Today the Bank of Canada put an interest rate hike on the back burner. Why is that a bad thing?
"The rich ruleth over the poor, and the borrower is servant to the lender" -- Proverbs 22:7
Usury is the practice of making money out of nothing; moneylending. Today it is the crutch of everything in our society; governments have borrowed trillions from other governments. People have borrowed thousands from financial institutions and we are all being crippled from the effect. Greece is going bankrupt – so are the US, the UK, Germany, France, Italy, The Netherlands, Spain, Ireland, and Japan all trillions of dollars in the hole.
Aristotle said “The most hated sort of moneymaking, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term Usury which means the birth of money from money, is applied to the breeding of money, because the offspring resembles the parent. Wherefore of all modes of making money this is the most unnatural” (384–322 BC)
During the Middle Ages usury was deemed biblically prohibited to Christians on punishment of eternal damnation. Christianity forbade it for centuries. Jews however were allowed to lend money to non-Jews, but could not lend money to fellow Jews. This began a deep resentment by many Christians of the Jewish community as far back as 300 AD.
But what about the opportunity cost of money?
If money was created to allow trade and to maximize talent, why should someone with too much money be prohibited from lending to someone who does not have enough? And if they do help out their fellow neighbor, what did they give up?
If person A lends money to person B, the money they lent B could not be used to make more money, because it would be tied up until B was able to pay it back. But if A could have kept that money and invested it they could probably have made a return on that investment. Say 10%.
Well because A gave up the ability to make that 10% by helping out B, why then shouldn’t A be allowed to charge B 10% interest on the loan? That way A doesn’t lose anything and B still gets help.
And then what about a reward for added risk?
If A had kept that money and invested it safely in a sure thing, he would be guaranteed to receive his 10% payment. However if he lends it to B, who is likely to go bankrupt because of his many other financial problems he may never see his money again. Why should A lend to B and risk losing the 10% return? B could offer a risk incentive and agree to pay back 12%. If A thinks the risk is worth the extra 2% he will lend to B after all.
The needs of some and the ability of others created a huge black market and few could deny the benefits of moneylending even if the bible condemned it. By the 16th century and during the Golden Ages of Exploration immense wealth was brought to Europe. Explorers needed loans to fund their trips and the wealthy wanted both a return on their investment and a payment for risk.
Martin Luther (1483–1546) and John Calvin (1509–1564), lead the reformation starting the separation of church and state. They said the bible can’t condemn usury by saying it is ok for Jews and not for Christians. If it is ok for Jews it must be ok for everyone. They made lending publically acceptable and by the end of the 16th century the Lutherans and the Calvinists had created a protestant revolution – Capitalism was born.
Well Capitalism is a wonderful thing. It created the Wealth of Nations Adam Smith wrote about. The more money lent and the freer trade became the wealthier everyone got. Economics was born with all its bubbles and cycles and people and countries continued to lend and to borrow.
So back to today – what is the problem with lower interest rates?
Lower interest rates promote money lending and boost the economy. Which is great because this is exactly what we need right now. The problem is that we are really just extending the problem. The more people are able to borrow the more they can buy driving up the price of goods.
If money is too easy to get supply and demand says prices will increase. More people can buy new houses, therefore they will pay more for those houses and soon inflation takes over.
In the short term this is great, but then rates need to start trending up to slow growth. If we allow growth to get out of control prices get out of control and when the bubble bursts we will have overextended our lines of credit beyond what we can manage – rates will have to go up because the government will have to pay back the money they borrowed beyond what they can manage and we won’t be able to afford the payments. Then poor Canada will follow the trend of all the other leading nations.
Interest rates have been exceptionally low for a good ten years now, and we need to start the trend up. Unfortunately we as a nation can’t start trending up until industry picks up because people will never be able to afford the increase while they are still sitting at home on lay-off.
So, it is good that the bank isn’t raising rates too quickly, even though it needs to happen at some point. But it means industry isn’t able to meet the difference and the economy will continue in a dismal state until at least 2012. We need to pay back debt rather than continually lowering our payments, but we need industry to create jobs and boost income to afford the increase, this might be a problem with all the other countries trillions in debt.
http://www.huffingtonpost.com/2009/11/30/10-countries-with-huge-de_n_374458.html
http://www.theobjectivestandard.com/issues/2007-fall/morality-of-moneylending.asp
No comments:
Post a Comment