Tag Archives: steve keen

New York Times: Keen Right, Bernanke Wrong

22 Jul
Steve Keen, an Australian economist, used the ideas of another economist, Hyman Minsky, to  set forth the possibility of a global debt crisis that now seems prescient. In a 2000 book,  Mr. Bernanke briefly mentioned, and dismissed, Mr. Minsky. (Source: Demetrius Freeman/New York Times)

Steve Keen, an Australian economist, used the ideas of another economist, Hyman Minsky, to set forth the possibility of a global debt crisis that now seems prescient. In a 2000 book, Mr. Bernanke briefly mentioned, and dismissed, Mr. Minsky. (Source: Demetrius Freeman/New York Times)

Oh dear.

What does it tell you — particularly about the gross misallocation (and mis-remuneration) of human intellectual resources — when the New York Times declares the most powerful central banker on the planet, US Federal Reserve chairman Ben Bernanke, to be fundamentally wrong, and a humble Aussie economist, (now unemployed) Associate Professor Steve Keen, to be fundamentally right:

For a time, the period before the collapse was known as the “Great Moderation,” a term that Mr. Bernanke helped to publicize in a 2004 speech. Low levels of inflation, long periods of economic growth and low levels of employment volatility were viewed as unquestioned proof of success.

And what brought on that success? In 2004, Mr. Bernanke, then a Fed governor, conceded good luck might have helped, but his view was that “improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation.”

In 2005, three Fed economists, Karen E. Dynan, Douglas W. Elmendorf and Daniel E. Sichel, proposed an additional explanation for the Great Moderation: the success of financial innovation.

“Improved assessment and pricing of risk, expanded lending to households without strong collateral, more widespread securitization of loans, and the development of markets for riskier corporate debt have enhanced the ability of households and businesses to borrow funds,” they wrote. “Greater use of credit could foster a reduction in economic volatility by lessening the sensitivity of household and business spending to downturns in income and cash flow.”

At least Mr. Bernanke’s hubris was not as great as that of Robert E. Lucas Jr., the Nobel Prize-winning University of Chicago economist. In 2003, he began his presidential address to the American Economic Association by proclaiming that macroeconomics “has succeeded: Its central problem of depression prevention has been solved.”

In his speech last week, Mr. Bernanke cited several assessments of the Great Moderation, including the one by the Fed economists. None questioned that it was wonderful.

The Fed chairman conceded that “one cannot look back at the Great Moderation today without asking whether the sustained economic stability of the period somehow promoted the excessive risk-taking that followed. The idea that this long period of calm lulled investors, financial firms and financial regulators into paying insufficient attention to building risks must have some truth in it.”

One economist who would have expected that development was Hyman Minsky. In 1995, the year before Minsky died, Steve Keen, an Australian economist, used his ideas to set forth a possibility that now seems prescient. It was published in The Journal of Post Keynesian Economics.

He suggested that lending standards would be gradually reduced, and asset prices would rise, as confidence grew that “the future is assured, and therefore that most investments will succeed.” Eventually, the income-earning ability of an asset would seem less important than the expected capital gains. Buyers would pay high prices and finance their purchases with ever-rising amounts of debt.

When something went wrong, an immediate need for liquidity would cause financiers to try to sell assets immediately. “The asset market becomes flooded,” Mr. Keen wrote, “and the euphoria becomes a panic, the boom becomes a slump.” Minsky argued that could end without disaster, if inflation bailed everyone out. But if it happened in a period of low inflation, it could feed upon itself and lead to depression.

“The chaotic dynamics explored in this paper,” Mr. Keen concluded, “should warn us against accepting a period of relative tranquillity in a capitalist economy as anything other than a lull before the storm.”

When I talked to Mr. Keen this week, he called my attention to the fact that Mr. Bernanke, in his 2000 book “Essays on the Great Depression,” briefly mentioned, and dismissed, both Minsky and Charles Kindleberger, author of the classic “Manias, Panics and Crashes.”

They had, Mr. Bernanke wrote, “argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behavior.” In a footnote, he added, “I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.”

It seems to me that he had both Minsky and Kindleberger wrong. Their insight was that behavior that seems perfectly rational at the time can turn out to be destructive.

The Clinching Argument In The “Private vs Public Debt” Debate

5 Jul

“He’s pretending that he’s elected by the people, and he’s actually elected by the banks”

In the following interview, Professor Steve Keen discusses how government “stimulus” or “help” programs that hand out borrowed (by the government) money to entice prospective house buyers, are actually Ponzi schemes.

But the most important truth of all is revealed from 10:14sec onwards:

INTERVIEWER: The Chancellor of the Exchequer, George Osborne, says he wants to reduce debt in Britain, while simultaneously launching the “Help To Buy” scheme which is an increase in debt. So my simple question is, Is the Chancellor lying?

KEEN: I think the Chancellor, like most politicians, is focussing on the level of government debt, not on the level of household and private debt, and they think that’s the real problem. The cause of this crisis was an out of control private banking sector lending to the private sector to encourage it to speculate on assets….

INTERVIEWER: (interrupts) Let me, let me, let me jump in for a second, because what we have found out in 2008 and going forward is that there really is no such thing as private debt, because when these private debts become unsustainable the private sector simply gives them to the government. So ultimately taxpayers always end up footing the bill for this debt, all the combined debt of household debt, bank debt, government debt, it’s all the same debt, that’s all underwritten by the same abused taxpayers, and the Chancellor — by ignoring this — is pretending that the UK people are brain dead!

KEEN: Well, what he’s pretending is that he is elected by the English people and he’s actually elected by the English banks. All this happens because the banks have got the politicians by the intellectual balls. They believe that the economy has to have a growing banking sector to be healthy, and that’s just like believing that you have to have a growing cancer to be a healthy human being. Past a certain stage the financial sector becomes a parasite. But it becomes such a strong and powerful parasite that the politicians think that if they let it die the economy will die. That’s precisely the opposite of the case — you’ve got to get the financial sector to shrink, you’ve got to cut it down, say in England, by a factor of at least 2 — and then in terms of abolishing debt, writing it off, not honouring the stuff, and standing up for the debtors, rather than standing up and voting for the creditors which, unfortunately, is what the politicians around the world have been doing this time around…

Unfortunately, Steve sidestepped the critical observation made by the interviewer — that because banksters simply palm off their out-of-control debt problems to the government, aided and abetted by compliant politicians, what this means is that, in the end, private debt and public debt must be considered in sum, not separately.

This is why Barnaby is right.

Although relatively “low” compared to that of “other advanced economies”, nevertheless Australia’s ever-rising public debt trajectory does matter a helluva lot.

Why?

Because — even though (sadly) Barnaby never points this out — Australia’s private debt levels are the highest in the world.

