ultranomics

Ultranomics and Obamanomics? Now try Godnomics – the pilgrimage to zero interest rates…

The latest round of interest rate cuts around the world have taken rates to amongst their lowest points in half a century. In the UK, USA and Japan they are approaching 0% and according to some analysts are likely to get there soon.

Savers of course, are none-to-happy with all this, whilst mortgagees are praising the Lord. The prudent savers of the nation are wondering what they did wrong. They didn’t splurge on consumer trinkets, they didn’t spend beyond their means, and in fact put money aside for a rainy-day. The spendaholic hoardes on the other hand, who maxed out their credit cards and bought houses which they couldn’t really afford are now being pandered to by the State, which is slashing rates to ‘ease their burden’. The poor savers and their dwindling rates of return meanwhile barely get a mention.

It hardly seems fair.

Yet there is another school of thought, which predates our modern day economists by a fairly wide margin and that could shed an alternative light on the debate. We all know (or should do) that the three major monotheistic faiths, Judaism, Christianity and Islam all have in their literature a prohibition on interest. The Torah, The Bible and The Quran all advise against dealing in interest, whether charging it or even paying it. References on these can easily be googled so I won’t elaborate here.

To my understanding of the idea behind this prohibition, it seems that just like the Paradox of Thrift mentioned above, there is another paradox when it comes to interest. Although at an individual level it may seem totally reasonable and even desirable for banks to extend loans in return for interest so that we can buy a house or start a business, on the macro-economic level it may eventually play a large part in causing the booms and busts that we experience. The theists will argue that taken as a whole, the harm caused by interest is far greater than the good that might come of it, hence it is not allowed. It is a complex subject and not one that can be covered in detail in this Ultraletter, but one worthy of a separate article which we promise to write up soon in the name of research and understanding. In the meantime here is an excellent guide from one of the UK’s leading ethical financial advisers, 1stethical.com, on the subject of Interest based lending in the modern banking system

At the crux of it though, the ‘good savers’ that put their cash away into savings accounts were after interest income without risk, or making money directly on their money without doing any economic activity, e.g. trading or renting out an asset. They were not actually contributing to the economy by spending or investing, but rather trying to earn money whilst taking no risk, i.e. capital was secure. Accordingly since no risk is being taken, to be honest they deserve no reward. It could be argued that its the people buying houses, paying stamp duty and VAT in the process, then spending thousands doing up their houses in the pursuit of happiness and profit who are the real stars of the economy. They are the ones who put their butts on the line! Those amongst them who took too great a risk, i.e. self-certified loans beyond their means or where they had a shaky cashflow, have been punished automatically by losing the asset they acquired.

Furthermore we know that its the banks’ own loose lending policies that led to these risk-takers’ downfall. The banks were like the savers, dishing out their cash (in fact usually cash that they never even had due to the magic of Fractional Reserve banking) hoping for a return on their money without taking a risk. They thought they would eliminate risk by screening homebuyers and asking for deposits. But when you’re making easy money with no risk its all too easy to take your eye off the ball. That’s what the banks did. Their lending criteria got sloppier and sloppier. Had they not used the interest-based system (i.e. earning money directly on money) but instead taken a shared-risk strategy, i.e. buying the house ‘together-with’ the individual, thereby sharing in any fall in value of the asset as well as any rise, they might even have made better profits since they most certainly would have made better investments. If their own capital was at risk they would have screened the individuals’ proposals in more detail and only lent on good projects. Since they thought they’d get an ‘interest’ return on each and every loan regardless of the quality of the investment they never assessed the investment’s potential. This is the core reason for the subprime meltdown, and it all channels back to the lazy-greed profit system called ‘interest.’

Suffice to say that with falling rates across the globe, whether willingly or not, the world’s bankers are getting closer to a more divine banking system month-by-month! We wonder though if they will ever see the light. Our breaths are not being held !