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Thursday, 16 July 2015

That Which Is Owed

WARNING!!! This blog post gets quite rambly about finance, and is made from the perspective of a bit of a leftie amateur economist. Read on but be warned!

Once upon a time, there was a sin called Usury; and Usury was the sin of charging interest on a loan or transaction.

We are talking a long while ago, mind. Biblical times. There's a couple of verses that address the issue directly - essentially saying that you can do it to every other bastard, but not to your homies:
Exodus 22:24 (25)—If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.

Deuteronomy 23:20 (19)—Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest.

Deuteronomy 23:21 (20)—Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it.
...which is interesting, because even in a historical sense, right there - it's recognised as Not A Good Thing. Fast-forward to 325AD  wherein, at the First Council of Nicea, clergy (and later, laity) were forbidden from charging interest to ANYONE.

The Qur'an has something to say about it too:
Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
So...interest. Not cool bro. Not cool at all.

Smashcut to 2015, and if you try telling anyone that interest is a bad thing, they will think you are crazy. Interest is so ingrained into our lives that we barely even notice it any more. It's made a lot of money for a lot of people (and cost a lot of people a lot of money too).

Interest made lending money to people very profitable indeed. It led to the financial institutions as they exist today, as huge and monolithic as they are, with traditions, laws and practices that extend back centuries.

It's why people, civillians lets say, talk about being in debt, or getting into debt. It's a Bad Thing. While loans are Good Things (they help cashflow which can lead to more money being made for all) debt is a Bad Thing.

On the other side of the coin, debt is - to financial institutions - a fungible product. It is a thing. It can be traded, bought, sold. It has a value. When a bank makes a loan to a person, they are investing in them - and that investment repays. What happens if it doesn't repay? The remaining debt is sold to a recovery agency or similar, for a small percentage of the original value - and they then chase the debtor, for the full amount plus a markup.

There's all kinds of laws in place for loans, of course. The maximum interest one is allowed to charge, for example - the once-evil concept is regulated, tamed, made into something that is profitable to the lendor without crippling the debtor. Risk should factor into the decision to offer loans and at what rates, too - the current financial crisis is what happens when loans are handed out en masse to those that are at higher risk of default or failing to repay. Credit ratings are a numeral indicator of risk as seen through the eyes of credit companies, from the data they can access on one's lifestyle.

The regulations are in place as much for those taking out the loans as for the banks and institutions lending them out, of course. A bank can only afford to have so many of its loans go bad before it doesn't have enough cash to operate properly, and suddenly, Too Big To Fail becomes Shit That's A Big Failure.

Either way, when a bank makes a loan to a person, the two parties make agreements. They agree to a schedule of repayments and an interest rate, for example. They agree what happens if the debtor defaults. That's what those bits on the contract that you sign say, anyway. A good bank will offer a competitive interest rate, sensibly limit how much money they lend to people with consideration to how much they can afford to pay back, and up-front tells the person they are lending to what happens if they don't pay it back.

What the bank doesn't get to do is tell you how to manage your finances after the fact. It doesn't tell you how you should be working, what you should be saving, that you can't go out for a pint on Friday because if you do that then you may not be able to repay the loan. They work on the assumption that you aren't risky - that you won't blow the entire loan on hookers and blow and then try and flee the country.

Debt recovery agencies are a little more harsh than that, depending on circumstances. If you clearly can pay what you owe, they'll come after it, hobnail boots jammed into doorframes, seizure orders, the works. If you cant pay, however, they tend to work with you. They try to ascertain what you can afford to pay, and then get you to pay it - because they want to get paid. You don't get money from people who don't have a lot by demanding the entire thing while threatening to snatch their matress. You work with them, you come to an arrangement - they get paid, and eventually, your debt is cleared.

This approach shows that most debt agencies actually know more about austerity (and how it isn't actually good for anyone) than its proponents.

Lets say a small business owner defaults on a loan, for whatever reason. Their income is 800 credits, their outgoings are 700 credits, and they default on a debt of 1200 credits. A letter lands on their doorstep demanding 1500 credits - that's the original debt of 1200, plus 300 for the recovery company's time.

A smart recovery company will come to an arrangement with the business owner. They can afford to pay back 100 credits a month with absolutely no quarter for potential failure, decreased sales or increased costs. So the smart company comes to an arrangement for less than that - say 50, spread out over 30 months. It'll take them a long time to get paid, but they'll have gotten paid, and the business they are collecting from won't go bust and fail to complete the payment schedule. It is reduction of risk, to avoid gouging a debtor so hard that their ability to repay you is impaired.

Or in other words: don't shit where you eat.

Where am I going with this ramble? Why, Greece is the word.

In short, they are probably considered high risk at this point, which is perhaps understandable. Currently, though, the raft of measures that are being deployed to arrange repayment is shitting where you eat. If the IMF expects the Greek economy to recover, then demanding austerity AND a harsh repayment schedule is beyond foolish. Austerity doesn't help anyone repay anything. It slows economies down, reduces monetary circulation, and hobbles spending power - spending power such as that needed to repay large loans to the IMF.

Which is going to get them into trouble, probably. Maybe another default - which may lead to another set of bailout loans.

Now...if a mobster made a loan to our same businessman from earlier, and they were to default. 800 credits income, 700 credits outgoing, 1200 credits owed. The mobster sends the boys round, demands 1500 - but demands 300 of it up front; more than the businessman can pay without crippling his business.

Either 1) the businessman fucks his business and pays the 300 credits but can't ever pay back the rest as his business is gone or 2) the businessman says he can't pay that much.

Well that's fine, says the mobster, cracking his knuckles. We'll take 100 now...but you'll owe us 2000 credits later. And the businessman agrees, and cuts to the bone, so he can afford to spend a credit on food as well as keep paying the mob - and that's great...until his outgoings increases to 710 credits due to inflation or a supply problem.

Mobster sends the boys round again. Can't make the payment? Well that's fine...we'll lend you a little more to get you out of trouble. But here's the thing. You're gonna need to be paying us 120 credits a month for twice as long to cover it all.

If you heard about this happening to someone you know - well you'd demand they call the police, because that's loan sharking. Engineering a financial difficulty for someone in order to profiteer from them? Highly illegal, amoral, and part of the reason why usury was a sin.

But if the mobster is a huge financial institution and it is sending the boys around to entire countries...well, nobody seems to think that's as messed up as it really is.

This is what austerity does. In times of poverty, those that do well are those who take advantage of others. It is a predatory environment, and sometimes the predators hunt prey as small as a person - and sometimes they go for entire nations. If another country tried to rob the Greek economy directly, they'd be met with military force, but these robbers wear suits and are acceptable parts of society.

Keep this in mind: whenever a cut is announced, and it's to "reduce the deficit" - that is going into debt owed to loan sharks, a group of rich people in an office deciding what we're worth as a nation and gouging us for every single penny they can. In ancient times we saw this as wrong. In day-to-day life we know it's wrong, on a personal level. Why is it okay on a global scale?

If we're to approach this moralistically, and ethically - it's not.

National debt is profiteering on a grand scale, and we shouldn't be okay with it. Neither should the Greeks - and neither should the Germans.

Usury is a sin. that's off my chest...back to our regularly scheduled programming.

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