Our Household Debt sits around 150% of household disposable income.

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Our government-guaranteed banking sector is massively leveraged to Australia’s world-leading house price Ponzi.

So, simply stated, because of our massive private debt problem, our nation absolutely cannot afford the added risk of an ever-rising public debt level too.

An Historical Warning For Proponents Of A Modern Debt Jubilee

30 May

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Australia’s own Professor Steve Keen — one of only 13 economists worldwide to predict the Global Financial Crisis beginning in the mid 2000’s, and explain why — is perhaps the foremost proponent of a Modern Debt Jubilee “for the public”, as a solution to the ongoing global debt crisis:

Michael Hudson’s sim­ple phrase that “Debts that can’t be repaid, won’t be repaid” sums up the eco­nomic dilemma of our times. This does not involve sanc­tion­ing “moral haz­ard”, since the real moral haz­ard was in the behav­iour of the finance sec­tor in cre­at­ing this debt in the first place. Most of this debt should never have been cre­ated, since all it did was fund dis­guised Ponzi Schemes that inflated asset val­ues with­out adding to society’s pro­duc­tiv­ity. Here the irresponsibility—and Moral Hazard—clearly lay with the lenders rather than the borrowers.

The only real ques­tion we face is not whether we should or should not repay this debt, but how are we going to go about not repay­ing it?

We should … find a means to reduce the pri­vate debt bur­den now, and reduce the length of time we spend in this dam­ag­ing process of delever­ag­ing. Pre-capitalist soci­eties insti­tuted the prac­tice of the Jubilee to escape from sim­i­lar traps (Hud­son 2000; Hud­son 2004), and debt defaults have been a reg­u­lar expe­ri­ence in the his­tory of cap­i­tal­ism too (Rein­hart and Rogoff 2008). So a prima facie alter­na­tive to 15 years of delever­ag­ing would be an old-fashioned debt Jubilee…

We … need a way to short-circuit the process of debt-deleveraging, while not destroy­ing the assets of both the bank­ing sec­tor and the mem­bers of the non-banking pub­lic who pur­chased ABSs. One fea­si­ble means to do this is a “Mod­ern Jubilee”, which could also be described as “Quan­ti­ta­tive Eas­ing for the public”.

Quan­ti­ta­tive Eas­ing was under­taken in the false belief that this would “kick start” the econ­omy by spurring bank lending.

Instead, its main effect was to dra­mat­i­cally increase the idle reserves of the bank­ing sec­tor while the broad money sup­ply stag­nated or fell, for the obvi­ous rea­sons that there is already too much pri­vate sec­tor debt, and nei­ther lenders nor the pub­lic want to take on more debt.

A Mod­ern Jubilee would cre­ate fiat money in the same way as with Quan­ti­ta­tive Eas­ing, but would direct that money to the bank accounts of the pub­lic with the require­ment that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injec­tion would have their debt reduced but not elim­i­nated, while at the other extreme, recip­i­ents with no debt would receive a cash injec­tion into their deposit accounts…

Alas, in wisely looking to the past for a guiding light to present action, proponents of a Modern Debt Jubilee appear to have glimpsed only a small part of the full historical picture. Indeed, it seems that they have failed to duly note the significance of what is the veritable mastodon in the room of recorded economic history.

This is somewhat inexplicable to this observer, particularly when one considers Professor Keen’s referencing of the research of his colleague, Professor Michael Hudson, in making the case for his modern jubilee proposal.

It would be well for all modern proponents of “wiping the slate clean” to heed the warning bell tolling from the depths of recorded history, the echoes of which ring out most clearly in Professor Hudson’s fascinating and exhaustive research study, How Interest Rates Were Set, 2500 BC to 1000 AD. The following excerpts are instructive, and most germane to our present inquiry (my emphasis added):

For economic historians, the Riddle of the Sphinx (if not the Holy Grail) has long been to explain how interest-bearing debts originated, and why interest rates differed from one society to the next. Interest rates are known to have been set in three primary civilizations at the outset of their commercial takeoff — Bronze Age Sumer, classical Greece and Rome…

Many economists theorize that interest rates reflect productivity and profit levels, subject to the risks of lending. A century ago, for instance, the German economic historian Wilhelm Roscher attributed the long decline in interest rates since antiquity to the “advance of civilization.”[1] He suggested that these rates declined because the riskiness of investment, for example, had been lessened by improvements in social stability, market efficiency and the security of credit. Also, shrinking profit margins and/or falling yields of cattle or crops would have reduced the ability of debtors to pay interest.

Following this approach, economic historians interpret the “kid” or “calf” words for interest (máš in Sumerian, tokos in Greek and fænus in Latin) as reflecting the growth of herds. But this begs the question of why such growth would have declined from Sumer through Greece and Rome. Already a century ago, Böhm-Bawerk rejected such “naive productivity explanations” of interest rates.[2]

We need not assume that interest rates were “economic” in the sense of being within the ability of most cultivators to pay. Abject need was the motive for agrarian debt. A key financial dynamic of ancient civilizations was precisely the problem of debt arrears (including unpaid tax collections) mounting up beyond the ability of many borrowers to pay. This is what led to the royal amargi, andurarum and misharum “Clean Slate” proclamations of Mesopotamia during 2400-1700 BC, cancelling agrarian debts…

Referring to the Levitical Jubilee Year, [Morris] Silver insists on “the counterproductive nature of the [Biblical] prophets’ economic ideas from a real world standpoint,” that is, the standpoint of modern laissez faire urging governments to refrain from interference with market forces. The modern assumption is that no matter what governments do to steer the economy, the market will undo such efforts.[12]

What were the Babylonians (and for that matter, the Judaeans and Israelites) thinking of? I think they knew something that modern economic theory does not acknowledge: if “market forces” are left to themselves, they lead to widening economic polarization and growing disequilibrium as financial claims on wealth and income tend inexorably to exceed the ability to pay (the Frederick Soddy principle). Interest rates exceeded profit and crop-surplus (“real rent”) rates.

One is reminded of Samuel Kramer’s complaint that Urukagina’s reforms were fruitless, for the usury and impoverishment problem simply began again.[13] Of course it did — and when the economy’s financial balance veered too far out of an equitable equilibrium, or simply when a new ruler ascended the throne, the debts were cancelled yet again. This was how the Sumerian and Babylonian debt overhead was prevented from growing too far out of bounds (a counterpart to the “overgrowth” of hubris in Greek social-economic thought).

One would think that — in the perhaps unlikely absence of an ideological and/or conceptual blind spot regarding the putative “time-value” of “money”; that is, the popularly-accepted post-Renaissance casuistic rationalisation for the charging of “interest” rates — the modern-day economic problem-solver should easily recognise the obvious lesson of history contained here.

