t be able to sell the repossessed house, or will only be able to sell at a loss. What if the asset isn’t a house, but something that rapidly gets used up or depreciates in value, like a car? What if the loan is to start a business that can’t attract customers and goes bankrupt? Even if the bank seizes all the collateral, they’ll still be stuck with a business that may not be any more viable for them than it was for the original owners. In each of those cases, the lender, whether for-profit or non-profit, will take a loss on the loan. If this happens often enough, and if they’re not charging interest and therefore can’t turn a profit on the loans that do work out, they’ll inevitably bleed to death from a thousand cuts.

    There’s no reason why a non-profit lending institution can’t exist — it isn’t a contradiction in terms — we’re just used to not having any around.

    I agree! I loan through one of them. But Kiva still charges interest, although it’s non-profit. Those two things are orthogonal.

    @kagerato:

    Thanks to the powers of inflation, interest making, and outright deception, 400 Americans have greater total wealth than the entire bottom half of the economic ladder combined. That’s 400 versus 155,000,000. The top richest 10% have 70% of the nation’s wealth.

    What’s ironic, kagerato, is that I completely agree with your diagnosis of the problem, just not your theory of the cause. Yes, I agree that the world and the USA especially is in serious danger of becoming a plutocracy, and that this is unjust and unjustifiable. But it’s not because of interest; it’s because of regulatory capture, the willingness of politicians to rewrite the laws for the benefit of wealthy donors, and the apathy of voters who permit this to happen.

    The idea that banks somehow create growth and prosperity is laughable.

    No, it’s not. That’s why Mohammed Yunus won the Nobel Peace Prize for creating Grameen Bank, an institution which lends (yes, at interest) to the poorest of the poor. Kiva does the same thing. And what do you think their clients do with these loans? They can start a business, expand an existing business, buy a more efficient irrigation system, buy mosquito nets so they’re not debilitated with malaria and able to work, or replace a dirty, polluting kerosene lamp in their home with clean, reliable solar lanterns – whatever people need to lift themselves out of poverty and become self-sufficient. And the money they repay in interest can be used to help still more people. If done right, it becomes a self-sustaining virtuous cycle.

    …the maximum rate of interest should be capped at the more-than-fair ten percent.

    Why? And how did you arrive at this number? Groups like Kiva charge more than this, sometimes 30% or so for an individual loan. That’s not because they’re evil; it’s because their clients are borrowing less money, in absolute terms, and they need to cover their overhead. (And given the difficulty of reaching and communicating with borrowers in remote, impoverished rural regions that don’t have paved roads or electricity, they have more overhead than traditional banks that only loan to the wealthy.)

    I’m all in favor of laws that limit predatory or deceptive lending schemes that are designed to plunge people into more debt than they can ever reasonably repay and keep them paying for life. Some corrupt or greedy microfinance schemes have become like this. But it’s not interest itself that’s the problem, and eliminating interest altogether would mean slamming this door shut on billions of the world’s poorest people.

  • http://kagerato.net kagerato

    Jormungund wrote:

    It does make the rich richer. It also makes the poor and middle class richer. It allows people who want to start a small business able to do so without first saving large sums of money, for instance. Sure, that small business owner has made the bank some profit and some very rich people are getting richer off of that profit. I’m not against that. Also, that small business owner who started their business with a loan is also richer. You make interest sound like an evil bogeyman. It isn’t.

    I didn’t claim that loaning money (whether at high or low interest) has no influence on opportunities. It does increase opportunity, to some degree. However, what’s missing here is that such opportunities all come with the risk of failure. And in the event of your entrepreneur failing, they can rarely dispel the debts they’ve accumulated. Bankruptcy laws are not nearly as friendly to borrowers as people think they are. There are even certain kinds of debts which can never be dispelled except as result of explicit court order, and naturally the indebted cannot afford a lawyer.

    Also, I do not declare interest an evil bogeyman. I declared it a tool, and it a tool it remains regardless of perspective. Like all tools and all methods, it has valid and invalid uses, moral and immoral applications. What I decry is that apparently, it is the common view that the moral purposes have vastly outweighed the immoral ones, despite recent events.

    You are advocating a ban on too high of profits? Why? What kind of limit or restriction would you want?

    What does that mean, a “ban on too high profits”? I advocated against profiteering, and proposed mechanisms by which that can be accomplished. My goal is as stated, to prevent oligarchy and plutocracy from developing. There are many ways to ensure such a goal, but all of them will involve some form of limits or controls on financial enterprise.

    That means that lending institutions wouldn’t lend to certain people.

    I understand that entirely. It’s quite intentional. No institution should not make loans for which there is a justifiably high suspicion of default or fraud. Lenders should be required to thoroughly investigate the backgrounds of the borrower(s) and determine with meaningful accuracy their risk.

    When most or all of the largest banks do begin taking large and repeated gambles, leveraging their existing capital out at levels of 50, 75, even 100 to 1, what inevitably happens next is simple. The system collapses. It was merely a house of cards, money invented out of thin air, so there should never be any real surprise at this. You can’t create nine dollars from one dollar and expect little to no risk. That scheme wasn’t profitable enough, though, so the next step is to create 90 dollars from one dollar. Do you think that, perhaps, there should be a limit to this madness?

    If limits on leverage, why no limits on interest? Why no limits on inflation? A stable long-term economy requires enforced limits on all three. Unless we develop a scheme that replaces money and finance entirely, this will always be the case.

    Beyond this, the responses to my post seem to misunderstand something important. No one should need to borrow money to pay for food, a place to live, or essential medical treatment. These are basic human rights that must be afforded to every person. They are fundamental goods that ought to be provided regardless of any other factors. That public society, government, and other cooperative non-profit efforts have not met these obligations is not evidence of the glorious triumph of banks to improve lives. It’s evidence of social failure.

    Yahzi wrote:

    I realize you think that abolishing Captialism and Rich People would fix all the worlds problems and we would live in peace and plenty with puppies and kittens for all; but that’s not how it works.

