Debt - The Devil and the Detail
Historically major world faiths, especially Islam, Judaism and Christianity, have prohibited lending money at interest. Any lending, especially at high rates of interest, to people facing permanent or temporary shortfalls of income relative to their aspirations or requirements for consumption
Debt can have the significant effect of trapping people in poverty. Atif Mian and Amir Sufi’s book - “House of Debt” states clearly, “this is a fundamental feature of debt; it imposes enormous losses on exactly the households that have the least.”
The former Bishop of Worcester, Peter Selby, put it very succinctly in his book “Grace and Mortgage”:“Lending money at interest transfers money from those who need it to those who already have it.” The book is a reflection on the deeper meaning of the 2007-8 financial crisis. In the course of a book which opened many people’s eyes to the corrosive effects of debt, he writes of when his children went to university. They had been brought up not borrow money, but were immediately required to take on a student loan and offered interest free overdrafts by banks who hoped that they would one day become borrowers who paid interest.
The title of his book draws a contrast between the grace of God, available at no cost, which opens up a future of hope and potential, and mortgage or debt, which carries considerable cost and closes down the future for all too many people.
This is sadly all too true for personal credit, extended to fund consumption. As commerce and economic structures grew ever more complex, Christianity at least recognised that a complete prohibition of usury was an impediment to economic progress. John Calvin was prominent in changing the church’s attitude in the sixteenth century.
A more nuanced view allows us to recognise three broad categories of lending, the third of which has generally been held to be beneficial for the parties involved.
Firstly, lending can be for the purchase of existing assets, the stock of which is not increased as the result of the lending. Principally this means land/property, and the inevitable result of an increased money supply seeking a fixed supply of land/property is inflation of real estate values. For individuals this may serve a useful social purpose, as they feel better off, but overall it generates credit and asset price cycles ending in crises and recessions. Inequality increases as some grow asset rich, whilst others are excluded from purchases by rapidly rising values.
Secondly, we have lending for consumption (personal credit), as outlined above. This always runs the risk of exploiting the borrower, and trapping them in debt.Recently the Financial Conduct Authority identified 3.3 million people in that position, with people paying £2.50 in interest for every £1 borrowed.Credit card debt was rising at its fastest rate for 11 years.
Thirdly, there is lending which increases productive capacity. The arrangement between creditor and lender is essentially that the loan is repaid out of the proceeds of increased or more profitable production. Neither can be said to exploit the other where there is the opportunity for banks to compete in lending the requested funds. Although the lender may take, as loan security, a ‘1st call’ on the assets of the business, it does not share the same level of risk as if they took a stake in the equity of the venture.
Lending by banks is one means by which money is created. Excessive creation of money can lead to inflation (“too much money chasing too few goods”). However, if sufficient goods are produced as a result of, and in proportion to, lending, the risk of inflation is minimised.