Wednesday, July 06, 2011

Of Usury

"Romish Internet Graffiti" had a post a while back noting that, contrary to the view in some quarters, the Catholic Church still insists that usury is wrong. It says something about our age that people's minds are so boggled by this.

I find that there are a couple of stumblingblocks in the way of understanding what it even means to hold that usury is immoral and unnatural. Some of these have to do with the understanding of 'usury' itself.

(1) There is a common misunderstanding in which 'usury' is taken to cover any investment from which you receive a return or profit. This is not a reasonable understanding at all, but it shows how far the confusion extends.
(2) There is a rather more understandable misunderstanding in which 'usury' is taken to cover any loan with interest.

Neither of these is correct, but the fact that we simply don't make a distinction between different kinds of profit received on money given out goes a long way to showing how it has become plausible to think that usury is just a necessary part of social life.

Usury is when (to use the famous Fifth Lateran definition), from its use, a thing which produces nothing is applied to the acquiring of gain and profit without any work, any expense, or any risk. The basic idea in later condemnations of usury was always the treatment of lending as if it gave one intrinsic title to interest -- i.e., as if the mere act of lending gave one the right to have a profit. (Earlier condemnations were usually concerned with the injustice of the rich fleecing the poor for profit, and this always remained an issue, but receded in later days when extensive lending became more widely possible; it has, however, become increasingly important again as interest-charging has become more and more accepted as the norm regardless of who is borrowing.) This violates any notion of just exchange: for an exchange to be just, you must have done something to earn any profit you make. That's the "without any work, any expense, or any risk" part of the definition. If the interest charged is because you've done some work in making the loan (e.g., you are recuperating paperwork or delivery expenses in making the loan), or because making the loan has cost you something (e.g., you have to pull money out of a venture that is currently making money), or because the lending itself is risky (e.g., you could lose the whole loan, to detriment to yourself), this is what is called extrinsic title to interest. I've talked about extrinsic titles to interest before. Merely because one only appeals to extrinsic title to interest doesn't automatically make the exchange just, and, in fact Renaissance-era disputes about how just various extrinsic titles to interest could be were very heated. But such interest need not be unjust, and any injustice that arises from such interest is not the injustice of usury in the proper sense. Admittedly, things get a little more complicated when people do things that can be justified in terms of extrinsic title to interest but do so as if they had intrinsic title to it, but this is really just a point at which usury sinks below the ability of public sanction to handle directly, and not a point at which it ceases to be an issue for justice.

It's sometimes argued today, incidentally, that inflationary considerations give general title to interest: if I lend you money, and you pay me the same amount back later, inflation means that the real value of the money you gave me is less than what I gave you in the first place. Could this be considered extrinsic title to interest? Certainly -- if it is agreed upon beforehand, the interest is fixed to the level of expected interest (with possible fraction additional for any risk or damage in the loan itself), and if there is provision to pay it back (with possible fraction less for any risk or damage in the loan itself) should deflation happen instead. I find that apologists for usury who use this argument always conveniently overlook the question of what would be just should the expected inflation never happen. But certainly inflation can be taken into account to the extent it actually harms or increases the risk of the lender (and, it should be said, mere restriction of what one can do is in itself neither a harm nor an increase of risk).

One of the corollaries to this whole approach that is worth thinking about is that it means that interest can be charged for loans but its being charged and its amount always have to be explicitly justified. This is where our society falls down: we allow interest to be charged without even the shadow of a justification. This is, as we say, a lack of transparency.

Other confusions about the subject tend not to do with what makes something usury so much as with what it means to say that something is immoral and unnatural. But this is another can of worms.

35 comments:

  1. Ocham7:17 AM

    <span><span>
    <p><span><span>>></span></span><span> </span><span><span>interest can be charged for loans but its being charged and its amount always have to be explicitly justified.</span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>Why?<span>  </span>The market for money will guarantee that an objective level for the risk-free rate is set.<span>  </span>The existence of risk-free capital investments like the orchard in my example above will guarantee that, in a perfectly functioning market, an appropriate rate is set.<span>  </span>I don’t even have to know there is such an orchard.<span>  </span>If I offer to lend money at less than that rate, the world will flock to my door, borrow my money and reinvest it and make a risk-free profit.<span>  </span></span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>Now I may choose to lend to a needy person at less than that rate, or free of charge.<span>  </span>But then that is a combination of lending at the risk-free loan, and a cash gift. </span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>>></span></span><span> </span><span><span>we allow interest to be charged without even the shadow of a justification</span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>The ‘justification’ is the arbitrage just mentioned. The rate for borrowing, and the rate for investment must converge.<span>  </span>If you were somehow able to force lending at zero rates, the price of capital goods such as cherry orchards would shoot upwards instantly. </span></span>
    </p><p> 
    </p></span></span>
    <p> 