Merely establishing a Modern Debt Jubilee cannot solve the global debt problem for the longue durée (“long term”). Any “wiping the slate clean”, or “debt reset”, would be an exercise in futility, in the absence of addressing the root cause of excessive debt.

It would not be unreasonable to suggest that the repeated failure of Sumerian/Babylonian “Clean Slate” proclamations to address the root problem causing indebtedness in the first place, offers a compelling explanation as to why the Biblical (Hebrew) prophets invoked the authority of God in explicitly commanding not only that all debts should be annulled every 7 years (the “Sabbatical” Year Jubilee), and that all property rights must be restored after 49 years (50th Year Jubilee), but also that usury in any form was a mortal sin, and thus outlawed within their society (e.g., “Thou shalt not lend upon usury to thy brother—usury of money, usury of victuals (food), usury of any thing that is lent upon usury.” – Deut 23:19).

Professor Hudson concludes (my emphasis added):

Usury became the major force polarizing ancient society as credit passed out of the hands of public institutions into those of private households. By classical Greek and Roman times, no palace rulers were left to cancel agrarian debts and otherwise keep creditor power in check. Thus, what seems to have begun as justifiable debt in third‑millennium Mesopotamia evolved into classical usury. Its corrosive dynamics polarized ancient society more than any other factor, destroying the archaic social balance between rich and poor, mercantile creditors and cultivators, despite the nominal decline in interest rates.

The power of creditors increased in the face of declining royal authority. Although the normal lending rate declined from Bronze Age Mesopotamia through classical Greece and Rome, creditors were able to render irreversible the forfeiture of land and personal freedom which debtors traditionally had been obliged to pledge as a condition for obtaining loans. In sum, what is first documented in Sumer is a revolutionary institution, revolutionary in that interest-bearing debt ended up by inciting populations to revolution at the end of antiquity, in the second and first centuries BC throughout the Romanized Mediterranean world.

Can the lesson of antiquity regarding debt cancellation, and the repeated need for it having arisen as a direct result of allowing the practice of usury (i.e., gains on lending), be any more clear?

Now, it would be a disservice to the estimable Professor Keen were your present author to neglect to draw readers’ attention to the fact that he (the good professor) does not advocate for a Modern Debt Jubilee in isolation from other measures. Indeed, “Taming the Finance Sector” is the second plank of his proposed solution. It includes suggestions for “Jubilee Shares”, and “The PILL” (or “Property Income Limited Leverage”).  Inquiring readers can delve into those details in Professor Keen’s Manifesto.

Not to put too fine a point on it — and with the deepest respect to Professor Keen — your present author remains avowedly sceptical as to the likely efficacy of these proposals.

Indeed, he would politely suggest that the good professor draws somewhat nearer to the realisation of a truly efficacious solution, in his briefly commenting on the proposals of others (my emphasis added):

There are many other pro­pos­als for reform­ing finance, most of which focus on chang­ing the nature of the mon­e­tary sys­tem itself. The best of these focus on insti­tut­ing a sys­tem that removes the capac­ity of the bank­ing sys­tem to cre­ate money via “Full Reserve Banking”.

“The best of these …”?

I would humbly beg to differ.

Firstly, an important, if rather obvious, clarification. The “monetary system” is not an independent life form. It should not be misunderstood as being a unique entity, one somehow separate and distinct from the human beings who act within and upon it. The monetary system is, and always has been, an artificial, conceptual, and very human construct. One shaped by very human motives. And that construct has, at various times and places across the span of recorded human history, existed in rather different forms and with rather different characteristics to those we observe today.

Secondly, I submit that Full Reserve Banking, while laudable, would not change “the nature” of the (present) monetary system itself.

Indeed, Professor Keen himself appears to sense this reality, albeit for the wrong reason (my emphasis added):

Banks profit by cre­at­ing debt, and they are always going to want to cre­ate more debt. This is sim­ply the nature of bank­ing.

Again, I beg to differ. As does the National Australia Bank (my emphasis added):

How Banks Work

…Their profit is the difference between what they pay in interest on your deposits and what you pay them in interest for the loan they made you.

It is not the nature of banking, but the nature of bankers, to seek out ways to make profits.

Bankers do not make profits by creating debt.

Bankers make profits, by practicing usury.

Or, to use the modern euphemism (since changing our words can conceal all manner of sins) – by “maximising” their “net interest income”.

Creating debt ex nihilo (“out of nothing”) — in the modern era, by mere digital bookkeeping entry — only affords bankers an additional power; to leverage the true root source of their profit-making.

Which is usury.

It is worth reminding ourselves of Professor Hudson’s summary observation on usury in ancient times:

The power of creditors increased in the face of declining royal authority.

This should give the thoughtful reader pause to reflect on, and reevaluate much of what we have been taught to believe concerning the past 500 years of “modern” Western “progress”.

Since the Renaissance (meaning “a revival of or renewed interest in something”) of the early 16th century — the days of the morally “liberal” King Henry VIII of England, and Giovanni di Lorenzo de’ Medici (son of Lorenzo the Magnificent, of the Medici banking family), better known as Pope Leo X of the European “Holy” Roman Empire — the authorities that were previously invoked against the practice of usury (i.e., God, Pope, King) for some 1,500 years, have declined.

Indeed, in a manner remarkably akin to that in which the white blood cells of our physical body’s natural immune system are seen to mutate and instead become the cancerous cells of leukaemia, those (human) authorities that had long been invoked in order to restrict and repel the power of usurious “creditors”, instead turned to rot the Western body politic, from the inside out.

Beginning with the reigns of England’s Henry VIII and Europe’s Leo X, after nearly two millennia of philosophical, divine, monarchical, and legal prohibition, the “nature” of Western banking (money-lending) became legally usurious.

In light of the historical evidences, it is your present author’s view, that were the wise urgings and proclamations of Plato, Aristotle, Cato, Cicero, Seneca, Plutarch, Buddha, Moses, Vashishtha, Jesus, Mohammed, Aquinas, Luther, and many more to be heeded today, and were the old Western laws banning usury in all its forms to be reinstated, then the core incentive for bankers to create excessive debt in the first place — for usurious profit/gain, or “net interest income” — could once again be effectively brought to heel.

In the absence of same, any advocacy for partial revival of ancient Biblical economic prescriptions, is doomed to come to naught.

