Monday, May 12, 2008

Amos and the Consumer Credit Industry

After finishing I-II Kings, I reread Amos, Hosea, and Micah, the great prophets of the pre-exilic Northern Kingdom. They are also the great prophets of justice, particularly Amos. But reading them today, we implicitly translate. What is it they are attacking? Economic development, urbanization, centralization of rule: these are some answers offered by historians for the abstract description of their processes. See this previous post on Jezebel here. A problem with this reading is that if that's the point, they become pretty unusable to us today. Can de-industrialization and return to agrarian life really be an agenda for the church today?

Others say that the enemy described is capitalism as a system of seeking profit, and that today's answer is social democracy: a system of centralization and urbanization that aims to supply as many services in life as possible by tax-funded public programs. The problem with this being the a response to the prophetic denunciation is that Amos, Hosea, and Micah are explicitly harking back to the multi-generational family ideal of the Law, the idea of each family being settled on a particular plot of land, and so being tied to the family before the state. All of this is flatly contrary to any conceivable notion of social democracy (More here and here.)

I would like to suggest abuse of consumer credit (particularly in the housing industry) as the best usable answer today (and by the four laws of intertestamental Bible interpretation, the Bible is always relevant). Here's a shocking article by Elizabeth Warren on the new wild west of consumer credit from Harvard Magazine.

Here's how it starts:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact. Similarly, it’s impossible for the seller to change the price on a toaster once you have purchased it. But long after the credit-card slip has been signed, your credit-card company can triple the price of the credit you used to finance your purchase, even if you meet all the credit terms.

And here are some of the crazier grafs:

For example, after 47 lines of text explaining how interest rates will be calculated, one prominent credit-card company concludes, “We reserve the right to change the terms at any time for any reason.” Evidently, all that convoluted language was there only to obscure the bottom line: The company will charge whatever it wants. In effect, lenders won’t be bound by any term or price that becomes inconvenient for them, but they will expect their customers to be bound by whatever terms the lenders want to enforce—and to have the courts back them up.

Talk about getting your neighbor’s goods in a way that only looks right! The author explains how long-standing regulations have been virtually voided by imposing the much looser federal regime on the closer state regulations propounded when banking was limited by states. She proposes a Financial Products Safety Commission (modeled on the Consumer Product Safety Commisssion created by President Nixon:

For example, an FPSC might review the following terms that appear in some—but not all—credit-card agreements: universal default clauses; unlimited and unexplained fees; interest-rate increases that exceed 10 percentage points; and an issuer’s claim that it can change the terms after money has been borrowed. It would also promote such market-enhancing practices as a simple, easy-to-read paragraph that explains all interest charges; clear explanations of when fees will be imposed; a requirement that the terms of a credit card remain the same until the card expires; no marketing targeted at college students or minors; and a statement showing how long it will take to pay off the balance, as well as how much interest will be paid if the customer makes the minimum monthly payments on the outstanding loan balance.

Framing the issue this way opens a different perspective on our economic system. Compared to ancient Israel, or any agrarian economy, capital is amazingly cheap today and interest rates over-all shockingly low -- and that's a good thing (sorry, Mr. Jefferson and Mr. Barry). Here's a story of credit abuses from the North China under the Mongols in the 1240:

All at the same time, endless schemes were used to push people into accumulating debts. In addition, debts which the clerks in office had borrowed from Turkestanis lending silver each year would double. The next year with the interest added in again it would double again. This was called “sheep’s-lamb-profit.” The debts simply never ended and they often destroyed families and scattered clans, to the point where wives and children had to be pawned, yet in the end could not be redeemed. Yelü Chucai [a Kitan Confucian serving the Mongols] asked His Majesty and all the debts were repaid in silver with official funds, totaling 76,000 ding. He memorialized as well that it be fixed from now on that no matter how many months or years have passed that when the interest has come to equal the principal, then the loan will no longer bear interest. This then became a set rule (from Song Zhen's biography of Yelü Chucai).

In other words, it was a big reform to limit annual interest to -- 100%!! That's rather worse than even credit card debt! And even this reform didn't really work: scarcely twenty years later we read:

As wealthy people loaned money to the civilians, it would happen that the interest would equal the principal, and would then be added into the principal and a new contract drawn up with the interest added. When the term expired, the debts had to be repaid; it was called “sheep’s lamb interest.” The cruelty of their dunning debtors involved, for example, threatening them with fire in the summer or putting them in icehouses in the winter, and the people could not deal with their malice. Lian Xixian [a part Uyghur, part-Kitan Confucian and big fan of Mencius] corrected their suffering. Even though the term had long expired, it was not allowed exceed in settlements the repayment of the original principal and interest. If some one got more, then he had all the contracts seized and burned and then would treat them according to the regulations (from Lian Xixian's biography written by Gao of Henei).

So even enforcing a limit of interest to 100% is tough in an agrarian society!

Capitalism and economic development have created an economy in which in general and overall, consumer credit is available on amazingly easy terms, historically. The thirty-year mortgage is one of the great achievements of equity and humanitarianism. It is all the more valuable as it works to reinforce, not weaken, the family as an autonomous little commonwealth (more on this point here). But as we see in the sub-prime loan scandal, that achievement of a consumer credit industry that serves people and does not prey on them is always threatened by a return to speculation fever, both on the part of big lender Honest-Johns, and the little Pinocchios who think they can play the system.

So the solution is neither mooning after a return to agrarianism, futile prohibitions on lending on interest, or exhortations to never borrow money (people need capital, and rightly managed it is a vital part of ordinary life), nor is it a public housing industry, whole-sale income redistribution, and a generally condemnation of capitalism as built on greed, nor yet a general bail-out of debtors who tried to buy and flip houses, but rather a regulation of the consumer credit industry, limiting it to honest profits, something like what Elizabeth Warren suggests in her article. And specific denunciations of consumer credit loan-sharks wouldn’t hurt.

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