    </p><p> </p>

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  2. Ocham7:17 AM

    <p><span><span>>></span></span><span> </span><span><span>because making the loan has cost you something (e.g., you have to pull money out of a venture that is currently making money)</span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>except that the ‘having a current money making venture’ is unnecessary.<span>  </span>Why would that matter?<span>  </span>The cost of risk-free capital should be everywhere the same.<span>  </span>I’m also a bit unsure about what you mean by ‘making money’.<span>  </span>I think you mean, investing capital in something like an orchard, or a farm, or a business, or anything that produces income. But that is not ‘making money’ in the standard sense.<span>  </span>Making money is borrowing at one rate, then investing in some form of income producing enterprise that pays more than the risk free rate.<span>  </span>But then it follows that all money-making is risky.<span>  </span>If my investment pays more than the risk-free rate, that is because the income is risky.<span>  </span>And if capital markets are efficient, the value of the ‘spread’ over the risk-free rate should be approximately equal to the probable value of losing your capital.<span>  </span>There is a whole well-developed theory about this.<span>  </span>The riskier the capital investment, the higher the return over the risk-free rate.<span>  </span>Unfortunately, because the poor represent a high ‘credit risk’, market theory requires that lending to them will attract the highest rate.<span>  </span>Thus, those who need money the most, and those who have the least ability to pay, are charged the most.<span>  </span></span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>However, there is an obvious distinction between investing in capital goods (e.g. an orchard) where there is an income stream attached, and lending to people who will use the loan as type of income, in order to spend it.<span>  </span></span></span>
    </p><p><span><span> </span></span>
    <span><span>On your remarks about inflation, the risk-free rate theoretically builds in an expected inflation adjustment.<span>  </span>The real interest rate is constant over long periods at about 1.5%.<span>  </span>Anything over that is an implied market adjustment. </span></span></p>

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  3. Ocham7:18 AM

    <p><span><span>A quick walk through capital markets theory is needed here.<span>  </span>Suppose I have an orchard of trees, guaranteed free of rot or disease, guaranteed to produce regular crops of fruit of a certain quality and quantity.<span>  </span>Then I have a ‘risk free return’ if I own the orchard.<span>  </span>It would therefore be unfair on the lender to be able to borrow money at zero, or at any rate less than the ‘risk free rate’, in order to buy the orchard.<span>  </span>For I would be making a risk free profit by doing so.<span>  </span>Therefore, given a whole market of buyers and sellers of money, all risk free capital investments will attract the ‘risk free rate’.<span>  </span>This will probably be the same as the rate at which a risk-free government is able to borrow money – although there is no such thing as risk-free government these days.</span></span>
    </p><p><span><span> </span></span></p>

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  4. branemrys7:39 AM

    It's simple and straightforward nonsense to hold that markets guarantee anything. Rather, markets increase the probability of certain equilibria which depend on the conditions under which they operate. Such conditions can be distorted, leading to shifts of equilibria in any direction one can imagine; this is precisely why even hard market proponents still recognize the need to enforce laws against fraud and coercion (which are merely the most obvious and easily manageable distorting factors). Treating arbitrage as 'justification' in and of itself is obvious hocus-pocus; one might as well treat 'the fact I can make a profit' as justification for fraudulent contracts.

    Failure to justify interest is failure to make explicit conditions relevant to the fairness of the agreement, to the potential detriment of one of the contracting parties, and thus can conceal potential harms.

    You also seem to have missed the explicit point of the post, which is that eliminating usury, to the extent possible in society, does not involve the enforcement of lending at zero rates (this is error 2) but the enforcement of explicit justification of interest in terms of what service, expense, or risk it is supposed to compensate. This was made quite clear in the post. The only conditions under which the elimination of usury would require enforcement of lending at zero rates would be the rare condition under which lending was extremely easy, involved no harm to the lender, and was completely risk-free, and even that only if it was really practically enforceable.

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  5. branemrys8:23 AM

    I mean by 'making money' what everyone means by making money.

    I have no idea why you are talking about 'unnecessary' here. Of course it's not necessary; this is blatantly obvious, since not all lending pulls money out of ventures currently making money in order to lend that money. But pulling money out of ventures currently making money so as to be able to lend it would be extrinsic title to interest. It was also only one example; that's what "e.g." means, as you well know, so the 'unnecessary' is doubly mysterious. And what, in fact, does the risk-free rate have to do with anything? Not everyone has access to investment at risk-free rates, and risk-free rates are precisely that: rates that only consider risk. Indeed, they only consider one very specific kind of risk, financial risk relative to a form of lending sufficiently stable as for practical purposes to involve no risk of loss. But there are other risks of lending, and occasionally nonmonetary compensations for risk; likewise lending under different circumstance can involve any number of different harms and benefits. This is something known by anyone in creation who has ever lent anything; if your theory of lending is not sophisticated to cover these points, it is not a theory of lending adequate for addressing questions of just lending because it is not even adequate for addressing questions about lending as such.

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  6. branemrys9:12 AM

    Whether it would actually be unfair to the lender would obviously depend on any number of issues that are not in your scenario. If you and I are friends or family, and I lend you the money at zero interest, and you buy the orchard and are therefore no longer constantly embarrassing me by complaining about your money troubles, it is obviously not unfair to me no matter how much risk free profit you earn: your risk free profit is itself a benefit for me. If you lend the money to me and I use it to buy the very orchard you were intending to buy, under certain circumstances it may well be unfair to you regardless of what interest is charged. If you lend the money to me at zero interest and I buy an orchard the owner would never, ever sell to you, and I let you share it, this is obviously not unfair to you. If the orchard is one you really want, and the owner hates you enough never to sell it to you, and I borrow the money from you at zero interest and buy the orchard, but then after a few months of profit sell it back to you at yet another profit, this is also not unfair to you, given how much you want the orchard. If the alternative is between the orchard, the only stable moneymaker in the county, continuing to exist or completing going to weed, and you lend me money at zero interest to buy it, and I keep it running, and everybody in the county benefits from its continued production, including you, it's again probably not unfair to you that I'm making a profit from it. And so on and so forth.

