Via Rod Dreher comes some good news: the Kentucky Baptist Convention is pushing for legislation to regulate predatory lenders:
Kentuckys largest religious denomination joined Tuesday in a growing call for regulations on payday lenders, saying such loans cost the annual equivalent of nearly 400 percent in interest and amount to usury decried in the Bible.At its annual meeting, the Kentucky Baptist Convention adopted a resolution without dissent calling for state and local regulations that would cap interest on short-term loans at 36 percent.Its the first public statement in recent memory by the state affiliate of the Southern Baptist Convention on regulating financial institutions, and it puts it on the same page with several other religiously affiliated organizations that comment more regularly on economic issues.
One of those "other religiously affiliated organizations" is, of course, the Catholic Church: witness Benedict XVI's call in Caritas in Veritate for financial regulations that will protect the vulnerable "from the risk of usury and from despair", plus the much louder condemnation in Leo XIII's Rerum Novarum:
Public institutions and the laws set aside the ancient religion. Hence, by degrees it has come to pass that working men have been surrendered, isolated and helpless, to the hardheartedness of employers and the greed of unchecked competition. The mischief has been increased by rapacious usury, which, although more than once condemned by the Church, is nevertheless, under a different guise, but with like injustice, still practiced by covetous and grasping men. To this must be added that the hiring of labor and the conduct of trade are concentrated in the hands of comparatively few; so that a small number of very rich men have been able to lay upon the teeming masses of the laboring poor a yoke little better than that of slavery itself.
This article from the 1957 Catholic Encyclopedia provides a helpful (for me, anyway) summary of the development of Catholic teaching on the issue, and concludes as follows:
Lending money at interest gives us the opportunity to exploit the passions or necessities of other men by compelling them to submit to ruinous conditions; men are robbed and left destitute under the pretext of charity. Such is the usury against which the Fathers of the Church have always protested, and which is universally condemned at the present day. ... It is in itself unjust extortion, or robbery. The sin is frequently committed. In some countries are found the exaction of interest at 30, 50, 100 percent and more. ... The exorbitant charges of pawnbrokers for money lent on pledge, and, in some instances, of persons selling goods to be paid for by installments, are also instances of usury disguised under another name. As a remedy for the evil, respectable associations for mutual lending have been instituted, ... and help has been sought from legislators; but there is no general agreement as to the form which legislation on this subject should take.
As the article notes, however, the framing of the prohibition against usury as a prohibition just against "exorbitant" rates of interest is a significant walk-back from the Church's earlier position, where figures like Thomas Aquinas stood with numerous official documents in arguing that Christians should be disallowed from charging any interest whatsoever on monetary loans. In a paper that she wrote in 1970 and was recently published in a posthumous volume titled Faith in a Hard Ground [edit: the title of the paper is 'Philosophers and Economists: Two Philosophers' Objections to Usury' -- JS], the philosopher Elizabeth Anscombe explores the rationale for this position, observing that it lies in the idea that it is appropriate to charge someone for the use of something only if, when they give it back to you, its value has somehow decreased. Here is how that argument is addressed in the article linked just above:
The just price of a thing is based on the general estimate, which depends not in all cases on universal utility, but on general utility. Since the possession of an object is generally useful, I may require the price of that general utility, even when the object is of no use to me. There is much greater facility nowadays for making profitable investment of savings, and a true value, therefore, is always attached to the possession of money, as also to credit itself. A lender, during the whole time that the loan continues, deprives himself of a valuable thing, for the price of which he is compensated by the interest.
This seems reasonable to me, though I am sure that Anscombe would not be fully satisfied. (She rarely was.) Of course, another reason why it can be necessary to charge interest on loans is because it can be the only way to cover transaction costs and -- even more importantly -- make up for cases where loans are not repaid. Kiva, an organization that enables you to lend money for worthy projects via microfinance institutions, or MFIs, explains these points as follows:
There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers both these costs for either loan.The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same amount of staff time for meeting with the borrower to appraise the loan, processing the loan disbursement and repayments, and follow-up monitoring. Suppose that the transaction cost is $25 per loan and that the loans are for one year. To break even on the $500 loan, the MFI would need to collect interest of $50 + 5 + $25 = $80, which represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can't be cut below certain minimums.
This strikes me as a significantly stronger argument than the first one. (It is notable -- and perhaps not an accident? -- that the rate cited is the same as the one suggested by the Kentucky Baptist Convention. Microfinance is singled out for praise in the paragraph quoted above from Caritas in Veritate, by the way.) For more on the Church's view of usury, see this piece by Dale Ahlquist (h/t Dreher once again). And while we're at it, let me note that Kiva gift cards make a fine Christmas gift.Image credit: Flickr user Steve Rhodes.
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