    I said no such thing, and your poor characterization is insulting. It is very revealing, though, that simply suggesting that there might be better methods for organizing an economy than the exact status quo is taken as extreme idealism. There’s a word for that: reactionary.

    As Ebon clearly points out, interest is payment for risk. If you are expecting people to take risks for free, then you are as deluded about human nature as the Marxists. And if you are expecting economies to function without risk, you are as deluded as… well, I can’t think of anybody that silly.

    No one asked anyone to take risks at no potential gain. It was a mere suggestion that perhaps the rewards given to the wealthy lenders are out of proportion with their actual contribution.

    As to ‘Marxist’. See reactionary. No one in the thread suggested that workers should own the means of production. Although I note that you didn’t do anything to contest the merits of that idea.

    Personally, I think Marx and Engels were too optimistic about their understanding of people’s inborn capacity to cooperate. They were also not nearly pessimistic enough about the capacity of just a few people to silence and dis-empower the vast majority through violence and fear. So long as those problems remain, the ideal of communism is as far away as the ideal of the perfect free market.

    This kind of economic fantasy is essentially religious in nature: the invention of an ideal world that operates off of naively simple principles but bears no relation to the empirical world – yet the believer insists on reinterpreting everything as a function of the imaginary ideal. It’s not amusing or helpful when religious people do it, and it’s not amusing or helpful when economic cranks do it.

    I don’t have any of these naive delusions you claim I do. I merely think that a different set of guiding principles and laws would create a better world than the existing one. For that, I’m tarred as a crank and an idealist.

    Do I need to note that the most substantial and interesting parts of my post were utterly ignored?

    Ebonmuse wrote :

    I have to disagree; no lending institution could feasibly work this way. Your plan assumes that the asset itself is nonconsumable and of fixed value, so that if the bank repossesses my house, say, they’ll be able to sell it for at least as much as I originally borrowed from them to buy it.

    This is why I say you take economic reality as though it were a law of nature. There is no fundamental reason why asset values should rise and fall in periodic boom-bust cycles. That occurs precisely due to improper constraint of economic forces.

    I’m sure you didn’t ever think that it actually took $500,000 to build a typical suburban house at the height of the housing bubble. So, then, where did all that money (some would sarcastically say ‘added value’) appear from? No matter what you do, the answer always traces back through the money supply to the banks (and from them, to the government that gave them their powers).

    Asset bubbles occur as a result of gambling and speculation. Few people seem to realize that the act of a bank making a loan creates money that did not exist the moment before. It is a central, fundamental part of the inflation-deflation cycle. In some instances, particular bankers realized that they could completely game this system to great profit. By massively over-leveraging their capital and assets, they are able to guarantee inflation. However, the extreme leveraging requires the issuance of many high-risk loans, the majority of which will never be repaid. When those loans do default, the banks are able to simultaneously declare a credit crisis and repossess all of the relevant assets.

    Now, it’s certainly true that the assets lost nominal value during the bust. However, the bank never bought the asset at its original value to begin with! Instead, they lent out leveraged (invented) money for the loan-holder to purchase it. When the default comes, the net effect is that they bought the asset using money that previously didn’t even exist. This is 100% profit. (Assuming that the borrower made some payments, and they typically make many of them, it’s actually more than 100% profit. It’s a brilliant scheme.)

    Here comes the real kicker, though. Instead of simply marking down the values of the assets they have repossessed to their current market value, which would be a loss compared to the bubble value, they declare a credit crisis and demand the government fill in the difference.

    Now, there’s three things a powerful federal government could reasonably do in response to this situation. One, they could sit on their hands. This, unfortunately, risks the banks throwing a temper tantrum and doing everything in their power to hurt economic growth. Two, they could accede to the banks’ demands and fill the difference between the inflated and actual values. (This is done by — you guessed it — more inflation. Either the outright printing of money, or deficit spending on the banks.) Three, they could seize the banks outright, either by buying them or with the force of law. With the banks under control, they can be audited, have all their assets revalued to market price, and then sold off.

    We all know which of these three options was taken in reality. And with that, the scam is complete. Assets bought under the state-granted power of loan-invented money are added to bank balance sheets, and any possible losses in the scheme are covered by a federal influx of yet more new money.

    But Kiva still charges interest, although it’s non-profit. Those two things are orthogonal.

    Non-profit and non-interest bearing are, indeed, orthogonal concepts. Many people do not realize how easy it is to become a de-facto non-profit organization when the key leadership wants to be. You merely have to spend all revenue on salaries, equipment, licenses, et cetera. The taxes are then assessed on employees instead.

    Whether there’s a meaningful distinction between such a non-profit organization and one which applies profits into savings or investment accounts is another discussion.

    But it’s not because of interest; it’s because of regulatory capture, the willingness of politicians to rewrite the laws for the benefit of wealthy donors, and the apathy of voters who permit this to happen.

    My explanation was not meant to exclude any other factors. These are all very much part of the cause as well. Indeed, without the interaction between bank lobbying (among other political and social influences) and the law, most of what they do would not be possible to begin with. Even more fundamentally, their ability to lend at leverage and charge interest are powers given by law.

    That’s why Mohammed Yunus won the Nobel Peace Prize for creating Grameen Bank, an institution which lends (yes, at interest) to the poorest of the poor. Kiva does the same thing. And what do you think their clients do with these loans? They can start a business, expand an existing business, buy a more efficient irrigation system, buy mosquito nets so they’re not debilitated with malaria and able to work, or replace a dirty, polluting kerosene lamp in their home with clean, reliable solar lanterns – whatever people need to lift themselves out of poverty and become self-sufficient.

    Oh? Does Yunus deserve all (or even most) of the credit for such successes? Or was the labor and ideas of the people who produced the actual changes somehow involved?

    I have nothing against non-profit and reasonable low-profit lenders. The facts, however, are that the vast majority of lenders and the vast majority of all loans are made primarily to generate substantial (and typically recurring) profits to the lender alone, without due consideration of any other factors. Their purpose is not to lift people out of poverty or to improve social well-being.