    Setting aside the fact that there is no single market of lenders and borrowers, however much some markets might dwarf others in absolute quantity of money loaned, risk free capital investments only attract the risk free rate because the risk free rate is a relatively objective benchmark capable of being incorporated into the negotiations between lenders and borrowers, either directly or indirectly (by means of regulation, or just by the parties keeping it in mind, or whatever). History shows that in fact lenders repeatedly attempt to do better than the risk free rate from their point of view if they can get away with it, and borrowers attempt to do the same from their point of view, and that sometimes one or the other succeeds for an extended period of time; this arises in part because not all borrowers are knowledgeable of what is a good deal for them, and in part because not all lenders consider only their own risk when borrowers are desperate, and in part because not all lenders are immune to self-destructive lending practice.

    Of course, in practice it is usually to assume risk free markets; neither the borrower nor the lender is without risks, and lenders are in many cases able to use various tricks to hide how much they are actually taking from borrowers. In cases where people in desperate need taking out $20000 in loans end up paying almost that much in closing costs due to extraordinarily high brokerage fees, or when lenders give low estimates for rates without letting borrowers know that by taking those rates they will actually be losing money through massively fewer discount points, or mortgage lenders through business arrangments with title companies end up charging massively higher-than-market title fees, or when borrowers are unable to inform themselves of their options due to unnecessary complications, or in markets contaminated by high numbers of fraudulent lenders or, for that matter, fraudlent borrowers, or in markets where pressures external to the market itself force lenders to lend or cause either lenders or borrowers to mis-assess the work or expense or risk of the loan, going on and on about risk free rates is, besides again making the elementary confusion between usury elimination and enforcement of [...]

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  7. Brendan Hodge10:51 AM

    I'm wondering if to an extent it helps to illustrate to think about under what conditions it seems just or unjust to charge rent for the lendin of a capital asset -- rather than thinking about money in particular (for which there is such an active market in modern society that it's hard for people to envision the idea of money which they could not more productively invest elsewhere, etc.)

    Say I own a wood chipper (I really wish I did, actually) and my friend down the street wants to borrow it for a week.  If I need it myself that week, I might tell him no or ask for some sort of time or work splitting consideration, but generally I'd just say "yes" and let him borrow it for no cost.  Indeed, it would be unfair of me to charge him for borrowing a tool which would otherwise be sitting idle.

    By comparison, if I go down to the garden center and rent a wood chipper, they will charge me.  But this is because they have a large pool of people who want to borrow wood chippers, and if they lent it out for free, it would never be available to anyone.  They charge rent for borrowing the wood chipper in part because if I don't borrow it, someone else will pay to borrow in.  And this has the practical result that it is in often enough that it is possible to get hold of it (whereas without a per day cost for borrowing it, it would simply never be in.)

    Applying this same approach to money -- if my brother in law wants to borrow the thousand dollars which I have sitting in a savings account which has only earned $0.03 interest in the last year, I might tell him "no" based on the idea that I'm saving the money in case I have an unforseen expense, but it would arguably be unjust for me to charge him interest to borrow that money from me for three months, since if he didn't borrow it I would not make appreciably income off the money.  If I told him that I'd lend him the thousand, but only if he paid me back eleven hundred, I'd arguably be behaving userously.

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  8. <p><span><span>Many of your objections below stem from the perception that the capital markets are not efficient.<span>  </span><span> </span></span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>>>). Treating arbitrage as 'justification' in and of itself is obvious hocus-pocus; one might as well treat 'the fact I can make a profit' as justification for fraudulent contracts.  </span></span><span>

    </span>
    </p><p><span>What justifies the existence of the risk free rate (i.e. the fact money has a time value at all) is the finite price of real assets.<span>  </span><span> </span>The existence of only one risk free rate is guaranteed by arbitrage (see above).<span></span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>On your point about obviously bad practices and usurous lending – i.e. where the excess yield is much higher than the implied probability of default – that is another question entirely.<span>  </span>I am still not clear whether you would regard (a) lending at the risk-free rate as usurous (b) lending at rates with an excess yield, but consistent with the implied joint default probability, or (c) lending at a rate in excess of that implied by (b) as usurous.<span>  </span>I would only regard the last one as usurous.<span>  </span>Lending so that my losses from default exactly balance my excess yield, i.e. so that I break even and don’t ‘make money’ I would regard as a charitable public service.</span></span>
    </p>