ADDENDUM

Further to Professor Hudson’s research, readers who may be even superficially acquainted with the unequivocally economic reference to “Mystery, Babylon” in the Apocalypse (“Revelation”) of St. John’s epochal 18th chapter, will find the following revelation concerning the geographic origins of usury rather telling (my emphasis added):

Only recently has it been recognized that the charging of interest is not a universally spontaneous phenomenon, but was invented in Sumer — yet another Sumerian “first,” as Samuel Kramer would have said. No Early Bronze Age evidence for interest‑bearing debt has been found in the Indus civilization or the Hittite kingdom. The Hittite debt cancellation edict of Tudhaliya IV refer to wergild-type compensation owed for personal injury, not interest-bearing debt.[27] The fact that no archaic Egyptian debt records exist might possibly be the result of destruction of the papyrus writing medium, but regions that used clay tablets for public administration, such as Crete and Mycenaean Greece during 1600‑1200 BC likewise have left no hint of commercial credit, no pooling of money by partnerships, and — most telling of all — no agrarian debt cancellations. Egypt’s sed festivals, unlike their Mesopotamian counterparts, did not allude to debts. The absence of such debt records outside of Mesopotamia prior to the first millennium BC thus does not seem simply to reflect the absence of written documentation. It is the very essence of such debt to be documented.

Where the charging of interest appears earliest outside Mesopotamia — as in Assyria’s Asia Minor trade colonies — a comparative analysis of public and sacred laws shows these to derive from southern Mesopotamian practice. In any case, the role of debt was quite circumscribed outside of Mesopotamia, even in commercial economies such as Ugarit, the city‑state with the closest ties to the Aegean during 1400-1200 BC. As for Europe’s less centralized, tribally organized economies, the historian Tacitus noted as late as the first century of our era that the Germans, whose debts were mainly of the wergild type for legal restitution of damages, were not acquainted with loans at interest.[28] This probably can be taken as applying to European tribal communities generally. It follows that the origins of interest are to be understood in terms of Sumerian economic institutions.

If the Mesopotamian term for interest, máš, was not a literal reference to payment in young animals but a metaphor for the numerical accrual of interest, the next question to be addressed is whether this usage was reinvented spontaneously by classical Greece and Italy or was borrowed from the Near East.

I have argued elsewhere that the idea of interest-bearing debt was brought to Greece and Italy by Phoenician or Syrian merchants, probably in the 8th century BC.[44] For if the practice of charging interest and other commercial procedures were not pristine indigenous developments in Greece and Italy, the calf metaphor for interest likewise is unlikely to be inherent and universal. I believe that the semantic imagery of interest was adopted from the same Near Eastern sources that pioneered in charging interest on debts.

The Apologia Of An Awakening Real Estate Agent

25 May

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Reader “Phil” had the following to say, in response to Thursday’s post, Real Estate Marketers Now Out To Get Your Kids.

His words are an object lesson for real estate industry professionals everywhere (my bold added):

As a licensed real estate agent myself, I would like to suggest a difference between single office agencies and franchise groups. The typical stereotype of a real estate agent is derived from the high flying top 3%. There is no doubt there are some wankers in the industry. The rest that I know are hard working good people who support families and employ staff of 10 to 15 on average. That goes for many of the offices within franchise groups.

Since 2008, I have stood back and looked at the industry a bit differently. I have recognised that most real estate agents have no idea that it is bank credit expansion that causes house prices to rise. Or as Steve Keen explains, actually “growth” in credit expansion.

This is only possible due to legislation allowing private banks to use housing equity as security to create credit. We just continue to do this as that appears to be the way it always was. (IMO housing should be a consumable not an asset).

BTW, hat tip on your recent article exposing those who foster the continuation of the “housing industry” as a financial derivative.

Back to the franchise groups and franchises in general (Parasites!!!). This is not unlike usury or rent seeking. They take franchise fees from hard working small businesses and promote corporate ideals. The LJ Hooker promotion is revolting IMO.

I keep returning to your story of the used car salesman. Most people just keep doing what they know to do to get by or maybe get ahead. We are all preyed on by those who control and promote the FIRE structure.

As one who is now seeing the reality of this I feel a responsibility to speak. Much as you do. I tend to do this even as it makes me an outsider. Strange that huh?

The Only Aussie Economist To Predict The GFC Shows Treasury Department How The Economy Really Works

26 Apr

This past Friday, Professor Steve Keen – the only Australian economist to predict the GFC and give cogent reasons why, and thus one of very few economists in the world who is not a danger to the public – gave this superb, by-invitation (!?!) presentation to staff at the Australian Treasury department.

If you want to gain a better understanding of how the economy actually works – as opposed to how all the people who run the country ass-ume it works – I highly recommend making time to watch the whole thing.

One of many highlights for me came in the question time following Steve’s presentation (1:09:20):

“One of my students put a beautiful question to me once saying, ‘Is the finance sector a Profit centre, or a Cost centre to be minimised?’ It is the latter.”

Logical inference: We must minimise the size (and power) of the finance sector.

The excesses of the finance sector are built, primarily, on the Twin Pillars of currency exclusivity (legal tender laws) … and the power of usury.

Breaking those twin pillars is where any realistic long term “solution” must begin. For those interested, this is my idea for how to begin doing that.

Enjoy this brilliant presentation by Steve Keen, and follow him on Twitter @ProfSteveKeen

* Please help educate others, by sharing this video.

EU Madness: Bank Deposits Stolen For Bailout Of Cyprus

17 Mar

Cross-posted from a project update on Professor Steve Keen’s MINSKY Kickstarter fundraiser (please donate now, ends tomorrow a.m.).

This is big. HUGE:

Madness in the European Union

I write a weekly column for the Australian online newspaper Business Spectator. Today’s startling news out of Europe will be this week’s topic, and given how topical this is I thought I’d share my reactions with Kickstarters:

Europe Goes Troppo

John Lennon’s best line in a lifetime of song-writing was “Life is what happens when you’re busy making other plans”. I had planned today to write about the excellent Atlantic Monthly The Economy Summit 2013 conference I spoke at in Washington on Wednesday, where it seemed that senior figures in the US were finally starting to realize that private debt, not public, was the main game in a debt-deflation.

Then “I read the news today, oh boy”: I woke at 4am to the news that the EU has confiscated 10% of depositors’ funds in its “bailout” of Cyprus. Lennon didn’t go far enough. It seems political suicide is also what happens when you’re busy making other plans. If there was one lesson that I thought the world had learnt from the Great Depression, it was the need to guarantee depositors’ funds.

So much for that fantasy. Now the EU has shown that its obsession with austerity has gone so far that even this historical wisdom has been abandoned. Not only are depositors’ funds not guaranteed, they are being lost even in banks that have not (yet) failed. Many banks are likely to fail however, if depositors come to believe—as this action gives them every right to believe—that their savings are not safe in banks. The public’s first response will be to no longer trust the digital 1s and 0s in their bank statements, and to demand their funds in cold, hard cash. The only way to do this is to front up at the bank, present it with a withdrawal equivalent to the deposit balance, and wait for the teller to count out the notes.

