Invasion of the Moneylenders – Part 2 – “Usury by any other name”

By Peter Ewart

(This is the second in a series of articles on the banking and credit industry.  The first article was:  “Invasion of the Moneylenders – Part 1.”)

People can sense that something is up.  In Michigan, Florida, Colorado, California and other states, thousands of homeowners are watching as their houses plunge in value or are repossessed by banks.  Scandals break out in both Canada and the U.S. when investors find out that, what they thought were secure investments, are in fact riddled with bad debt from the U.S. subprime mortgage industry.  In England, there is a “run” on the Northland Bank with long lines of anxious depositors waiting and hoping to withdraw their savings, something not seen since the Great Depression of the 1930s. 

The world’s leading currency, the American dollar, wilts beside the Euro, the Yen, and even the Canadian dollar.  The stock market, as if suffering from a malarial fever, races up one day and down the next.  Reports leak out that financial institutions are refusing to honour lending and borrowing agreements with each other, fearful of acquiring “toxic” debt. To “increase liquidity,” central banks lower interest rates, print more money and inject billions of dollars to calm jittery credit markets.  All the while, the U.S. federal debt edges up towards the $9 trillion mark – an astounding amount without parallel in human history.

Central bankers, like Ben Bernanke, of the U.S. Federal Reserve, issue gently reassuring statements, such as “the economic fundamentals are sound”, that are eerily reminiscent of those made by the financial elite before the crash of 1929.  As the American journalist and economist Robert Kuttner has pointed out, the economic fundamentals are “sound” only if you ignore the “financial economy” that is “dangerously unsound” (1). 

Indeed, Nobel Laureate Joseph E. Stiglitz warns of “a human and economic disaster in the making” (2) and financial journalist John F. Ince worries that “the entire [world] monetary system” could be “destabilized.”  Others, like Richard C. Cook, of Global Research, argue that the “crash of 2007-2008” is already well underway (3).

Alan Greenspan, former Chair of the U.S. Federal Reserve, claims that the problem lies in the fact that too many “subprime” loans were given to people who had “bad credit” and that the Bush government was financially “irresponsible” in not reining in the government deficit.  Others say that Greenspan himself is the culprit because he drastically cut interest rates for a number of years, thus paving the way for easy credit to be thrown around everywhere as if the mythical figure “Johnny Appleseed” had been reincarnated somehow and gone to work as a subprime mortgage broker.

But Bernanke and Greenspan miss the point.  They don’t admit what is standing right there before their eyes.  We have been invaded by the moneylenders.  Not only have we been invaded, we’ve been taken over lock, stock and barrel.  Presidents, Prime Ministers, Legislatures & Assemblies, businesses, religious leaders - all must pay homage to the great gods of Debt and Compound Interest.

In terms of human history, moneylenders and usury do not fare very well at all in popular opinion, often situated somewhere between the Devil and Judas Iscariot.  Indeed, in the New Testament Bible, the normally non-violent Jesus got so upset that he drove the moneychangers out of the Temple with a whip.  Today, given the avaricious financial practices of some religious leaders and churches, Jesus might be the one who gets driven out.

The word usury is derived from the Latin “usuria” which translates as “interest” or “excessive interest.”  The Jewish Torah spoke against it, and even today, the collection of interest is forbidden in the Muslim religion (5), although some would say that it is collected in other ways.

Many ancient thinkers, including Plato, Aristotle, Plutarch, Moses and Bhudda, denounced usury, seeing it as a parasite on the productive economy.  And the same was true of the great literature of various epochs.  For example, there is Shakespeare’s depiction of  Shylock in his play “The Merchant of Venice,” and then there are the plays of Moliere and Marlowe.  The great Italian poet Dante puts the usurers in the 7^th circle of hell between the “suicides” and the “blasphemers,” which was definitely one of the “hotter” places in that vault of misery from which no escape is possible.