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  9. <p><span><span>>>neither the borrower nor the lender is without risks, and lenders are in many cases able to use various tricks to hide how much they are actually taking from borrowers.</span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>If the investment is not risk-free, then there is a risk of default, and this will be priced in to the lending rate as a ‘spread’ or excess yield.<span>  </span><span> </span>In an efficient market, the excess yield should exactly balance the probability of default. A crude example would be an investment that has a market-implied default probability of 1%.<span>  </span>In that case, the excess yield will be approximately 1%.<span>  </span>The lender (a bank) will borrow at the risk-free rate r, will lend to 100 investments with the 1% probability of default, at a rate r+1%.<span>  </span>Then 1 in 100 of those investments will default, given that probability, and the 1% excess yield will exactly compensate for that loss.<span>  </span>The bank breaks even (in a perfectly efficient market, which the real market isn’t).<span>  </span>This actually was the case for prime lending before the crisis – most banks were lending to prime lenders at close to the risk-free rate, causing them to expand into sub-prime, but that’s another story.<span>  </span></span></span>
    </p>

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  10. <p><span><span>You raise so many points here that I don’t know where to start. <span>  </span>We could start with the “risk free rate” (r), which is an elementary and fundamental part of capital markets theory, and then the ‘credit spread’ (c), which is the difference between the rate actually lent at, and r.<span>  </span>Thus </span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>y = r + c</span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>We’ll ignore the effects of inflation which in practice is built into r (since r is the sum of the ‘real risk free rate’ and the market implied inflation rate, which you can work out in practice by an elementary function of the price of index-linked government bonds and standard non-linked bonds).</span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>Now one of your remarks seemed to imply that if I lent to someone at r for one year – perhaps by lending 100 and contracting to get back 104 after one year – then I would be ‘making money’, i.e. would be making the 4, which is the difference between the 100 lent and the 104 received.<span>  </span>Capital markets theory would not call that ‘making money’.<span>  </span>‘Making money’ would be borrowing at the risk-free rate, or something close to it, and then investing at a rate higher than that.<span>  </span><span> </span></span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>>> Of course, in practice it is usually problematic to assume risk free markets; </span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>I assume by ‘risk free markets’ you mean ‘risk free investment’ or ‘risk free asset’.<span>  </span>This is not problematic at all.<span>  </span>There is a huge and liquid market in risk-free government bonds, for example.<span>  </span><span> </span>There is also a large market in ‘real assets’ i.e. businesses with an income (‘orchards’).<span>  </span>The fact that such real assets have a finite price guarantees the existence of a risk-free rate.<span>  </span>(In fact the ultimate real asset is the tax-paying population which returns a relatively constant income to the government’s treasury, which in turn allows it to borrow at the rfr).</span></span>
    </p><p><span><span> </span></span>
    </p><p><span><span>If people had no time preference, i.e. all were prepared to defer consumption indefinitely far into the future, then the [...]

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  11. branemrys11:56 AM

    It's certainly right that any adequate account of just lending has to take the lending of capital assets into account. It can get tricky since capital assets can often do real work beyond storing value for exchange, and this affects how the loan is to be understood, but it's also the case that we tend to find such barter-type loans less abstract.

    (Thinking through the wood chipper example aloud.) With the case of the wood chipper, the Renaissance bankers/moral philosopher who developed much of the full theory on the subejct would consider reasonable fees for wear and tear (damnum emergens) and for late return (poena conventionalis) and perhaps for the danger of nonreturn (periculum sortis)  to be extrinsic titles to interest, as would any reasonable fee for risk of these things. (This would be over and above the natural value of the actual service of providing a wood chipper to use, which they wouldn't consider on its own to be a matter of interest at all, but just straightforward exchange of money for services.) If this is all there is to it, none of this would guarantee that the garden center's price was just, but it would mean that if there is any injustice, it isn't usury. And at least the later ones would tend to argue that, in the absence of fraud, violence, emergency gouging, relevant ignorance, and sheer greed or malice, the market value for all of these things would closely approximate the value for just exchange.

    Likewise they would say that  (setting aside issues of what you owe your friends), you could charge for the service without being usurious (it might well be wrong in some other way, depending on the circumstances, and you'd definitely be wrong on the traditional view to charge as much as the garden center for the reason you mention); and you could also demand the same sort of fees as part of the loan (but given that wear and tear is cumulative, and because you're not lending the wood chipper out all over the place, the harm you are likely to get from wear or lateness or risk of either from this one loan is likely to be minuscule in comparison with what the garden center can have in terms of its regular loans, so you'd almost certainly be guilty of usury if you charged as much for these things as the garden center, and if the wear and risk of lateness and so forth were genuinely negligible, you'd be wrong to demand payment for them).

    So in the case of the thousand dollars, any interest whatsoever would have to be justified in terms of (1) the pennies you are not getting from having it in the savings account (which give extrinsic title of lucrum cessans); and (2) the risk you are taking by not having it for unforessen expenses (which is a weak damnum emergens). (1) is obviously negligible, so that would (setting aside what we owe family members) leave the matter pretty much entirely in terms of how much you were risking by not having it in the bank account (barring fraud, etc., this would be reasonably approximated by what you and your brother in law could agree is fair). One sign (neither necessary nor sufficient, but nonetheless genuine) that you were doing things properly is if you canceled the interest (or most of it) on finding out that the risk was actually much less severe than you and your brother in law had thought it would be. Demanding the eleven hundred in payment would likely be usurious, because it would likely not be justifiable in terms of profit lost or risk to yourself.