    I’ve been accused of being an idealist. It’s ironic, because I think the way most Americans see their banking system and economy as an inherent good not subject to any reform is far more idealistic than anything I’ve said.

    Why? And how did you arrive at this number? Groups like Kiva charge more than this, sometimes 30% or so for an individual loan. That’s not because they’re evil; it’s because their clients are borrowing less money, in absolute terms, and they need to cover their overhead.

    Well, it’s certainly true that there are certain edge cases which would be adversely affected by a fixed cap at ten percent. You could resolve that by using a sliding scale of interest caps that fall as the principal rises.

    However, I’d still like to say that 30% compounding interest is crazy. What happens when your farmer’s new irrigation system fails (whether due to lack of demand for crops, incompetence, or even an unavoidable cause such as natural disaster)? The loan cost quickly spirals out of control, to the point at which the borrower can’t even afford the interest payments.

    Fixed interest (based solely on the original principal) helps a lot with this. A $1000 loan at 30% yearly fixed interest generates $300. Five years of no payment would make that $1500 interest, for a total of $2500 due. Continuously compounded interest for that same period makes the total due $4481, and it will only get worse from there.

    There are, of course, other alternatives to controlling interest growth. One is to reform bankruptcy laws and make it possible to dispel debts that clearly will not (and often cannot) be repaid. Another is to automatically clear all outstanding debts that have been held unpaid longer than a certain long period (say, ten or fifteen years). After all, it’s pretty clear that when nothing has been paid for that long, nothing will be paid in the future either.

    For some reason, there seems to be an awful lot of resistance among the American people to the idea that banks should have to be careful with who and why they lend money to, and shouldn’t be encouraged to lend to just anyone regardless of what kind of huge risk it might be to both parties. There also seems to be much resistance to the idea that people ought not to have to borrow huge sums of money to have a place to live, to get lifesaving medical care, and other similar issues.

    The society we have is not economically just, nor does it serve the needs of people well. I won’t artificially restrict the means to deal with the issues we face as purely politically or socially driven. Economic inequalities are most effectively dealt with by changing the rules of the economic structure itself; approaching from other angles is roundabout.

  • Alex Weaver

    This is why I say you take economic reality as though it were a law of nature. There is no fundamental reason why asset values should rise and fall in periodic boom-bust cycles. That occurs precisely due to improper constraint of economic forces.

    That’s somewhat reasonable with regard to houses. Ebon also offered the example of cars. Build a car that doesn’t gradually wear out, and thus become objectively worth less, and we’ll talk.

  • http://kagerato.net kagerato

    All things gradually decay given infinite time, Alex. To do otherwise would be violating the second law of thermodynamics.

    However, it is possible to build a car that will last ten to fifteen years in good shape. One that will retain the vast bulk of its functional value for most of that time. The aesthetic value, and the value of warranties, insurance, and other contracts are not so stable.

    Car companies have no incentive to build cars that last a long time. Actually, it’s worse than that: they have an incentive (shared among many industries) to build products that have guaranteed short-term failure or obsolescence. That’s how they can guarantee new demand on much shorter timescales.

    Or did you think all the proprietary engine designs, proprietary chassis, even proprietary wheels were for the sake of the customer? A design which isn’t understood can’t be serviced by third parties and will have far fewer standard parts (which are then far more expensive) than otherwise feasible.

    In any case, depreciating assets may present need for low level fixed interest, collateral, better lender assessment of borrower risk, recycling or refurbishing programs, and potentially other processes. It is not any justification for profiteering or high levels of compounding interest.

  • Jormungund

    It is not any justification for … high levels of compounding interest.

    I would say that it is. You give someone a car loan. They use it to buy a new car. As soon as that car leaves the lot, most of its value has been lost (and I am a little befuddled at your use of the term ‘functional value’, all value is subjective and based on the whims of consumers, there is no economic ‘functional value’). The last thing you want to do as the lender is to repossess that car. Even if the car retained 100% of its value, you still need to actually turn a profit on this, so you would still need interest. Interest is how lenders make money. That’s the whole point of the loan. They have no desire to own something with you. Their nightmare is you giving what you purchased with their loan to them and declaring that you won’t pay it off. People who get behind on house payments threaten to turn the house over to the bank if it won’t be lenient with them. That is the bank’s worst-case scenario.
    Whatever partial ownership/investment scheme you are imagining as a viable alternative to loans for interest just isn’t what businesses want to do. It isn’t how things work now, and it isn’t how things ideally should work. I suppose start-up companies with venture capitalists funding them is the exception to that. But the whole point of that is that they will rapidly increase in value unlike virtually every thing else in existence, so an investor wants partial ownership more than anything. In virtually all other scenarios, a lender wants interest on a loan and views taking possession of a house or car as the worst case scenario. It wouldn’t be profitable for a lender otherwise.

    it is possible to build a car that will last ten to fifteen years in good shape

    I understand the concept of planned obsolescence, but cars don’t seem to suffer from it. My car is ten years old and in good shape. The battery died on me once. Some stitching on the back seats is looser than it should be. That is the total extent of the problems I have had with it. Cars are built to last. I’ll be driving mine for years to come. I’m not sure that cars are a good example of planned obsolescence.

  • http://www.punkassblog.com Antigone

    Jormungund-

    just isn’t what businesses want to do. It isn’t how things work now

    I’m pretty sure we’re all pretty much aware of how things work. That’s not really the point of the matter since what s/he is discussing is the quoted alternate scheme.

    and it isn’t how things ideally should work

    .

    Why not? Why shouldn’t we strive to create a system that rewards effort and risk equitably, as opposed to rewarding people who lucked into money? Why shouldn’t see seek alternate systems that don’t send people into debts they can’t possibly get out of?

  • http://www.WorldOfPrime.com Yahzi

    Antigone: The only thing I don’t get out of this is the person who’s pulling the loan is taking an equal, if not greater, risk than the person who’s loaning the money.

