Sunday 26 August 2007

The Debt Disaster: How the 'sub prime' crisis works

You will find a very good explanation of how the 'sub prime' crisis works here on a BBC blog.

In case anyone thinks, "What has this got to do with vicars?", it goes back to the biblical prohibition on lending money at interest - one that I think is morally based, and of which we are now seeing the consequences when it is widely disregarded.

As CS Lewis put it many years ago, "There is one bit of advice given to us by the ancient heathen Greeks, and by the Jews in the Old Testament, and by the great Christian teachers of the Middle Ages, which the modern economic system has completely disobeyed. All these people told us not to lend money at interest: and lending money at interest — what we call investment — is the basis of our whole system."

Lewis raised the question then of whether this might have economic implications. Today I believe we are seeing part of the answer.

Revd John Richardson
26 August 2007


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6 comments:

  1. This comment has been removed by a blog administrator.

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  2. The anonymous comment above has been removed not because it is offensive but because the contributor didn't put a name and location. Please read the comments policy and then please do what it asks.

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  4. To the same anonymous poster,

    Trying it twice won't make it happen.

    My blog, my rules. That's the way it goes.

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  5. (Chelmsford)

    Just because something is abused, as is clearly true of the system of loans with interest in this particular case, that doesn't make it wrong in principle.

    Do you have any practical suggestions for setting up a financial system which does not rely on interest?

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  6. Hi Peter,

    It is important to understand that the objection made by the Church in past years was to returns based on fixed interest, not to profitting via loans. (I think you understand this, but the point is important.)

    I think Lewis was actually wrong, therefore, to identify "lending money at interest" with "what we call investment". (He did, however, admit to not being an economist, and I'm sure would have taken no exception to this comment.)

    Thus much of our economic system (as I understand it, bearing in mind that I am also not an economist) does not depend on charging interest.

    The critical phrase is "the value of your investment can go down as well as up". This is not true of charging fixed rates of interest, particularly if collateral has been used to underwrite the loan. In this case, the lender is at very little risk since, if the scheme fails, they can sell the collateral.

    In many other cases, however, investors take on a 'shared risk'. Sometimes this is because a loan is unsecured, sometimes it is because the return depends strictly on the success of the scheme.

    It seems to me it would be perfectly possible to transact all investments on the basis of 'shared risk, shared reward'. In that case, taking (say) 20% of the profits on a venture would not, it seems to me, be objectionable, provided the lender accepted that if the scheme failed the money was lost. A percentage on profits, however, is not the same as 'fixed interest'. The profits may be enormous, or they may be marginal, just as there may be no profits at all.

    I am sure it is not beyond human ingenuity to work out how this could be done!

    As it happens, I have just discovered a very interesting website called Kiva.org which allows you to lend money via Micro-enterprise initiatives in the developing world almost on a 'shared risk' basis.

    It is not quite shared risk, in that I gather most of the lending organizations do actually charge fixed rates of interest. However, as a lender you not only don't see any of that interest, you can lose your money if the person defaults! Given the amounts involved, however, it is a small risk and it is quite enthralling to be involved. I hope to blog later on how it went.

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