The public will be waiting a while: the cash currently simply doesn’t exist. Currency constitutes only a tiny percentage of the aggregate money supply—whether defined as that found in bank at-call cheque and savings accounts (M2), or including term deposits and other not-at-call accounts (M3). If everyone wants it, then only one in twenty will get it, if Europe’s figures are at all comparable to America’s.

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That’s why a collapse in confidence in deposits is called a bank run: only those who run first to the bank get their money.

Only Cypriots — and Russians, who apparently put substantial funds in Cyprus, probably in search of either a safe haven or high returns (that’s one trivia question I don’t know the answer to) — have an immediate motivation to demand cash, but they won’t be able to, thanks to a “bank holiday” in Cyprus on Monday, and withdrawal restrictions from Tuesday on.

But what about depositors in the other Mediterranean states—in fact, anywhere other than Germany? I can’t imagine them not queuing at their banks on Monday, and in large numbers.

With the inability of individuals to freely withdraw funds will come a political credit crunch. Commerce relies upon the easy transfer of funds from buyer to seller. Companies can’t have these restrictions imposed on their accounts without causing commerce to grind to a halt, but surely their suppliers—particularly tradesmen and small businesses—are going to demand cash payments in future. What happens when companies start demanding cash from their banks, rather than relying upon e-commerce?

What will happen to e-commerce after this? Would you trust the swipe of a card for a cappuccino now, or would you demand coin—even if they were Euro coins? And what on earth will money markets make of this? What will a Euro be worth on Monday morning?

Goldbugs will rejoice I am sure—here comes the currency apocalypse they have eagerly anticipated. The Bitcoin community is going to rejoice as well—theirs is one form of e-commerce that is likely to prosper after this insane act. The great attraction of Bitcoin is that it is the creature of no State, and therefore it can’t be confiscated by one.

There will be political demands for the return to national currencies: better the national State you can control than the supra-national State that controls yours. I can’t think of any other act that could do more to bring the Euro to an end than the news that a country has had 10% of its deposits confiscated, because that nation was foolish enough to cede the right to issue its own currency to the European Union a decade ago.

This will also surely stir the Russian Bear. I have no idea which Russians have funds that are now being used to bailout European banks, but I doubt that Vladimir Ilyich … I’m sorry, I mean Vladimir Putin … will take kindly to this effective seizure of Russian assets. Putin certainly has to act: his strongman image in Russia would be in tatters if he did not. What might his comeback be—turning off Russian gas supplies to Europe perhaps, until Russian depositors are repaid? And probably in dollars rather than Euros? What then in Europe, if strongman tactics force compensation for Russians, but none is forthcoming for Cypriots?

The most ominous political portent lies in the legitimacy this will bestow on the Far Right. This betrayal of the people of Cyprus by its politicians and bureaucrats will be seized upon by the fascist (and leftist) parties throughout Europe. The centrist parties whose politicians and bureaucrats have insisted on depositors contributing to a bank bailout to appease German voters have just thrown the center away.

God knows what the long term consequences will be, but if I had to identify one single act that could lead to a rerun of the political chaos of the 1930s in Europe today, this would be it. I began this post with John Lennon. Maybe the story will end with the resurrection of Vladimir Ilyich Lenin. But in the interim I expect that the Right—and most immediately, Golden Dawn in Greece—will make the most political capital out of Brussels’s incredible folly

I’ve written this quite literally “up in the air” — flying from Washington to Los Angeles — wondering what else will have occurred by the times I touchdown. Surely there will be a reaction by Cypriots today—and demonstrations elsewhere in Europe by both Left and Right. These might cause some backdown by the idiot bureaucrats and politicians who forged this plan, but even then it will be too late: the damage to the credibility of the Euro and the entire European banking system will already have been done.

Monday is going to be a very interesting day in Europe. And Tuesday in Cyprus? I would not like to be a bank teller on that day.

As I’ve been saying…

Do not – not for a moment – think that this will not impact us here in Australia.

Wars have begun over less.

See also –

UPDATE:

It has begun. From BBC News:

Cyprus bailout: Man threatens bank with bulldozer

People in Cyprus have reacted with shock to news of a one-off levy of up to 10% on savings as part of a 10bn-euro (£8.7bn; $13bn) bailout agreed in Brussels.

Savers queued at cash machines amid resentment at the charge, while co-operative credit societies shut to prevent a run on deposits.

At one Kyperounta Co-operative bank branch, a frustrated man parked his bulldozer outside, apparently threatening to break in.

UPDATE 2:

excavator cyrpus_0

UPDATE 3:

From Zero Hedge (emphasis in original):

But it doesn’t stop there: a partial “bail-in” of junior bondholders is also possible, as for the first time ever the entire liability structure of a European bank – even if it is a Cypriot bank – is open season for impairments. The logical question: why here, and why now? And what happens when the Cypriot bank run that has taken the country by storm this morning spreads everywhere else, now that the scab over Europe’s biggest festering wound is torn throughout the periphery as all the other PIIGS realize they too are expendable on the altar of mollifying voters and investors in the other countries that make up Europe’s disunion.

For the real response, look to Russia:

The island’s bailout had repeatedly been delayed amid concerns from other EU states that its close business relations with Russia, and a banking system flush with Russian cash, made it a conduit for money-laundering.

“My understanding is that the Russian government is ready to make a contribution with an extension of the loan and a reduction of the interest rate,” said the EU’s top economic official, Olli Rehn.

Almost half of [Cyprus’] depositors are believed to be non-resident Russians, but most of those queuing on Saturday at automatic teller machines to pull out cash appeared to be Cypriots.

While “saving”, pardon the pun, yet another insolvent country merely has the intent of keeping it in the Eurozone, and thus preserving Europe’s doomed monetary block and bank equity for a little longer, this idiotic plan will achieve two things: i) infuriate not just Russians but very wealthy, and very trigger-happy Russians. The revenge of Gazpromia will be short and swift, and we certainly would not want to be Europeans next winter when the average heating level of Western European will depend on the whims of Russian natural gas pipeline traffic; ii) start a wave of bank runs first in Cyprus and soon everywhere else that has the potential of being the next Cyprus.

Now the only thing unknown is Russia’s response:

Corporate tax rates in Cyprus will rise to 12.5 percent to 10 percent as part of the deal, Dijsselbloem said. Rehn told reporters that Russia, whose banks have loaned as much as $40 billion to Cypriot companies of Russian origin, would ease terms on its existing loans to Cyprus as the rescue unfolds. Cyprus’s finance minister is scheduled to fly to Moscow on March 20.

What is known, however is that Cypriots have taken the news in stride…. and to their local ATM machine, which sadly is showing the following message: “Your transaction has been cancelled due to a technical issue. This ATM cannot complete withdrawals at this time” (courtesy of Yannis Mouzakis).

