Stephen Bainbridge has a thoughtful post about Catholic teachings on usury. He's responding to recent pronouncements by the Pope against usury, and Andrew Sullivan's critiques of those pronouncements. The good Professor then provides a very nuanced and detailed discussion of what is actually meant by "usury," reaching the conclusion that "Benedict likely was not condemning all lending of money at interest, but rather simply unjust or inequitable interest charges."
I guess my follow-up would be: doesn't that beg the question to some extent? After all, what makes certain interest charges "unjust or inequitable"? Yes, it certainly makes life a lot easier for the Catholic investor to know that not all interest-bearing transactions are prohibited. But where does the Church draw the line?
As has been noted in some recent blog posts, we like to think that the capitalist system allocates wealth based in part on what people "deserve." But economists have emphasized that the market allocates rationally, and it is enough to leave it at that. If someone is willing to charge a high interest rate, and someone else is willing to agree to it, both parties must be better off, so we should enforce the contract. If we start making distinctions -- such as prohibitions again "unjust" usury rates -- how do we operationalize those distinctions?
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1. Posted by Christine on December 1, 2005 @ 13:37 | Permalink
I think the law already does make such distinctions, at least as far as consumer lending goes. Although NY has no usury limit for commercial loans, TX does (although one can merely choose the law of the contract to be NY without much difficulty). So, I think the question isn't "should we start making distinctions" but "should we stop"?
Although this is not a free market point of view, I actually have defended usury laws from time to time here.
2. Posted by Matt Bodie on December 1, 2005 @ 14:21 | Permalink
I should have been clearer by saying "how does the Church operationalize those distinctions?" I know many states (except Delaware and North Dakota, perhaps?) have usury laws, but I'm not sure if Catholic social teaching would dovetail with those laws. If it does, does that mean that Delaware is violating Catholic teaching?
3. Posted by Elizabeth Brown on December 1, 2005 @ 18:41 | Permalink
Regarding Matt's query about how the Catholic Church "operationalizes" its usury teachings, the Catholic Church's denounciations against usury are aimed at those persons or institutions that exploit the poor and vulnerable in society by charging them excessive interest on the loans advanced to them because the poor lack the bargaining power and knowledge to obtain reasonable terms. In the United States today, the types of lending practices that would run afoul of the Catholic Church's teaching are now labeled "predatory lending". Payday loans, which have effective interests of 100% or more and which are designed to keep the borrowers permanently in debt, would be examples of usury that violate the Catholic Church's teachings. These loans are not between two parties with equal bargaining power and information. The lender has both more power and information and is using these advantages to exploit the vulnerabilities of the poor and poorly educated, who are the bulk of the borrowers.
Basic contract law recognizes that some contracts should be void or voidable as unconscionable when one party uses duress or misrepresentation to induce the other party to enter into the contract. Predatory lending frequently fits within this category of contracts. For example, most borrowers do not realize and are not informed by the lenders regarding the effective interest rates that they are paying when the various "fees" attached to the loans are included. As a result, both the Office of the Comptroller of the Currency and many states have laws and rules that attempt to prevent the most egregious forms of predatory lending.
4. Posted by Shag from Brookline on December 2, 2005 @ 5:33 | Permalink
The definition of usury is most important to credit card enterprises. Is there any doubt that the interest rates charged by many credit card companies are egregious, especially considering the manner in which the parties "agree" to these rates, including how they are changed unilaterally from time to time by the companies? During the rather high interest rates in the late 1970s, Massachusetts provided a notification procedure for loans with interest rates exceeding the state's usury statute: the lender's representative (often an attorney) would send a letter to state's Attorney-General regarding the rate to be charged. This notification would limit the liability of the lender under such usury statute. This procedure came about as a result of lobbying efforts not of the "shady" lenders but conventional lenders, including banks, who based their high rates on market conditions.
I wonder what our economy would look like if "neither a lender nor borrower be" were the practice of most Americans.
5. Posted by Paul Gowder on December 2, 2005 @ 8:09 | Permalink
We operationalize them indirectly and intuitively.
Indirectly, by means of things like bargaining power, education, oppressive circumstances, conscious preying on the poor/clueless/young/elderly etc.
Intuitively, by virtue of the fact that even a somewhat "rational" economist-robot will have a morally horrified reaction to some situations. For example, I know of a case where a woman with approx. 10k unsecured debt and a 50k freenclear home ended up in the clutches of a predatory lender, and, within 3 years, the home was completely gone. Does that shock you? Then it's probably usury or some other kind of immoral lending practice.
6. Posted by Harry Frazee on February 6, 2006 @ 3:39 | Permalink
This post is in response to the comments by Paul, Shag, Elizabeth, Christine, and Matt.
It seems to me you folks are assuming that the money lent is taken from some source. This is not true except in the case of Loan Sharks and some "Quick Loan" places.
All the conventional financial institutions, i. e. banks, mortgage companies, credit unions and even the federal reserve banks create the "money" out of thin air when they make the loan. This method of money creation has been used by every civilization in history. The results have always been the same...the complete and utter devestation of the civilization using it. Therein, put simply, lies the problem with usury. Any interest is to much. These are the irrefutable facts in the matter and hitory shows it has always been condemened.
Usury was denounced by countless spiritual leaders and philosophers of ancient times, including Plato, Aristotle, Cato, Cicero, Seneca, Plutarch, Aquinas, Muhammad, and Moses.
Cato in his De Re Rustica said:
"And what do you think of usury?"
"What do you think of murder?"
In more modern times it was condemed by Thomas Jerrerson and John Adams who said:
"All the perplexities, confusion and distress in America arise, not from defects in the Constitution or Confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation . . . "
Abraham Lincoln commented: "Yes, we may congratulate ourselves that this cruel war is near the close, but I see in the future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. As a result of the war, corporations have been enthroned, and an era of corruption in high places will follow and the money power of the country will endeavor to prolong its reign by working on the prejudices of the people until wealth is aggregated in the hands of a few and the Republic is destroyed. I feel at this moment more anxiety for the safety of my country than ever before, even in the midst of war." Prophetic.
Usury is contrary to the laws of nature as the money owed is alway greater than the amount borrowed meaning perpetually increasing debt. This is not an argument. It is an enumeration of some of the facts. Want more. Let me know, there is plenty more to learn about this pernicious system.
Warmest personal regards. Harry email email@example.com
7. Posted by hpqupeob on August 21, 2007 @ 8:49 | Permalink
It's been years and years since we met.
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