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Tuesday, May 15, 2012

Is Modern Banking Fundamentally Flawed?

Jamie Dimon, CEO of JP Morgan Chase and board member of the New York Federal Reserve (a banking regulatory body), advocates not only that financial regulation reform is not necessary, but also that deregulation is the best course for the American financial sector. Meanwhile, JP Morgan lost $2 billion in an effort to reduce risk. President Obama quickly pointed out that if one of the smartest bankers in the room can preside over such a massive loss, then a deregulated financial sector would likely present us with an unacceptably high level of risk to the entire financial system (and economy). Elizabeth Warren suggested that relying on bankers to regulate themselves would not reduce the systemic risk. The alternative would seem to be strengthening financial regulation, even though—according to Sen. Dick Durbin—“the banks own Congress.”

Perhaps the problem with systemic risk in modern banking goes deeper—beyond how it can be effectively regulated—meaning made regular in line with the public good—and, moreover, beyond what our reigning modern perspective will permit us to acknowledge, let alone see. In ecclesiastical terms historically, lending was classified as a kind of charity, specifically to the poor, as the rich presumably are not in need of lent funds (by definition). In other words, the leverage assumed by the wealthy and corporations is unnecessary. Starbucks needs the funds to build four hundred more stores in China. Wal-Mart needs additional money to buy land for new stores in major American cities. Capital from stockholders is presumably not good enough. The capped cost of leverage relative to a lack of limit on profit attracts greed to favor borrowing over raising capital through stock. The vested interests of existing stockholders (often including the executives who control their corporate boards) seals the deal on leverage as the drug of choice, even if it is not in the long-term best interests of the respective companies. Such a view of borrowing and paying (and earning) interest is worlds away from the original purpose of lending.

Viewing a loan as alms to the poor, lending with interest was originally thought to be unjust. At the very least, it was viewed as unseemly to profit in the giving of charity (although modern corporations do it all the time and get tax deductions for it, besides good public relations). Furthermore, the property (i.e., the substance of the money) lent was viewed as being inseparable from its use (i.e., as a means of exchange). The substance of money is its use, according to that view, so charging more than the money itself (i.e., the principal) is undeserved surplus. Such profit was historically reckoned as being theft. It is not good form to steal from the poor to whom one is giving alms. It is like biting someone while handing him a $20, which he needs to buy lunch (and will return later).  “Hey, I forgot my wallet today and I didn’t bring my lunch. Can you help me out? I’ll pay you back tomorrow.” If of charitable good-will, the acquaintance would reply, "Sure, here you go." If of ever greater (i.e., self-less) good-will, the lender would add, "and don't worry about paying it back." This is lending at its finest. Demanding that the borrower pay more than simply returning the $20 would represent far less than accepting the principal back. Beyond unfairness, taking interest regardless of the borrower's circumstance evinces self-idolatry.

Specifically, for a lender to receive surplus (above the principal) without labor or uncertainty (having transferred the risk to the borrower by requiring repayment) is not only unjust because it violates the risk/return relationship (i.e., a higher return is justified by assuming more risk), the certainly assumed (artifiically) by refusing to accommodate or share in any losses incurred by the borrower is rightfully only that of God. That is to say, it is self-idolatry to assume a divine quality like certainty. Furthermore, the power that some lenders presume to have over delinquent borrowers can be interpreted as an attempt to claim God's power (omnipotence) for oneself. Altogether, arrogance and the infliction of harm come from making oneself an idol (i.e., as if divine).

That which usury risks in terms of morals and self-idolatry is utterly foreign to us moderns. The original charitable purpose of lending is also lost to us in part because we are so used to our own view of lending being the default and the necessary of commercial lending in our economy. Moreover, we assume our assumptions cannot be wrong, and so we do not question whether merely charging interest is inherently unjust and a sin against God. We assume we know the purpose of lending as if it had no history.

In 1612—exactly 400 years before this writing yet late enough that commercial lending was already well-ensconced in the economy—Roger Fenton, a Puritan divine in England, opined strenuously that the sin of usury is inherently unjust. “Where we finde no iustice, what hope can there be of charitie?” Salomon puts mercy as the opposite of usury. “Wherefore vsurie may well be termed a biting . . . it eateth out the very bowels of compassion.” Usury perverts the act of charity, “turning it into an act of selflove.” Usury is against “the Canon of that Charitie which seeketh not her owne, to respect the good of others; [usury] is turned to his owne proper lucre and gaine.” (Fenton, 1612, p. 106)

Injustice does not admit of mercy manifesting as charity. We moderns are so wrapped up in our self-love that we can scarcely imagine lending as an act of compassion. The Canon of Charity to which Fenton refers is the Golden Rule, whose equity guides the Calvinist view of justice as love and benevolence to all. Such benevolence is fueled by selfless love (agape), rather than higher self-love (caritas) directed to God. We moderns can scarcely recognize this theory of justice, so used are we to strict legal justice which limits one’s duty to paying for one’s crime. That the other theory of justice might be applicable to lending is apt to strike us as odd at best.

Nevertheless, the problem behind even the best bankers of today being reckless even as they advocate for deregulation may extend beyond the antiquated debate on regulation to include the making of something borne of something natural (compassion) into something artificial. That lending was designed to be a species of charity may mean that problems are necessarily entailed in using banking for leverage.

By analogy, a person might have been brought up one way and therefore have considerable trouble in adjusting to a way of life that is at odds with that upbringing. The problem facing the person would go beyond simply regulating the new life because a basic inconsistency is in such a drastic change. Were the person to know only the new life, having forgotten one’s upbringing, she would have no clue as to why she feels fundamentally ill at ease. She would look for things in her new life to assuage the difficulties, which nonetheless transcend that environment and therefore require a more basic solution.

Besides relying too much on debt for personal and business use, we as a society are cut off from the original (i.e., designed) use of lending as a means of mercy rather than to profit. Perhaps our perspective is more limited than we think, and the problem much deeper than we realize. Given that “cloudie conceits do hang in the braines of men, which cast a dye and tincture vpon the vnderstanding,” seeing usury “so much practiced of all sorts . . . men are euen thereby without further examination much moued to thinke it lawfull.” (Fenton, pp. 108-9). Yet further examination demonstrates just how limited our tiny window in modernity is—even in spite of our lauded technological development. Our “advancement,” in other words, may blind us to being so wrong about lending even as it is ubiquitous in our world.

By 2012, for example, $1 trillion in student loan debt had accumulated in the United States. Rather than the mercy of charity in waiving interest and even the principal in particular cases of dire need, such a load on poor students represented the hubris of a society run amuck on its own conceit and greed. Such a disparity exists between such selfishness and charity that the notion of debt forgiveness even for the poor is thought of as an unforgivable unfairness rather than as charitable equity that is essentially agape seu benevolentia universalis.


Fenton, Roger, A Treatise of Usurie (London, 1612). In The Usury Debate in the Seventeenth Century: Three Arguments (New York: Arno, 1972).