    This is an analysis I simply can’t follow. If you borrow $300K from me, put up $100K of your own money, buy a $400K house, and then burn it down, which of us is out the most? You get to declare bankruptcy and escape the debt; I get nothing. You are punished by not being able to borrow again; I am punished by not being able to lend because you lost all my money.

    Your analysis simply makes no sense. It values the credit rating of a borrower at the same value as a huge pile of cash. This is just bad valuation.

    Why shouldn’t we strive to create a system that rewards effort and risk equitably, as opposed to rewarding people who lucked into money?

    One part of that is easy. Jack up the inheiritance tax. Also, add public financing of schools, from grade school to college. Nobody here disagrees with any of those policies.

    However, the other part – actively going out and taking money from people who made a good deal but didn’t work that hard at it – turns out to be nigh-impossible. Separating the lucky from the smart turns out to be something governments are not good at.

    kagerto: It is very revealing, though, that simply suggesting that there might be better methods for organizing an economy than the exact status quo is taken as extreme idealism.

    I realized I failed to make clear what Ebon makes clear in his comment: yes, I agree with your analysis that America is in danger of becoming a plutocracy.

    But your analysis of why this is the case is simple ideological obsessive-compulsive disorder.

    No one asked anyone to take risks at no potential gain. It was a mere suggestion that perhaps the rewards given to the wealthy lenders are out of proportion with their actual contribution.

    You did, in fact, object to the notion of interest on loans. Perhaps you failed to make your position clear, too.

    I merely think that a different set of guiding principles and laws would create a better world than the existing one.

    And where did you get these principles? What tests have they been subject too? What mathematical analysis demonstrates their viability? What historical precedent do they have?

    This is why you are tarred and feathered as a crank. Not because you point out there are problems – we all agree on that – but because you think you have the solution. And you think the solution is simple. This idea that a silver bullet can magically fix a complex problem and yet no one else in history has been smart enough to figure it out is what identifies you as a crank.

  • http://verbosestoic.wordpress.com/ Verbose Stoic

    “In essence, rather than you buying a home with money borrowed from a bank and then repaying the bank with interest, the bank buys the home outright and then permits you to live there for a fixed period, paying rent to do so, while at the same time you slowly acquire ownership of the property by paying back the bank’s principal. If you think this sounds like a legalistic fiction, invented to technically comply with the prohibition on interest while exactly reproducing its legal structure, you’re right.”

    Except that it isn’t exactly reproducing the legal structure. When you have a mortgage, you own the property and have simply borrowed money from them. In the sukuk, the bank owns the property and you’re simply a renter who’s also putting the house effectively on layaway. It has the same effect financially as a loan with interest in terms of compensating for risk and the like, but it’s not the same concept at all.

    Think about it like this: imagine that there’s a field of land that one farmer owns that he never works, and a neighbour wants to start working it but can’t afford to pay it off right now. In one case, the owner transfers the money and puts the other farmer in debt to him, charging him interest on that debt, and pointing out that he’ll take the field back if he can’t make the payments. In another, the owner keeps the land and allows the other farmer to work it, charging him rent for it and drawing up an agreement so that the the other farmer can buy the property off a little at a time.

    The sukuk is like the latter, and that’s a lot different than the former, at least to me.

  • http://www.punkassblog.com Antigone

    If you borrow $300K from me, put up $100K of your own money, buy a $400K house, and then burn it down, which of us is out the most? You get to declare bankruptcy and escape the debt; I get nothing. You are punished by not being able to borrow again; I am punished by not being able to lend because you lost all my money.

    Leaving aside that it is not as easy to declare bankruptcy as people seem to think it is, you are missing lots of the risk that the lendee faces. In the hypothetical situation up there, if I borrow 300K to buy a house and then burned the house down, I’m also risking jail time (fraud) on top of, you know, not having a place to live. I think not having a place to live is a pretty damn big risk. And if you took a loan from the bank, the bank is not risking that it’ll never be able to loan again. It’ll just make up some more fictional money. Additionally, if that situation was to happen, the lender gets additional compensation in the form of tax write-offs.

    So, again, the risk from the borrower is just as high as the lender, and the borrower is the one putting in the effort.

  • http://www.kurmujjin.com kurmujjin

    One part of that is easy. Jack up the inheiritance tax. Also, add public financing of schools, from grade school to college. Nobody here disagrees with any of those policies.

    Not true. I disagree with both of those. The government is stealing in the first case, and near inept in the second. I’m OK with low interest rate loans and some subsidies for education, but i would rather have private institutions running education.

    The only thing I want to see government do is to level the playing field and then get off it. They should be refrees, not players. (IMHO)

  • http://kagerato.net kagerato

    Jack up the inheiritance tax. Also, add public financing of schools, from grade school to college. Nobody here disagrees with any of those policies.

    Wrong. I don’t support wealth taxes of any kind, not even in special cases such as inheritance. Income alone should be taxed, not wealth. An inheritance would thus be taxed, but only by the same rates and structure as income, and without the application of any special surtaxes or exemptions.

    Property taxes are not much better, though they fund the majority of local government services. I would prefer that specific, targeted taxes fund police, firefighters, roads, and so forth such that people could see their precise costs. Pooling everything into one general fund makes the system flexible but also vulnerable to corruption. Mandatory allocations to particular services, in contrast, are only as corrupt as the leadership of those entities.

    As to public education, I support it only in the sense that all of the known alternatives are worse. The goal of education should be to develop individuals into intelligent, independent people. However, the current state of the educational system in both public and private spheres is to maximize the emphasis of knowledge, especially the memorization of certain pre-ordained facts. When you combine this with the manner in which most schools are administered, the system becomes extraordinarily regimented. I don’t find it likely that this will change anytime soon, since it is extremely useful to businesses to have a constant influx of people who expect working environments which are monotonous, hierarchically authoritarian, and unconcerned with the well-being or maximum development of any particular individual.

    But your analysis of why this is the case is simple ideological obsessive-compulsive disorder.

    Now I’m mentally ill, eh?