    So I think that's how it would go, although I might be missing something.

    One of the problems with getting into details about usury is that there are so many factors that enter into it. Except for credit card interest and loan sharks and the like, no loans today involve interest rates anywhere in the [...]

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  12. Most of your examples involve cases of one individual lending to another, where it is hard to tease apart the 'gift' aspect of the loan.  If you are lending to a friend to help them out, you might lend to them at zero cost, because of the taboo attached to charging interest to friends.  In reality there is still an interest rate, but you are donating this to your friend as a gift.  There is a further moral issue about why you are lending to him or her at all.  Would you lend to fund a drugs habit, e.g. or to create a situation where they are gradually going underwater to pay back a commercial loan, and where you can clearly see that you are throwing good money after bad.  In the latter case you might do better to talk to them and get them to understand the reality of the situation, get a budget together, save, pay back the original loan etc.

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  13. Quite frankly I don't think the Renaissance theorists had a firm grasp of modern financial theory which emerged more than 400 years later in the 1960s.  They would need to start with the CAPM (Capital Asset Pricing Model), then the notion of 'efficient market' which has a precise technical meaning.  You can't really understand the subject of lending without that.

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  14. branemrys12:06 PM

    <span> You can't really understand the subject of lending without that.</span>

    This is about the most ridiculous claim I have ever come across.

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  15. Quite frankly I don't think the Renaissance theorists had a firm grasp of modern financial theory which emerged more than 400 years later in the 1960s.  They would need to start with the CAPM (Capital Asset Pricing Model), then the notion of 'efficient market' which has a precise technical meaning.  You can't really understand the subject of lending without that.

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  16. Brendan Hodge12:19 PM

    Ocham,

    Part of my assumption here is that the idea of usury originates in a period in which lending was much more like the interaction between two people who know (or at least know of) each other and less like the kind of relationship I have with Chase. 

    <span> In reality there is still an interest rate, but you are donating this to your friend as a gift.</span>

    I'm not sure whether this is the case in some factual sense so much as that this would be one way of describing the situation if one so chose -- just as, in theory, I could assess the amount of wear and tear to my house as a result of having guests over to visit and that that this constituted a rent for staying which did exist "in reality" but that I was choosing to donate it to the guests as a gift.

    FWIW, I think what you're saying about how interest rates are set is quite accurate as a matter of economics.  I'm just not clear as to whether it has much bearing on the ideas Brandon is putting forward in relation to what usery is and is not.

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  17. branemrys12:25 PM

    (1) Your scenario was in terms that did not make any special exceptions and (2) as I've pointed out, you also ignore cases in which lenders gouge borrowers, borrowers deceive lenders, outside forces meddle, and so forth; this is true regardless of whether the lenders or borrowers are individuals. I guarantee you that a lending market dominated by the Mafia or African warlords will not converge on risk free rates for risk free capital, and indeed may well have no plausible measure of anything like a risk free rate. You're right, of course, that there are moral issues involving the borrower, but why you are lending to someone may or may not be relevant to the question of usury, which has to do with the difference between intrinsic title and extrinsic title to interest.

    The whole issue of "donating the interest rate to your friend as a gift," however, is very obviously a theoretical fiction to preserve numbers in a model; it has nothing to do with actual lending beyond serving as a measure by which it may be compared to other loans. The fact that it is so hard to tease out is one piece of evidence that it is so; the fact that people can loan just fine without the slightest realization of 'donating' anything is another; and the fact that this alleged interest rate depends on comparison with things entirely extrinsic to the loan itself is another. The list could be extended.

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  18. branemrys12:29 PM

    Capital markets often aren't efficient, because they can be made inefficient, but that aside, the justification of the application of the risk free rate requires that the borrower understand where it is coming from, so that the borrower can understand whether the loan is just.

    It is not another question entirely; it is the bulk of the question, which is usury. You're the one who keeps considering the question only under ideal circumstances for merely risk free rates, which are only of relevance for the consideration of a narrow range of possible charges of interest.

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  19. Brendan Hodge12:31 PM

    Brandon,

    Following on all that, I'm a bit curious: Is there much of a case to be made that, in a modern mass economy with capital markets, there are far fewer circumstances in which money would be sitting around as a non-productive asset which should thus, arguably, be lent without interest if there is not risk of default?

    Obviously, other usery issues then come into play as to how much interest one might charge from a moral point of view (though, depending on the efficiency of markets, a fair amount of this ought to be resolved by the market itself) but might it not be the case that from the point of view of usery virtually all money lending by institutions in this day and age would legitimately be subject to charging of some level of interest?

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  20. branemrys12:35 PM

    <span><span>Now one of your remarks seemed to imply that if I lent to someone at r for one year – perhaps by lending 100 and contracting to get back 104 after one year – then I would be ‘making money’, i.e. would be making the 4, which is the difference between the 100 lent and the 104 received.<span> </span><span> </span><span></span></span></span>

    No, this had nothing whatsoever to do with the making money comment. The question was, if I lend to someone, and doing so requires pulling out of a money-making venture, can I justly take this into account in determining what a reasonable amount of interest would be. The answer is yes. That was the whole point. The point of the post, again, was to point out that the rejection of usury was not a rejection of all interest on loans; I was giving examples of kinds of interest on loans that are not included under intrinsic title definitions of usury. I haven't the faintest clue where you are getting anything else.

