Sunday 19 February 2006

Pic of the day: No, young lady, most of us don't actually have bags of money lying around. That's why we sometimes have to borrow.

Usury?

The other loan did indeed arrive on Friday. So now I can keep up my comfortable lifestyle without skipping a beat. Paying back the loans should be fairly easy: Just not buy any new computers until I'm out of debt again. ^_^

Looking at the interest rates, I remembered the old word "usury". It is not something you hear anymore, is it? I think I've picked it up from the Bible or related writings, though I am sure I have seen it once or twice elsewhere. Surely when there is near zero inflation, interest rates of 20-30% can be nothing but usury, right? Right?

Up through the middle ages, usury simply meant lending against interest at all. It still means that in Islam, which does not bode well for the economic growth around there. (Although some creative solutions have shown up.) In the West, the word has simply been re-defined to mean lending to the poor against unreasonable interest. You'd think consumer financing would still qualify, and I am sure most Christians think this if they think about it at all. Which they probably don't. But that's not going to stop me!

***

How is it possible to take 30% interest in a time when there is almost no inflation? The answer is obviously that people are desperate. The desperation may be genuine, as in they risk starvation or freezing if they don't get the money somehow. Or it may be artificial, created by emotional advertising coupled with a mind that is untrained or simply incapable of discerning between needs and wants. Surely then this is a sin, if not a crime, to take advantage of people who are desperate or mentally disturbed? If nothing else, surely it is one of the evils of capitalism?

That's where I have the benefit of a broader knowledge of financing. For instance, years ago I worked with a friend and his small debt collection agency to develop software for collecting debt and keeping track of debtors. And of course, some basic education within economics – and an interest in the field – has made me think differently from the people who have only their personal history to draw on. And here's what I thought:

If you can peddle loans with an interest rate of 30%, why doesn't every bank and every finance institution do this with all their might and all their heart and all their soul? After all, that's a truckload more money than they could get in any other legal way. But if everyone did this, the market would be saturated, and the only way to stand out from the competition would be to lower the prices. (Money is a very generic product, you know. You cannot advertise that your money smells better than other banks' money.) So eventually someone would set their interest rate to 29% instead, since they would get most of the customers and still earn a truckload of money from it. And then everyone else would have to do it too, and then you would have to go down another notch, on and on until there was so little to win from it that you didn't much care.

What is wrong with this picture? Why aren't common banks more eager to push these loans? That's where my time with debt collection comes in handy. The problem is that a large number of the loans are never paid back, and others only in part or very, very slowly. There is a reason why these customers are desperate. They don't save money, they don't have any collateral, and they don't have any friends of family with money, otherwise they would have asked them instead of paying crazy interest. This means they are not in a very good position to pay the money back either. The banks do a credit history check and some such, of course, to weed out the people who are hopeless. The hope is that the rest will eventually pay if you squeeze them hard enough. But this is hard to hit exactly. Some people may have been resourceful enough in the past, but suddenly fallen on hard times. They may have just divorced or said goodbye to the Lord and hello to heavy drinking or some such. And even if not, something may happen to them before the money is paid back, and they don't have anything to back them up when that happens.

***

The short of it is, this is not a lucrative market segment after all. The competition is not fierce, because the risk is so high. If they didn't charge high interests, they would run a loss. So the reason why virtually nobody talks about usury these days is not that capitalism has made it so commonplace no one notices it. No, capitalism has made it impossible. With a liquid capital market, everyone can get the loan they qualify for. It is just that in some cases, that is not a very lucrative one.

Of course the motivation is still to earn money, as with all other lending and most other activity outside the private sphere. But attempts to erase greed from the human psyche have failed spectacularly. This is not something that can be organized away. The last trace of usury will not be gone until we have had a revolution of the mind, until we all realize that others are as valuable as we are. For real, not just on Sunday. That's still a way off, I'm afraid.