Cyprus ATM two_0

It didn’t take long before the Cyprus Cooperative bank issued a statement saying “some ATMs run out of cash” – by some they likely mean all as the entire country is now gripped in a full force depositor run.

Congratulations Cyprus savers – you were just betrayed by both your politicians, and by Europe – sorry, but you are the “creeping impairments” in the game known as European bankruptcy. And so is anywhere between 6.75% and 9.9% of your money, which you were foolish enough to keep with your banks (where at least you were compensated with a savings yield of… 0%).

More importantly, as of this morning Europe has finally grasped that there is a 6.75% to 9.9% premium to holding physical cash in your mattress rather than having it stored with your local friendly insolvent bank.

UPDATE 4:

From Zero Hedge:

As the President of Cyprus proclaims to his people that “we’ should all take responsibility as his historic decision will “lead to the permanent rescue of the economy,” it appears that the settled-upon 9.9% haircut is a ‘good deal’ compared to the stunning 40% of total deposits that Germany’s FinMin Schaeuble and the IMF demanded.

A History Of The Legal Case Against Usury

24 Feb
Schistosoma_mansoni2

Schistosoma mansoni is an endoparasite that lives in human blood vessels.

Regular readers will know that I am an ardent opponent of the practice of usury.

In the classical meaning of the word.

Indeed, it is my view that the practice of usury is The Key to the power of the money-lenders.

While many others have argued that the key to their power is their exclusive right to create money (debt) whenever they make a loan, I tend to disagree.

In the absence of the legal right to charge interest (usury) on those loans, the money-lenders’ power would be effectively nobbled.

They could be replaced by full public banking. Or by alternate, free currency solutions like my own.

This key issue of the charging of interest on “money” lending, its origins, and its legal history, is awash with myths, theories, distortions, and outright falsehoods.

There are many eloquent and brilliant advocates for the alleged “need” for the charging (and offering) of a rate of usury on money. The theory of the so-called “time-value of money” is commonly cited in justification of what is, in truth, plain and simple parasitism –

Parasitism is a non-mutual relationship between organisms of different species where one organism, the parasite, benefits at the expense of the other, the host.

First used in English 1539, the word parasite comes from the Medieval French parasite, from the Latin parasitus, the latinisation of the Greek παράσιτος (parasitos), “one who eats at the table of another” and that from παρά (para), “beside, by” + σῖτος (sitos), “wheat”. Coined in English in 1611, the word parasitism comes from the Greek παρά (para) + σιτισμός (sitismos) “feeding, fattening.”

What I hope to do in today’s post is dispel some of the banking industry’s most powerful falsehoods.  That the charging (and offering) of “interest” on money is normal. That, at worst, it is a “necessary evil”.  That it is really something natural, and good, like a law of the universe, and vital to keeping our world turning.

I also hope to encourage readers to STOP using the banksters’ language.

And instead, to “call each thing by its right name.”

The original word used for the charging of interest on money … is USURY.

Usury does not mean charging “excessive” rates of interest.

The etymology of the word “usury” shows that it originally meant the charging of any interest, at all:

usury (n.)

c.1300, from Medieval Latin usuria, from Latin usura “usury, interest,” from usus, from stem of uti (see use (v.)). Originally the practice of lending money at interest, later, at excessive rates of interest.

How very convenient for the modern day money-lenders, that we have changed our language over the centuries.

No doubt with more than a little help from our “friends”.

In researching for more information on the origins of the word “usury”, recently I happened across an article published in the American Bar Association Journal, Volume 51, September 1965. It was written by a J.L. Bernstein, NYU Law School graduate and editor-in-chief of the New York State Bar journal. Following are some extended excerpts. It really is fascinating stuff.

But if you are tempted to leave before finishing, please do me one favour. Skip to the end, and read my closing observations concerning ancient Sumeria, the true origin of debt jubilees and New Year’s Eve celebrations, and the deeper meaning behind the Biblical story of Abraham.

Now, to the history of the legal case against usury (my bold emphasis added):

Background of a Gray Area in Law: The Checkered Career of Usury

Tracing the ancient and medieval history and development of usury, Mr Bernstein shows that at first it was any charge for the use of property, but later became only the charge of excessive interest on money. With the advent of our present consumer society, various procedures and methods of conditional selling have enabled what might otherwise be usury to escape illegality. It is time, the author suggests, to delineate what is fact and what is fiction in this shadowy world.

A CASE MAY BE MADE for usury as one of the oldest professions of man, yet the complexities of modern economic life “make fundamental a review” of the problem, as the late C.S. Lewis, Oxford and Cambridge don, scholar and theologian pointed out. The checkered career of usury cum interest is too long to detail here, but this mixed question of theology and law has always been a gray area for the courts – a veritable hodgepodge of legal decision, as this Journal once put it, with “no clearcut rationale”.

Even an elementary statement in a leading New Jersey case is questionable. The Supreme Court said: “Although the common law did not prohibit usurious exactions, our statutes have done so since 1738.” This view of the common law is challenged in Mark Ord’s authoritative Essay on the Law of Usury (1809), which states: “Usury in its strict and legal sense was always considered unlawful.” Likewise, Robert Buckley Comyn says: “Usury was in England an object of hatred and legal animadversion at least as early as the time of Alfred; and Glanville, Fleta, and Bracton bear ample testimony to the abhorrence in which it was held.”

All Interest Once Was Usury

At common law a usurious contract could not be enforced, and usury appears to have been an indictable offense, the punishment for it being fines and imprisonment. The fact is that from the earliest recorded times until the later Middle Ages even interest was forbidden by both canon and civil law, for interest then was synonymous with usury. Indeed, interest had no significant usage in English law until the statute of 21 Jac. 1, c. 17 (1624), although it had been employed in commerce, having been adapted from the Justinian Code of the Roman Empire.

The Lombard merchants, the principal moneylenders of medieval times, had made it a practice to charge a penalty on default, and the custom spread. Thus interest was not a charge for the use of money, but an exaction to make the creditor “whole”. In time it came to mean permissible usury, but it is noteworthy that neither the Old nor the New Testament recognizes this concept, except for the new Catholic edition of the Holy Bible (1954) which substitutes interest for usury and banker for exchanger.

Comyn describes the gradual transformation: “Usury was an offense which having first become odious from religious prejudices, at length became the object of political consideration, and parliamentary restraint. And as at first the taking of any profit upon money was denominated usury, so afterwards, when such profit was authorized by law, the profit was termed interest, and the illegal excess alone retained the odious name.” Thus usury began as malum in se, but at least from the time of Charlemagne in the ninth century (he considered all profit as “filthy lucre”), the secular arm had sought to reinforce the spiritual, making it also malum prohibitum. Speaking of the earliest English statutes, those of Henry VII (1487-1495), Coke declared that all usury was “damned and prohibited”. According to an ancient book of the Exchequer, entitled Magister et Tiburiensis, usury was ranked with murder as an offense.