    I agree that it was a confusing way to put it, but by risk free markets I meant risk free markets, i.e., ideal markets where the only consideration would be risk free rate.

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  21. branemrys12:41 PM

    You are assuming again that the only risks involved are risks of default. There are other risks relevant to loans: risks to social reputation, for instance, or risks of the borrower becoming violent (a risk that medieval Jews, for instance, had to take into account in their loans--but they had to take it into account explicitly, because it is not merely a risk of default on the loan, but a risk of losing one's livelihood or even one's life).

    But again, all this is not really relevant to the point. Rejection of usury doesn't require that these things not be taken into account; it merely requires that the borrower be in a position to determine if he is being charged fairly for things that involved genuine work, expense, or risk. It utterly baffles me that people can go into mortgage lenders in which costs are deliberately hidden and you can jaw on and on about risk free rates as if that took care of all the injustice in lending.

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  22. Brendan Hodge12:43 PM

    Or, tying more closely to the post, I'm wondering if the conditions listed here:

    Usury is when (to use the famous Fifth Lateran definition), from its use, a thing which produces nothing is applied to the acquiring of gain and profit without any work, any expense, or any risk.

    Are a virtually null set in a modern economy when it comes to lending money.  (Though come to that, it was probably a pretty null set for the Medicis too, do I'm probably being too simplistic.)  Any lending involves some risk of loss and and implies (at least in a dynamic market economy) committing monetary assets which could be productively put elsewhere. 

    Am I missing something here?

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  23. Brendan Hodge12:46 PM

    Alright, I'm officially baffled by the formatting of the threading...

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  24. branemrys12:56 PM

    As to your break even point, you would be presumptuous to assume that you have special right to magic profits. If you weren't being compensated for a service or trouble or harm, you would have no right to the money, and you would be gouging the people you are lending to. You are free to make any profit that you and your borrowers under fair conditions agree to be fair for any service, expense, or risk that actually does apply, where fair conditions includes among other things that you have made reasonable effort to guarantee that the borrower understands why you are charging the interest so as to be able to assess the fairness of the loan. Likewise, they are free voluntarily to donate anything that they please beyond what they owe in order to thank you for your assistance. Some would also argue that it's not properly usurious to receive any minimum interest the law guarantees you for a particular kind of loan.

    The answer to your (a), (b), and (c) would be: it depends in part on issues you are not including in the scenarios.

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  25. branemrys1:31 PM

    People like St. Berndardino or St. Antonino would say that it's not enough to be able to put your money productively elsewhere; there would be have to be genuine reason to think that you actually would have, and this would have to be a reason that could in principle be assessed by the borrower.  If you charge someone interest on the basis that you could have invested elsewhere and made a profit, but never actually had any intention to do so, you are committing both usury and fraud. Many such cases would be basically on the honor system anyway, so barring cases where any risk would obviously be pretty light, the later moral philosophers (the Franciscans, at least) were pretty easygoing about the bare charging of interest; they were merely serious about your actually having assessible reason for the amount you did. The Dominicans were stricter, which is why the Medici usually got along better with the Franciscans. The Franciscans agreed with them about the value of lending for the general benefit of society, and the impossibility of doing so adequately without regular, even if carefully restricted and regulated, interest. There are still banks in Italy that were founded by St. Bernardino himself.

    And all this is abstracting from any other obligations you might have; charging high interest, even interest you could entirely justify by extrinsic title, on loans to your children would have likely not amused them, because your relationship changes what you can demand of them in a just exchange. Another example, although one that they would not have used: Jews have a Talmudic obligations that prevent them from collecting certain kinds of interest on loans to other Jews, which at the very least have to be gotten around by certain ritual forms of buying and selling. Likewise, since they all agree (with various qualifications) that charity is a requirement of justice, you would have the obligation to forego any interest you could otherwise demand if it became clear at some point that it would bankrupt or cause severe harm to the borrower (in effect, you'd have to recognize your extrinsic titles as abrogated by greater need). But these are all the sorts of things the details of which were often hotly debated, which is why banking thrived quite well during the era in which people were most vigorously trying to stamp out usury, and why that era was more creative than any before in coming up with new kinds of loan.

    I think in terms of our modern practice, quite a bit of lending at interest is actually admissible as far as title goes; there's still room to ask questions about injustice, but they are at least potentially justifiable as nonusurious. The big issue is actually making sure that reasonable steps are taken to insure fair conditions and that it's clear to everyone that what is being charged is in fact being charged for work, expense, or risk, and especially that it is clear to the borrower under fair conditions; where this is done usury will be dealt with as far as law possibly could handle it. usury would still be possible; but what was left would have to be dealt with in the forum of God and conscience and social reputation.