But lending money has an ancient pedigree, being practiced by various societies going back 5,000 years or more.  Without the “grease” of moneylending, many argue that human commerce and human society itself could not have advanced.  It is a fact that moneylenders come in all shapes and sizes, and in practically all cultures, and, as we will discuss in a later article, have “morphed” into different shapes in the modern era.

Compound interest has often been seen as the worst form of usury. It was condemned by Roman law and by the common laws of many other countries.  Indeed, of all the instruments of torture passed down to modern times, compound interest can probably lay claim to inflicting the most pain on the greatest number of people.  Yes, the “iron maiden,” “the rack” and the “thumbscrew” were pretty bad, but it would take a lot of minor inquisitors working 24 hours a day in a dank castle dungeon to catch up to the grandest inquisitor of all – compound interest.

Compound interest requires that the borrower must pay “on the original principal of his or her debt, as well as the accumulated past interest” (6).  Depending on the interest rate, the banker (or whomever made the loan) gets to sit back and watch as this kind of interest, like one of those creatures in the movie “Gremlins,” relentlessly gnaws away at the debtor’s wealth. 

As anyone who has ever defaulted on their credit card payments knows, a small loan can  rapidly build up into an out-of-control big one – all through the “alchemy” and “magic”of compound interest.  Like that rock-n-roll song by the Kinks back in the 1960s, it ticks away “All of the day, and all of the night.”

But is it fair to condemn compound interest and the financial institutions that offer it?  An argument can be made that the spread of compound interest as a banking practice, especially in the last 500 years or so, laid the basis for our modern economy.  Yes, it can be like Chinese water torture for some, but for many others it creates wealth out of “nothing.”  And what’s the matter with that?

Demonstrating the potential of compound interest, Wikipedia points out that, if the 60 guilders the Dutch colonists paid the Native American tribe for Manhattan Island back in 1626 had been put in a bank at 6.5% interest, the investment would be worth $820 billion today, which is quite a chunk of change.

But where is the line between legitimate lending practices and loan sharking?  Gangsters, such as the TV character Tony Soprano, love compound interest more than a crooked card game or even their own wives.  10 or 20% interest a month, and if the borrower doesn’t pay up, break a leg or an arm as a gentle reminder. 

But in the U.S., because of de-regulation in the banking industry, credit card companies are sometimes charging as much interest as the gangsters.  The only difference is that these pin-striped paragons of the establishment don’t beat you up physically - just financially, seizing your car, house, bank deposits and anything else they can get their hands on. Either way, you end up battered, bruised and ruined.

Furthermore, when wide nets are cast, as was done in the U.S. subprime mortgage industry, and unaware poor, elderly, unemployed, and even mentally challenged people are first targeted, and then enticed to take out huge loans they will never be able to pay off, can that be called responsible banking?  Those who push such loans better hope like hell there is not an afterlife.

Some people, like journalist Robert Kuttner and Wall Street insider William H. Donaldson (7), see the problem as one caused by the deregulation of the banking industry and the proliferation of unregulated hedge funds and other financial instruments that are creating a toxic brew of credit; these, in turn, have spawned asset and housing “bubbles” that could burst in ways not seen since the Great Depression.

Others from both the left and the right of the political spectrum see the current credit and banking problem as being more of a systemic one.  The left believe the credit crisis is endemic to capitalism itself.  The libertarian right believes that the problem lies in the monopoly power of the U.S. Federal Reserve, as well as the unhooking of the dollar from the gold standard over 30 years ago.

And then there are the neo-conservatives like George W. Bush, Dick Cheney, and others who are in a league (or planet) of their own, believing that everything is just fine, that it is good fiscal policy to not only cut taxes but also increase spending, kind of like whistling and chewing gum at the same time, and, in George Bush’s case, eating pizza too.

Thus we barrel down the yellow brick road, the U.S. government in the lead, and Canada and other countries hanging on to its tail.  Where we are headed is anyone’s guess.

Peter Ewart is a college instructor and writer based in Prince George, British Columbia, Canada.  He can be reached at: peter.ewart@shaw.ca

Next: “Invasion of the moneylenders – Part 3 – “The Black Hole of Debt”