    You did, in fact, object to the notion of interest on loans. Perhaps you failed to make your position clear, too.

    I objected to the use of interest for particular goals, especially profiteering. I connected interest to the broader scheme of mechanisms by which poverty and power become self-propagating.

    You were the only one to misunderstand my post so severely, and levy a barrage of insults in response.

    And where did you get these principles? What tests have they been subject too? What mathematical analysis demonstrates their viability? What historical precedent do they have?

    This is truly astounding. You think that the existing economic reality was determined in a rigorous and well-justified manner, to explicitly maximize the good of society?

    Economic systems are forged and destroyed based on will and power. The current system works superbly well for a certain small set of people, and they will continue to apply it as long as they can get away with it.

    The reason why we cannot progress further as a society is largely due to precisely attitudes like yours. “The system must be the way it is for a reason. Surely, they have justification for this.” No, they never have; it never was that way.

    Economics, like mathematics, is completely arbitrary. You can establish an infinite number of different sets of self-consistent rules. Whether any particular model will accomplish certain goals in reality is wholly separate from that, and can’t be known until tested. The evidence has grown dramatically over the past three to four decades that the existing rules governing the economy substantially and consistently concentrate wealth and power. Continuing down that same failed path is madness; it’s well past time to start testing alternatives.

    I never claimed to have some any sort of silver bullet. On the contrary, I claimed precisely that the problem is multi-faceted, very difficult, and can be approached from separate angles simultaneously. Economists and other interested parties have researched the kinds of effects particular individual changes (such as fixed interest, substantial tax restructuring, far tighter capital and leverage requirements, restraints on day-trading and high frequency trades, …) would tend to have — at least in the theoretical models. No one can know for certain what they do in practice until they’ve been tried.

    Furthermore, it’s very interesting that you somehow managed to credit me for the origination of all these ideas. The fact is that I learned of each one of these concepts and their theoretical underpinning by reading the works of others. Not a single one is my own unique creation, contrary to your ‘silver bullet’ nonsense. I leave it as an exercise to the reader as to why these ideas were incorrectly credited to me.

    One last thing: this will be my last response to you, Yahzi, unless you can somehow find the courage and conviction to write a post not laden with meaningless and distracting ad-hominem attacks.

  • http://www.punkassblog.com Antigone

    The government is stealing in the first case

    Can’t steal from a dead man. We have a cultural value that wealth should pass on to children, but that doesn’t make it so. Besides, right now the inheritance tax is way BELOW what you would normally pay for an income tax.

  • http://www.kurmujjin.com kurmujjin

    Antigone, I would not argue very hard about taxing it at a reasonable rate (one that is well below income.) But the phrase “jack up the inheritance tax” produces images of wanton taxation amounting to theft.

    If I will the money to my children, they are the victims of that theft, not me.

    Passing wealth to children may be a cultural value, but it is one of which I am a proponent. And, win or lose, I vote for persons who will continue to hold that value in high esteem.

  • Alex Weaver

    One last thing: this will be my last response to you, Yahzi, unless you can somehow find the courage and conviction to write a post not laden with meaningless and distracting ad-hominem attacks.

    If I ever have a blog, misusing the term “ad hominem” will be bannable on the second offense.

    AD HOMINEM IS THE USE OF AN INSULT AS A PREMISE. INSULTS ATTACHED TO A CONCLUSION DO NOT QUALIFY.

    Bloody hell…

    More later.

  • Alex Weaver

    I’m OK with low interest rate loans and some subsidies for education, but i would rather have private institutions running education.

    Why?

  • http://www.punkassblog.com Antigone

    Dammit, should have hit preview:

    I’m OK with low interest rate loans and some subsidies for education, but i would rather have private institutions running education.

    “Financing” doesn’t mean “running”. It means that the government foots the bill, not chooses the teacher.

  • http://www.punkassblog.com Antigone

    Passing wealth to children may be a cultural value, but it is one of which I am a proponent.

    Why?

  • http://www.daylightatheism.org Ebonmuse

    The only thing I want to see government do is to level the playing field and then get off it.

    Passing wealth to children may be a cultural value, but it is one of which I am a proponent.

    kurmujjin, I would love to hear the chain of reasoning by which you conclude that these statements are consistent with each other.

  • http://www.kurmujjin.com kurmujjin

    Answer for Alex, #32: There are two parts to the answer, and I’m not sure which part is the focus of the “why? I’m Ok with the low interest rate loans and subsidies for education because I feel that education is important and worth paying taxes to help make sure it is accessible to all. I don’t know if private institutions would, on their own, make education adequately available across the entire income spectrum.

    For the second part, I think government generally is wasteful and inefficient and for principally those two reasons feel that education is better left in the hands of private institutions. It seems to me that there are more career politicians whose major focus is on becoming reelected than there are those who are truly principled. I don’t want a lot of pandering in the management of the education process.

    When I talk of private institutions, I do not necessarily mean those for profit. There are certain activities and responsibilities where too much profit motive is as bad as waste and inefficiency. I think education and health care are two of those.

    For Antigone in #34: Because I want to. I would love to be able to give something to my children to help establish them in their lives and give them more of a head-start than I had when I was young.

  • http://www.kurmujjin.com kurmujjin

    Ebonmuse,

    My concept of leveling the playing field is to 1.) set the rules, which is what our elected officials do on our behalf in the law making process. I would like to see this done in a way that the great majority of citizens feel is fair and 2.) enforce the rules and 3.) provide some assistance to disadvantaged persons so that they can get ON the playing field and have a chance at being successful. The latter I want to see means-tested and to provide an incentive to become independent to where they no longer need it.

    Passing wealth to children is just one of the moves on the field. It would have 1.) rules and 2.) enforcement. It would not qualify for 3.) assistance.

    Now it’s my turn. Why do you think those two are inconsistent?