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  26. branemrys1:54 PM

    Yeah, it doesn't seem to be very helpful. I suppose this system isn't designed for such extensive in-depth argument (most recent non-replies go from bottom to top, and most recent replies go from top to bottom immediately under the comment to which they respond, except where the replies to prior replies are in front of it....) Here's  a repost of my answer to your last post, on whether the workless/expenseless/riskless loan was a null set.

    <span>People like St. Berndardino or St. Antonino would say that it's not enough to be able to put your money productively elsewhere; there would be have to be genuine reason to think that you actually would have, and this would have to be a reason that could in principle be assessed by the borrower.  If you charge someone interest on the basis that you could have invested elsewhere and made a profit, but never actually had any intention to do so, you are committing both usury and fraud. Many such cases would be basically on the honor system anyway, so barring cases where any risk would obviously be pretty light, the later moral philosophers (the Franciscans, at least) were pretty easygoing about the bare charging of interest; they were merely serious about your actually having assessible reason for the amount you did. The Dominicans were stricter, which is why the Medici usually got along better with the Franciscans. The Franciscans agreed with them about the value of lending for the general benefit of society, and the impossibility of doing so adequately without regular, even if carefully restricted and regulated, interest. There are still banks in Italy that were founded by St. Bernardino himself.  
     
    And all this is abstracting from any other obligations you might have; charging high interest, even interest you could entirely justify by extrinsic title, on loans to your children would have likely not amused them, because your relationship changes what you can demand of them in a just exchange. Another example, although one that they would not have used: Jews have a Talmudic obligations that prevent them from collecting certain kinds of interest on loans to other Jews, which at the very least have to be gotten around by certain ritual forms of buying and selling. Likewise, since they all agree (with various qualifications) that charity is a requirement of justice, you would have the obligation to forego any interest you could otherwise demand if it became clear at some point that it would bankrupt or cause severe harm to the borrower (in effect, you'd have to recognize your extrinsic titles as abrogated by greater need). But these are all the sorts of things the details of which were often hotly debated, which is why banking thrived quite well during the era in which people were most vigorously trying to stamp out usury, and why that era was more creative than any before in coming up with new kinds of loan.  
     
    I think in terms of our modern practice, quite a bit of lending at interest is actually admissible as far as title goes; there's still room to ask questions about injustice, but they are at least potentially justifiable as nonusurious. The big issue is actually making sure that reasonable steps are taken to insure fair conditions and that it's clear to everyone that what is being charged is in fact being charged for work, expense, or risk, and especially that it is clear to the borrower under fair conditions; where this is done usury will be dealt with as far as law possibly could handle it. usury would still be possible; but what was left would have to be dealt with in the forum of God and conscience and social reputation.</span>

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  27. Josiah Neeley4:05 PM

    <p><span>One of the corollaries to this whole approach that is worth thinking about is that it means that interest can be charged for loans but its being charged and its amount always have to be explicitly justified. </span>
    </p><p> 
    </p><p><span>Not so. In fact, as indicated in the Catholic Encyclopedia article on Interest, the position of the Holy See since the 1830s has been that individuals may presume the legitimacy of interest charged in conformity with the law, without having to enquire as to its sources.</span>
    </p>

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  28. Ocham3:03 AM

    It got a bit heated below.  I have printed off your earlier 2009 post to understand better where you are coming from. 

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  29. Ocham3:35 AM

    <p><span><span>OK, I have now looked at your 2009 post. <span> </span>Your starting point is scholastic theories of interest. <span> </span>My starting point is modern financial theory. <span> </span>We need to find a way of meeting in the middle. <span> </span>As a gesture of good faith, I will attempt to translate some of the scholastic ideas into the corresponding modern terms, since some of them clearly have counterparts in modern theory. The really difficult one is the distinction between intrinsic and extrinsic title.<span>  </span>This is not clear to me at all.<span>  </span>I will post something at my place later in the weekend.</span></span></p>

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  30. branemrys10:53 AM

    This confuses several different things. In the 1800s usury laws went through a period of much greater strictness than they had for a while; thus most forms of interest that weren't illegal through most of the countries of Europe were at least justifiable. Every change to laws about loans, though, potentially changes things on this point, and would have to be examined; this has not been done with any thoroughness in a while because there have been heavier priorities with things like Modernism and two World Wars.

    However, even setting this aside, there is a difference between the two questions of what a lender of genuinely good will (which is being assumed in the allowances) can potentially do and what is the best way to protect borrowers from the injustice of usury, and this is what is in view here. If lenders do not divulge the sources of interest they are facilitating usurers, legal and illegal. On the lender side, see my response to Brendan immediately below, where I point out that most legal interest today is probably justifiable by extrinsic title. This is not, however, the same as saying that it is actually justified, nor does

    Even if this weren't so, a regime of toleration would not change the fact that explicit notification of sources of interest is the most natural recommendation to be made on the basis of the most developed theological discussions of the Church's position on usury.

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  31. branemrys11:15 AM

    I think it's been shown clearly enough in this thread that the modern theory is much, much narrower and abstracts from all ethical questions in the first place, whereas the scholastic theory is concerned with lending as such, regardless of market or alternatives or specific measures, and is an ethical theory through and through. I doubt translating the latter directly into the former will do much more than get one the oddness that would come of, for instance, trying to to translate a discussion of Christmas spirit into an economic theory of gift-giving. As the old joke goes, economics is the mathematical study of the ideal behavior of theoretical fictions in toy models.