But the general detestation was diminished by 37 Hen. 8, c. 9 (1545) which, while entitled “A Bill Against Usury”, tacitly legalized it to a maximum of 10 per cent per annum. This statute inaugurated the serviceable fiction that usury no longer meant any interest, but only excessive interest. As Ord puts it, this was the first English statute to “give any connivance to the practice of lending at interest”.

The statute still called usury “a thing unlawful”; it was an attempt at moderation, following the lead of the church. Earlier attempts to ban all interest had failed ignobly, but so did this new approach, and by 5 & 6 Edward 6, c. 20 (1552), repeal made interest and usury one and the same again. But this didn’t work, as before, and 13 Eliz. 1, c. 8 (1571) repealed the Edwardian edicts and revived the statute of Henry VIII. In order, 21 Jac. 1, c. 17 (1624); 12 Car. 2, c. 13 (1660); and 12 Anne, c. 16 (1713), toyed mainly with the rates, which went from a maximum of 10, to 8, to 6 and finally to 5 per cent in the statue of Anne of 1713. This is the one followed in this country. But the most common maximum rate of 6 per cent is derived from the Justinian Code.

The statute of 12 Anne, which served as a common model here, was abrogated 110 years ago in England by 17 & 18 Vict., c. 90 (1854). Therefore, the mother country has no general usury law today and interest of 48 per cent may be quite legal – even more, if the courts can be convinced. As H. Shields Rose puts it in his book, The Churches and Usury (1908), this was “the final capitulation of the state … as regards the maintenance of a legal maximum rate of interest in England”.

Note:  The abrogation of this 183-year-old English law placing limits on the charging of interest, came just ten years after the privately-owned Bank of England was granted exclusive power to issue the nation’s banknotes (Bank Charter Act, 1844). Coincidence? I think not.

The etymology of usury is from the Latin words usa and aera, meaning “the use of money”. But both by ecclesiastical and civil law it was always held that usury could exist in nonpecuniary transactions as well. Many state statutes, following the language of 12 Anne, speak generally of “money, wares, merchandise, goods and chattels”. The Bible is more inclusive: “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury.”

But courts that maintain that usury was not prohibited by the common law are on firmer ground if they mean thereby the common law as it was interpreted by the colonial judges here. Blackstone says that the common law of England consists of “That ancient collection of unwritten maxims and customs …”. Our early courts seemed to regard English authority on the subject so dubious, indifferent or contradictory that, without legislative enactment, anything by way of usury was legal. This led to such abuses that the colonists petitioned for action, and general usury statutes were adopted everywhere.

It is useless to deny that confusion abounded in the common law, for usury was no less a gray area and a hodgepodge of thinking then. Coke, for example, said that: “All usury is not only against the law of God [but] the laws of the realm, and against the law of nature.” But on another occasion he avers that what was actually forbidden was “biting usury”, i.e., unconscionable charges…

Note: It is your humble blogger’s firm opinion that, in a technological age where 97% of all “money” is no more than electronic binary code, mere digital bookkeeping entries, created at the click of a bankers’ mouse in the form of new debt, there is no question that ALL usury charges are unconscionable.

Genesis of the Problem Is of Ancient Origin

But if the common law is no less a puzzle than our decisional law, the trouble goes far back – to Holy Writ itself. Until the later Middle Ages all interest was interdicted, for it was abhorrent that money – “barren” as Aristotle and the inspired writers of the early Church had taught – should increase unnaturally while lying fallow. That a lender should profit in his own idleness and that a borrower should be charged even though he may have lost money in the transaction, both were intolerable. Indeed, the worst form of usury in medieval times is considered a most respectable practice in our own. This was the custom of paying interest from the day of the loan. Banks today not only pay interest “from the date of deposit”, but even from before, so that money deposited by the fifteenth of a month will draw interest from the first.

Note how the author first refers to “paying interest from the day of the loan”, then immediately switches gears to speak of banks paying interest “from the day of deposit”? This is a classic and oh so subtle mind trick, commonly used in justification of the practice of charging interest on lending. How so? By redirecting the focus of the argument on the fact that banks pay interest as well.  It is a clever distraction, because what is overlooked, is that banks never pay more interest than they charge. As a so-called “intermediary” in the payments system of the economy, the banks achieve the easiest of profits.  Not just because they charge more interest than they pay, which in itself would be a form of parasitism. But because they are not mere intermediaries – banks are able to create money (debt), and charge interest on it.  Contrary to popular belief, banks do not simply lend out money deposited by other customers. See The World’s Most Immoral Institution Tells You How

We have come a long way in our view of the fertility of money. But, oddly, the statute of James I, which gave the word interest its first significance in Anglo-Saxon law, contained the proviso that “… no words in this statute contained shall be construed or expounded to allow a practice [of charging interest] in point of religion or conscience”. But what did morality actually hold? That is the most vexatious of all inquiries.

The Fifteenth Psalm is clear without cavil: “Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill … He that putteth not out his money to usury…”. Throughout the Bible the angry prophets denounce what the early theologians called “horrible and damnable sinne”. But there are also loopholes born of contradiction, and the frustrations of the moralists came to be visited upon the jurists.

Although the quoted passage from Deuteronomy forbids all usury, the next verse is most tantalizing: “Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury…”. What does this mean?

Indeed. There is much that can be said, and much evidence raised, in answer to that question.  But we will leave that particular controversy for another time.

From Biblical times until the later Middle Ages, a moneylender was simply a usurer, and a banker an exchanger. The distinction of moderate usury, called interest, received no recognition in the Church until after the Reformation. In a sense, therefore, the liberalization of religious thought also marked the turn to the “Money Society”, in which the medium of exchange achieved the status of a commodity of intrinsic value and became the lifeblood of commerce. The burgeoning materialism of the age, trading on the discovery of the New World, was in a mood no longer to tolerate philosophical and religious thought treating money as “infertile” and profit from it as “unnatural”, since it was not endowed by God or nature “with genital and procreative faculties” in the words of St. Basil (fourth century). In the end, it was the lawgiver, Justinian, who prevailed, rather than the philosophers and theologians.

And there you have it. What has ultimately prevailed with respect to usury, is the code of man. The Corpus Juris Civilis of the “lawgiver”, Justinian, a ruler of the late Roman Empire (c. 529AD), are the foundational documents of the Western legal tradition. It is ancient Roman law that serves as legal justification for the resurrected, and globally-dominating practice of usury in our day.