  • http://www.daylightatheism.org Ebonmuse

    kurmujjin, you said that the purpose of government is to “level the playing field,” by which I assume you mean guaranteeing equality of opportunity to all citizens, regardless of the circumstances of their birth. That’s a good goal, and I agree with it. But you would also allow some people, just by an accident of birth, to inherit enormous wealth while other people start out in life with nothing. That makes for the most unequal playing field you could possibly imagine.

    I’m not saying we should impose a 100% tax on inherited wealth. While equality of opportunity is a worthwhile goal, we’ll never realize it perfectly, and a policy like that would be easily circumvented in any case. But we should take whatever reasonable steps we can, especially for multimillion-dollar estates. I think it’s an especially good idea from a policy standpoint that society impose a heavier tax on money you didn’t earn for yourself. That encourages individual effort and merit and discourages the creation of a de facto aristocracy.

  • Jormungund

    the purpose of government is to “level the playing field,” by which I assume you mean guaranteeing equality of opportunity to all citizens, regardless of the circumstances of their birth

    I cannot imagine a reasonable interpretation of kurmujjin’s posts that would lead to such a statement. I suppose that this must have been written in bad faith or some sort of feigned ignorance.

  • http://www.daylightatheism.org Ebonmuse

    @kagerato:

    Oh? Does Yunus deserve all (or even most) of the credit for such successes? Or was the labor and ideas of the people who produced the actual changes somehow involved?

    Of course Grameen’s borrowers, when they succeed, deserve credit for their ideas and effort. But those achievements were only possible because of the money that was loaned to them. This isn’t an either-or proposition.

    The more fundamental point here is that capitalism creates wealth – that is, it creates productivity, creates value – and lending at interest is one of the ways by which that happens. If an uneducated person takes out money to attend school and becomes a doctor (teacher, engineer, etc.), that person is now more valuable to society than they would be if they had no skills. The same applies if I take out a loan and start a productive, profitable business that makes it possible for more people to earn a living and increases the amount of goods and services that are available. In a real sense, those loans create value that didn’t exist before, which is why there’s nothing immoral about the lender expecting to be paid back more than they originally loaned out. They loan money (that is, they should be loaning money) because they expect that’s what will happen.

    There is no fundamental reason why asset values should rise and fall in periodic boom-bust cycles.

    Yes there is: because that’s what people are willing to pay for those assets.

    This is too easy to discuss in pure abstraction, so let’s take a concrete case. Let’s say there’s a neighborhood where a new factory opens, offering steady jobs at high salaries. Obviously, people will want to live there. That makes houses in the neighborhood more desirable, which causes their price to rise in accordance with the law of supply and demand. You seem to be taking the position that the presence or absence of this factory should have no effect on asset prices in the area. How would you prevent market forces from causing this? Pass a law forbidding people to sell their houses at more than the old price, even though they could get more if they asked for it?

    Now let’s say that the factory goes out of business, making it much harder to get a job in the area. Obviously, living in that community is now a less desirable proposition, and we should expect home prices to fall for that reason. Again, if you disagree with this, what would you do to prevent it? Force people to buy houses there at the old prices?

    What happens when your farmer’s new irrigation system fails (whether due to lack of demand for crops, incompetence, or even an unavoidable cause such as natural disaster)? The loan cost quickly spirals out of control, to the point at which the borrower can’t even afford the interest payments.

    Yes, which is why I think people should be able to discharge loans through bankruptcy when there’s no reasonable prospect they’ll be able to repay them. That gives lenders an incentive to be cautious about who they lend to. But if it’s too easy to escape debt through bankruptcy, that creates a moral hazard which discourages lending from happening at all.

    To be clear, I don’t think that’s a problem we currently face: I think the laws in their current state are heavily tilted in favor of the lenders, unjustly so. But that doesn’t mean it’s impossible to go too far in the other direction.

  • Jim Baerg

    Kagerato re #28:

    Why do you regard ‘wealth taxes’ as in some way worse than ‘income taxes’?

    I have seen criticism of income taxes on the grounds that they tax ‘getting rich’ over ‘being rich’ & tend to keep the already rich on top at the expense of those who might become rich. Regardless of the validity of that I don’t see any reason to favor income taxes over weath taxes.

  • http://www.kurmujjin.com kurmujjin

    ebonmuse,

    When I talk of leveling the playing field, I only mean rules and referee. I am OK with giving the disadvantaged a hand, but I am loathe to take from those who have already earned what they have, so long as it was earned according to the rules. It seems to me to be the antithesis of liberty.

    Rather than take from the advantaged, I would rather enforce rules so that they can not use their wealth to further disadvantage the other players.

    Equal opportunity is not the same as equal outcome. That’s one mistake I think we make in our thinking. I do not like enforced socialism, though I think voluntary socialism has its place.

    I have no beef with aristocracy so long as they are strongly induced to behave fairly.

  • http://www.kurmujjin.com kurmujjin

    I was thinking about taxation as a result of this thread and am going to shift my position a bit. I was wrestling with how to tax fairly and came to the conclusion that taxing different income types at different rates is tantamount to subsidizing some income types.

    I think all income should be taxed at the same rate. I’m OK with a progressive tax structure to avoid oppressing the lower classes. And I think we should tax gross income rather than net. It’s the only way, in my mind, to absolutely limit loopholes. Then, whatever economic activity takes place, does so on its own merit and not as the result of government interference and preference for one type of income over another. I hate the fact that the tax code is littered with subsidies and loopholes.

    So, I would say that a tax on inheritance should be imposed at the same rate as any other form of income.

  • http://www.whyihatejesus.blogspot.com/ OMGF

    When I talk of leveling the playing field, I only mean rules and referee.

    So, as long as everyone is held to the same inheritance tax laws…?

    …I am loathe to take from those who have already earned what they have…

    If I inherit $1M, what part of that have I “already earned?”

  • Jormungund

    I would say that a tax on inheritance should be imposed at the same rate as any other form of income.