    Rather, I think the best result would come of going back to basics: take a very, very simple case of lending, analyze it in both terms, and compare. How, for instance, would the modern theory handle the following case: You need something to write with, but don't have anything you can use. I do, and lend you my pen. You use it to write what you needed, and return it. No theory of lending that is incapable of making good, straightforward sense of such a scenario is an adequate theory of lending, and helps one identify the core of the account without contingent assumptions of what would be involved in whole economies or banking systems. It's also easily variable; we can add an interest component, e.g., I'm reluctant to lend you my pen because I'll need it later and it's almost out, so you offer to give me another pen, or money for another pen, at a later point in the day. And moving out from there allows one to get the whole scope of lending in view. It's looking at cases like this that will most reduce the chance of hidden assumptions (either scholastic or modern) gumming up the works.

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  32. I've opened a thread here http://ocham.blogspot.com/2011/07/on-usury.html to discuss this.  I addressed your point about ethics.  Modern financial theory of course has nothing to say about the ethics of charging interest.  But it does have something to say about what interest *is*, and if you don't understand what something *is*, then you can't really talk about whether it is right or wrong, can you?

    The next post will be about the risk-free rate (which you rather derided).  This is the closest (I think) to an 'intrinsic return' to money, and the question about whether we are entitled to earn it is crucial.  The medieval logic (if I understand it) is that it is wrong to get something for nothing, earning a risk-free return is getting something for nothing, ergo etc.  But more later.

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  33. branemrys12:58 PM

    Well, first of all, your rhetorical question about whether you can talk about whether something is right or wrong without understanding what it is, is actually very obviously ambiguous. If meant in an absolute sense, it's obviously right. But one can easily talk about whether something is right or wrong if one only knows it be genus, for instance, or if one only understands it far enough to see that it has clear symptoms of wrongness.

    I have never derided risk free rate; only your use of it in this context. Risk free rate is absolutely orthogonal to the question of whether you are getting something for nothing, which is why I've repeatedly pointed out that knowing risk free rate tells you nothing about ethics of charging it; what matters for the latter is, in the actual charging of interest, what the interest  is being charged for. If I and a borrower fairly and honestly agree, using the risk free rate as a reference baseline, on a particular level of interest, and on the proposition that this level of interest is a fair compensation for work, loss, or risk,  and the reasoning for this is understood by us both, then there is nothing problematic going on.

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  34. Josiah Neeley1:59 PM

    <span>In the 1800s usury laws went through a period of much greater strictness than they had for a while; thus most forms of interest that weren't illegal through most of the countries of Europe were at least justifiable. </span>

    <span>Okay, but you also say that "</span><span>most legal interest today is probably justifiable by extrinsic title," so I'm not seeing how the situation today is different from the situation in the 1800s. </span><span> </span>

    <span>this has not been done with any thoroughness in a while because there have been heavier priorities with things like Modernism and two World Wars.  </span>

    <span>A couple of years ago the Vatican came out with a document on the "Ten Commandments of Driving." So if the Church hasn't gotten around to putting out a statement on the validity of new laws governing interest, I don't think this can be excused simply as a matter of the Church having more pressing issues to address. A more plausible explanation of why the Church hasn't come out with new statements regarding the validity of laws regarding interest is because it thinks the old laws are acceptable.  </span>

    <span>However, even setting this aside, there is a difference between the two questions of what a lender of genuinely good will (which is being assumed in the allowances) can potentially do and what is the best way to protect borrowers from the injustice of usury, and this is what is in view here.</span>

    <span>Whether requiring an explicit accounting of the sources of interest would help prevent usury is a prudential question. Maybe it would be a good idea (though I'm skeptical). The important point, however, is that such a requirement doesn't just follow from the Church's teaching on the subject, so you can't simply conclude that there is something wrong with interest charges that don't include such an accounting in the absence of a legal requirement to do so.  </span>

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  35. branemrys2:35 PM

    Yes, the 'probably' is very important here; I don't know for sure. A lot of things have changed, and the expectations that we typically have about loans don't really do much to make transparent the things that would make it an easy question to answer.

    It was one of the Pontifical Councils that came out with the recommendations for the road; the point of a Pontifical Council is to be a thinktank for the Holy See, and so they hold various kinds of conferences on all sorts of topics, some them rather strange. And this is deliberate. They are by their explicit purpose idea generators and not authoritative, and so tend to look at secondary ramifications of Church pronoucements and Catholic belief in society, not things that are integrally and universally related to it or that would require authoritative interpretation of Church pronouncements or essential doctrines.

    There's a radical difference between saying something is a prudential question and saying that it doesn't follow from Church teaching; if it's a prudential matter, it can follow from Church teaching as a prudential matter. Lots of prudential standards follow from Church teaching (all but the core principles of Catholic social teaching, for instance, consists of such standards); deviating from them is not a sin or even in every case morally risky, but that doesn't mean they don't follow as prudential standards. But the claim was, in any case, not that it followed from Church teaching but that it followed from the most developed theological approaches to explicating the Church's official teaching on the injustice of usury.

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