Reverse Usury

Reverse Usury

(The economist plays theologian again; get the laugh track ready)

Effective Federal Funds Rate

I am aware of the notion of usury, and that its moral character has been debated. My own opinion is that interest rates are simply prices that equate the demand and supply of loanable funds: Bob has extra cash that he doesn’t need but would like to see its value appreciate (much like his IRA, his house, or his classic car), so he lends to Joe who needs cash now to pay for whatever his heart desires at the moment. Joe’s demand for the item exceeds his value of the principal and interest on the loan; thus, he would rather have the item now than have the money later. They agree to an interest rate, exchange, and all’s well with the world.

My point in this post is not to argue the morality of high interest rates, but rather the morality of low interest rates (I’ll call it reverse usury). The Ben Bernank has been keeping Fed rates terribly low for the past few years (click to enlarge the nearby FRED graph), which feeds through and puts pressure on most other interest rates to stay low too. This would seem to evoke huzzahs from the anti-usury party, but consider:

  1. Low interest rates are attractive to borrowers (the intention of the Fed) but unattractive to savers. What happens to the practice of temperance and frugality when the difference between spending and saving a dollar is a measly 0.25% interest? Do we encourage consumerism by keeping rates low?
  2. Widely recognized among economists is the link between saving and investment, which drives economic growth and standards of living. If people don’t save, banks don’t have investment dollars to lend to businesses who want to purchase more efficient equipment or expand to underserved areas. Yes, I realize it seems like a chicken-and-egg thing since savers want high rates and borrowers low rates, but if low rates do not encourage savers to save, investment funds dry up. The result is outdated equipment which wastes our scarce resources and ultimately leads to lower standards of living, more poverty, more unemployment, etc.
  3. The Austrian theory of the business cycle suggests that low rates set by central banks cause overinvestment, where projects that would be deemed unprofitable given normal interest rates are pushed into profitability through artificially low rates of borrowing. This malinvestment is realized later (as, arguably, the internet and housing bubbles were) and small- or large-scale crashes occur; interest rates rise to normal or above-normal levels to clear out the malinvestment. To fix the recession (that it caused with its earlier loose money policy), the central bank again lowers interest rates to “get the economy going again.” If high interest rates or usury are condemned because of the possibility of causing financial ruin for the borrower, low rates that spur a market crash can do exactly the same thing.
  4. The anti-usury side, in my opinion, seems myopic in decrying high rates because they focus only on the borrower and don’t consider the risk undertaken, and services provided, by savers who charge high rates, nor do they consider that some borrowers really do want the money now and are willing to pay higher interest later. Keeping rates artificially low penalizes savers or lenders at the expense of borrowers. I imagine the argument will be made that the saver is in a better financial position than the borrower (or else why is he borrowing?), but I don’t buy it. Right now, I am both a borrower (mortgage, car/student loans) and a saver (direct deposit to my bank). What if GM wants to borrow money to design a replacement for the Chevy Volt and sells bonds to individual households (who have retirement funds through their jobs) to get it? Here you have a huge corporation borrowing from very small savers; why penalize the households for GM’s benefit?
  5. The cause of low interest rates by the Fed is a huge influx of money into the money supply which ultimately reduces the value of our currency (i.e., inflation). Yes, the CPI hasn’t budged much lately but tons of new dollars cannot help but increase prices eventually. If usury is morally problematic, is inflation caused by low interest rates not?

Loan Shark -- photo by Jesse Wagstaff

I’m aware the Church won’t offer an opinion on current Fed policy (thankfully!), but I am curious what other religiously-minded folks think about it. Is Ben Bernanke more ethically upright than a loan shark?