    Fair enough. The current max rate for the inheritance tax and the income tax is 35%.
    If we greatly simplified our tax code (such as getting rid of the numerous exemptions and exclusions in the inheritance tax), you could have both of those be the same thing.
    I too would like a much simpler tax code. Unfortunately large corporations and very rich people benefit from a byzantine tax code that their lawyers can can manipulate. A simplified tax code will not be made since political donors and PACs are not for it.

  • http://kagerato.net kagerato

    Of course Grameen’s borrowers, when they succeed, deserve credit for their ideas and effort. But those achievements were only possible because of the money that was loaned to them. This isn’t an either-or proposition.

    Indeed. Our disagreement seems to be that you would give Grameen and the worker equal credit, whereas I would give the worker 70 or 75 percent of the credit. There is also the question of how much credit is due to society itself, rather then the particular individuals involved.

    As to the capitalism creates wealth, interest can build wealth and so forth — yes. I didn’t argue to the contrary…if anything, my position is precisely that interest and existing economic power are too self-propagating.

    I don’t see wealth or economics generally as a zero-sum game. In nearly any economic system, you will have real growth (not mere inflation) to some degree. However, I do not prioritize maximizing growth (measured by GDP, jobs, or other figures) as ends unto themselves. If people have good food to eat, stable homes to live in, a clean and open environment, substantial time for leisure, access to essential medicines, and so forth, I don’t care if GDP is flat-lined and employment is at a meager 10%.

    Those conditions don’t exist for everyone to nearly the degree that they should. This is a sub-optimality to be addressed, but most of our political leadership has no intent of doing so. If anything, it seems to be that as conditions get worse, the leadership entrenches itself into that evolving status as the “new normal”.

    This is too easy to discuss in pure abstraction, so let’s take a concrete case. Let’s say there’s a neighborhood where a new factory opens, offering steady jobs at high salaries. Obviously, people will want to live there. That makes houses in the neighborhood more desirable, which causes their price to rise in accordance with the law of supply and demand. You seem to be taking the position that the presence or absence of this factory should have no effect on asset prices in the area. How would you prevent market forces from causing this? Pass a law forbidding people to sell their houses at more than the old price, even though they could get more if they asked for it?

    Let me ask you something: do you think the price of food should be allowed to rise without limit, due to changes in supply and demand? Do you think the price of medicine should do the same?

    If not, then why do you think the price of another essential commodity should do so?

    Or do you find it fitting that people are forced to move from place to place, merely due to industrial and commercial changes that are almost entirely out of their control?

    We’re leaving aside the fact that the recent housing bubble had nothing whatsoever to do with local factories or local businesses, or indeed any meaningful connection to economic development whatsoever.

    Why do you regard ‘wealth taxes’ as in some way worse than ‘income taxes’?

    Jim, the primary reason is that some particular wealth taxes are assessed on an on-going or continuous basis. The estate tax is not one which functions this way; depending on implementation and relevant jurisdiction it acts as either a displacement for income tax or a surtax on top of it. Property taxes are common example of a rolling tax which is paid in perpetuity. Any taxes which apply directly to savings or investment based upon their existing size rather than growth would be another example.

    I would argue that the estate tax we’re familiar with is not really a wealth tax at all, considering that it is only applicable during the transfer of wealth — which must be income by definition.

    It’s probably no surprise that I don’t think people ought to have to work their entire lives, even into old age, just to live very comfortably. Taxes which target wealth tend to affect long-term investments and savings that would otherwise make retirement a done deal. Income taxes slow the rate at which such retirement savings may grow, but they do not reduce the actual saved value.

    Some may argue that we should tax wealth in order to keep the rich working as much and as long as possible, for the good of society. This, to some degree, assumes that the wealthy are dramatically more productive or more effective than those lower in the economic ladder. I don’t see that as accurate. It’s much more a difference in decision making, social influence, and inherited conditions that accumulate massive wealth than meaningful differences in skill.

    Others will say: well, just tax wealth and redistribute it for everyone’s retirement (and other benefits). I don’t like that approach for a couple reasons. One, it’s very roundabout. The government already has the power to spend (indeed, create) money. It makes more sense to create initial conditions that would lead to long-term success for nearly everyone than to later intervene to correct broken conditions caused by insufficient involvement. Two, it treats the rich as a single uniform body of people. They didn’t all earn their wealth in the same manner, and some means are much more morally legitimate than others. They don’t all have the same spending habits, either. Some simply hoard, others invest, and yet others give most or all of it away on philanthropy. We don’t know ahead of time what will be done with a particular wealth pool.

    One other reason is that wealth taxes do not typically respond to changes in the economy as fluidly and automatically as income taxes. That’s not an irresolvable problem in principle, however.

  • http://www.kurmujjin.com kurmujjin

    OMGF, Answer to the first is yes and for the second, I propose amending my statement to include both earned and gifted. I am loathe to take away from someone property or wealth that they were given. Taxing it is more than adequate in my mind.

    Jormungund, I would include inheritance with other income and if the amount is high enough to trigger the 35% rate, so be it. I would graduate the tax, though, as it is now, and the effective rate might be something less.

    Looking quickly, I found only one article on recent inheritance and from what I can tell, only 2-3% of americans receive more than $50K and 91% receive nothing at all. The inheritance tax might not make much difference anyway. (article here)

    I think the bigger problem is real wages. I have received many links to articles describing how real wages have been slipping in this country for two decades. And partly because of the real wage issue and predatory lending (back to the original topic), debt is astronomical.
    And paying the debt service is debilitating.

    Giving up on reforms, even though a difficult and seemingly impossible task, is too defeatist for me. I would keep the discussion going.

  • http://www.whyihatejesus.blogspot.com/ OMGF

    OMGF, Answer to the first is yes and for the second, I propose amending my statement to include both earned and gifted. I am loathe to take away from someone property or wealth that they were given. Taxing it is more than adequate in my mind.

    So, you do or you don’t have issues with inheritance tax?