Theory of Moderate Usury or Interest Is Approved

This same logic, that there is nothing immoral about usury, was advanced in Parliament in the last century during the debates on the proposed abolition of the general usury statute of 12 Anne. “God did not so hate it, that he utterly forbade it”, contended one member; while another stated: “He could not have desired that the ban against all usury should be of moral and universal application”, for the Bible did not so clearly provide. An economist with the United States Treasury Department even advanced the view that usury could be traced “to the Creator Himself”, who first caused “all things to grow and increase”.

Nevertheless, that the total prohibition of all interest was at the center of canonist doctrine until the later Middle Ages is clear. “Not until sixteen hundred years after Christ did interest find any defenders”, proclaimed Roger Fenton. Then it was the Church which led the way to its acceptance, and the State which followed. Two principal reasons may be advanced for it: (1) the growing power of economic forces which chafed under enforced unselfishness and (2) the equivocations of Scriptures which encouraged the casuistries of “permissible instances”. Ultimately, perhaps, it was a hopeless struggle against human cupidity, or maybe only against “progress” for it is unlikely that, no matter what position it assumed, the Church could have stemmed the tide that was running.

Assailed on either side by those who, like St. Basil, called usury “the last pitch of inhumanity” and those who found it out of harmony with the facts of life, the Church sought to steer a middle course. Since its primary object has always been to protect the weak against the economically strong, it saw justifications for exceptions in commercial transactions between sophisticated parties.

“Sophisticated” parties? Now where have we heard that justification used more recently?

Moreover, on the allegation that, after 16 centuries, the Church succumbed to the pressures of economic greed and “progress”, it behooves one to point out that, in doing so, its ecclesiastical leaders and learned theologians all managed to lose sight of the simplest teachings of their own namesake, The Christ: 

“No one can serve two masters: Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money.”

It is this blogger’s view that the vast, unfathomable wealth of “the Church” – the sheer obscenity of which induced a sense of nausea on his sole tour of the Vatican – stands as ample testimony to the identity of which “master” it has long chosen to serve.

“Interest”, laconically comments Roger Fenton, “is the brat of commerce.” By what Mark Twain would have called “theological gymnastics” the Church has been charged with acquiescing in contrivances and subterfuges; and its capitulation to usury – limited or otherwise – has been held to constitute a virtual abdication of the precept against avarice, a former “venal” sin.

The Church first approved the idea of interest as it originated in the Justinian Code, which implied a justified penalty on default, although it is likely that this in itself was a subterfuge to avoid the ban against usury. But theological approval of the dammum emergens, for actual loss incurred, was not satisfactory to business or its lawyers, who argued also for the lucrum cessans, certain gain lost. This the Church resisted for at least a century more, for it was not ready to concede that money, the love of which is “the root of all evil” in the Bible, was fertile. But in time it acceded to this, provided that the money was lent for an initial gratis period. Thus, technically, the interest was still not for the use of money, but as compensation for its nonreturn on the due date.

This attempt at charity led to an ingenious evasion. The grace period, accepted with high good humor in the market place, became a mere sham. The lenders merely fixed a due date so close that borrowers could not hope to repay by then, following which huge penalties were added. The evasion and the practice survive to this day, and the courts commonly enforce, after default, a rate of charge in excess of that permitted by general usury laws. It persists in “revolving” or “flexible” charge accounts, in which no charge is made if a bill is paid within ten days or so, after which interest (called a “service charge”) of 18 per cent is added.

But the Church never approved of lending to the poor in order to profit from their poverty, nor of such things as “consumer’s loans”, formerly called “consumptive loans”, a rather more descriptive phrase. Indeed, to lend for any but productive purposes or to engage in commerce except as a service to the community was still immoral. In 1515 the Lateran Council pronounced: “This is the proper interpretation of usury, when gain is sought to be acquired from the use of a thing not in itself fruitful, without labor, expense or risk, on the part of the lender.” The element of risk loomed larger in importance, but the Church having made distinctions, it was not long before the law of England followed suit. Within thirty years, in 1545, came 37 Hen. 8, the first statute to legalize moderate usury.

Today it is commonly argued that the charging of interest on loans simply represents a fair and reasonable “rate of return” to moneylenders, to compensate them for their “risk” in making the loan.

This is self-serving bunkum.

As we have seen previously, there is no labor or “risk” involved in the modern process of “money” creation and lending. It is simply typed into existence, as a new digital bookkeeping entry. And even when the moneylenders take their money debt-creation schemes to stratospheric levels, blowing asset bubbles that lead to the total insolvency not just of millions of common people, but of their own institutions – (eg) the predatory mortgage lending practices in the USA preceding the GFC – the government conspires with the bankers to make them “whole” again. In the modern era, it is perfectly clear and beyond refutation that the lending of money by the banking system is risk-free … for the bankers.

In closing this post on usury, there is one more piece of research I’d like to share.

Biblically-literate readers will be familiar with the story of Abraham. As the man chosen by God to be “the father of many nations”, he is a central figure in the history of three powerful world faiths and their billions of adherents. Indeed, they are named after him – the “Abrahamic” faiths of Christianity, Islam, and Judaism.

In the Genesis 11-12 account of Abraham, we learn that he lived in the region of ancient Sumeria (or Babylonia), in a place called “Ur of the Chaldees”. God told him to get out of Ur, and to go to a land that He would show him.

The Promised Land.

A metaphor for Heaven.

In David Graeber’s masterful work Debt: The First 5,000 Years, we learn a wealth of fascinating, myth-busting information on the true anthropological history of money, exchange, barter, and debt throughout recorded history. It is a “must read” book.

Many of us would be aware that the earliest written records of humankind are the clay tablet (cuneiform) writings from ancient Sumeria. The concept of a debt jubilee now being revived by Professor Steve Keen has its earliest origins in Sumeria/Babylonia, where actual “money” (eg, coins) was very little used; instead, the economy functioned almost entirely on a system of debts and credits, which (like today) were nothing more than bookkeeping entries, written originally on clay balls, later, on clay slates. The phrase “a clean slate”, meaning to have a fresh start or new beginning, has its origins here. New Year’s Eve celebrations also have their origins here – it was not uncommon practice for Sumerian kings to declare all debts annulled, to destroy all the records of debt and so begin with “a clean slate” in the new year; a cause for joyous celebration if ever there was one!

CunEnv

In chapter 7 of Graeber’s book, we also discover the meaning of the word “Ur,” from an early Sumerian dictionary:

ur (HAR): n, liver; spleen; heart; soul; bulk; main body; foundation; loan; obligation; interest; surplus; profit; interest-bearing debt; repayment; slavewoman.

I think there may well be a significance to the story of Abraham and his journey out of Ur to the Land of Promise, that is both far deeper, and far more practical, than most give it credit for.

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