  • Doug kirk

    I’m following the thread a bit and I the thought that inheritance should be treated as normal income. To that I just have to ask why? It’s a plain fact that the massive accumulation and centralization of wealth directly leads to social imbalance and dysfunction and inheritance is its primary venue. It’s also a well established fact that people will not work hard for something for which they feel they are not rewarded and the existence of a rich class is necessary. I think we have to acknowledge that teh goal should be to keep wealth from becoming too concentrated while simultaneously encouraging people to accrue it. No easy task.

    I think the only way to have an incentive to accrue wealth and at the same time have a disincentive for accruing wealth is an inheritance tax coupled with a gift tax based on the value of the givers estate at the same rate as the inheritance tax (to prevent loopholes). Furthermore, it would be an inheritance tax that increases with the size of the estate because the effective social difference between 100 thousand and 150 thousand is much much greater than the difference between 1,100,000 and 2,100,000. Also, inheritance taxes would only be triggered for a non-spouse inheriting the estate or a spouse inheriting the estate from their spouse who died past the retirement age. So old businessmen can’t just marry their daughters or cousins to keep the money in the family and young people don’t have to worry about forfeiting large sums of money should their spouse die prematurely.

    For estates worth less than 5 million (which is the current upper limit for most lower-middle middle class families) there should be no inheritance tax at all. This gives an incentive for families to accrue wealth and to leave a nest-egg for their children. This and all other numbers would rise with inflation to keep it incentivized.

    For estates worth 5-25 million dollars, a simple 35% inheritance tax would be applied. This is not so large as to be unnecessarily cumbersome and disincentivize saving but still large enough to prevent those who inherit the estate from sitting pat and hoarding wealth.

    For estates worth 25-100 million, the tax rate should be 50%. For estates worth 100-999 million, the tax rate would be 80%. For estates worth 1 billion or more, 90%. This is clearly an affort to redistribute wealth and keep it from being accrued too aggressively by a small proportion the population. Although it should be noted that 10% of 1 billion dollars is still 100 million, so we aren’t exactly pushing wealthy families into the poor house.

    If possible, the inheritance taxes should have provisions attached that prevent the money from being spent on anything other than public education, public health services, and the prison system. All things that if managed properly and well funded can contribute to a greater number of people accruing their own wealth.

    I tried to think of scenarios that would prevent the massive accumulation of wealth that wouldn’t involve an inheritance tax or the government declaring emininent domain on stagnant wealth (which I think would be absolutely awful and much worse than a sensible inheritance tax) and came up blank. And haven’t seen any solutions profferred so far.

    Of course, it’s all pie-eyed dreaming. No current system or politician would endorse anything remotely close to this; and I can’t imagine even a future scenario where this would ever be allowed to happen. And bah for the massive block of text. Sorry for the rant

  • http://www.kurmujjin.com kurmujjin

    OMGF, as it currently exists, I do not have a problem with estate tax. The US currently has one and the bottom rate is I think 18% and the top rate is 45%.

    Inheritance tax on top of estate tax is double jeopardy and I have a problem with that. Some states add an inheritance tax.

    My preference would be for only a progressive inheritance tax and no estate tax. I am OK with taxing unearned income. I don’t want to arbitrarily increase the rates or confiscate the income altogether.

  • http://www.whyihatejesus.blogspot.com/ OMGF

    Which states, and aren’t they simply the state level taxes being taken out? I mean, most states also have income taxes.

  • http://www.kurmujjin.com kurmujjin

    OMGF, here are two links (obtained by Google-ing “inheritance tax”):

    http://retirementliving.com/RLtaxes.html

    http://www.mcguirewoods.com/news-resources/publications/taxation/state_death_tax_chart.pdf

    My personal experience was that I paid no tax on money left to me by my mom. All estate taxes had been taken out before disbursement and my state has no inheritance tax.

  • http://www.whyihatejesus.blogspot.com/ OMGF

    Again, how is that any different than states imposing an income tax separate from the feds?

  • http://www.kurmujjin.com kurmujjin

    It’s not different. If you treat inheritance simply as income, the states will take their share. Part of what I was saying is that I don’t want to have any more than a simple income tax for any source of income. Therefore, a separate inheritance or estate tax is not necessary. Treat all cash inflows as income, period, and treat them as such the moment the recipient receives it (spouses don’t count, as is currently the case).

  • http://www.whyihatejesus.blogspot.com/ OMGF

    I’m still confused.

    You claim that you are against state imposed inheritance taxes as “not necessary” but can’t tell me how it’s any different than a state imposing a separate income tax – i.e. it’s still taxing the same money but by two separate entities, the feds and state, which you seem to be OK with. So, which is it?

    And, if inheritance of an estate is simply another form of income and you are OK with taxing income, then why are you complaining?

  • http://www.kurmujjin.com kurmujjin

    Originally I mentioned that I did not want to “jack up the inheritance tax rate”, seeing it as an unfair attack on people who have a desire to gift their property to their successors. I feel that decision is theirs to make and the government should keep their hands off.

    A ways up the thread I came to the realization that to the recipient of the gift, it is income. I realized that I agreed with it being taxable income to the recipient at ordinary income tax rates.

    What I am objecting to in this latest exchange is taxing it twice, first as an estate tax paid by the donor before disbursement and then again as income on the part of the recipient after disbursement. That is double jeopardy.

    My net position is that I would only like to see it taxed one time (Fed and State if the person lives in a State having an income tax) and the recipient would pay the tax on the gift as ordinary taxable income.

  • http://www.whyihatejesus.blogspot.com/ OMGF

    In practice states tax individuals once and feds once and that’s it for almost every single instance (although sometimes no tax is levied). Only a few states (Kentucky and what others?) tax both, and only for people who are not direct relatives. This seems like a non-issue.

  • http://www.kurmujjin.com kurmujjin

    At this point I would agree that it’s not much of an issue. My reaction was more to the suggestion to jack up the rates.

    According to the link I posted, above, the states with inheritance tax (this is in addition to the federal estate tax) are Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee.

    I would like a simpler tax code. Seems to me that ditching the estate tax and treating inheritance as income would be part of that, along with a good many other reforms.

    And I apologize for dragging this out so long, being a bit off-topic and all…


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