Is Modern Banking Fundamentally Flawed?

Jamie Dimon, CEO of JP Morgan Chase and board member of the New York Federal Reserve (a banking regulatory body), advocates not only that financial regulation reform is not necessary, but also that deregulation is the best course for the American financial sector. Meanwhile, JP Morgan lost $2 billion in an effort to reduce risk. President Obama quickly pointed out that if one of the smartest bankers in the room can preside over such a massive loss, then a deregulated financial sector would likely present us with an unacceptably high level of risk to the entire financial system (and economy). Elizabeth Warren suggested that relying on bankers to regulate themselves would not reduce the systemic risk. The alternative would seem to be strengthening financial regulation, even though—according to Sen. Dick Durbin—“the banks own Congress.”

Perhaps the problem with systemic risk in modern banking goes deeper—beyond how it can be effectively regulated—meaning made regular in line with the public good—and, moreover, beyond what our reigning modern perspective will permit us to acknowledge, let alone see. In ecclesiastical terms historically, lending was classified as a kind of charity, specifically to the poor, as the rich presumably are not in need of lent funds (by definition). In other words, the leverage assumed by the wealthy and corporations is unnecessary. Starbucks needs the funds to build four hundred more stores in China. Wal-Mart needs additional money to buy land for new stores in major American cities. Capital from stockholders is presumably not good enough. The capped cost of leverage relative to a lack of limit on profit attracts greed to favor borrowing over raising capital through stock. The vested interests of existing stockholders (often including the executives who control their corporate boards) seals the deal on leverage as the drug of choice, even if it is not in the long-term best interests of the respective companies. Such a view of borrowing and paying (and earning) interest is worlds away from the original purpose of lending.

Viewing a loan as alms to the poor, lending with interest was originally thought to be unjust. At the very least, it was viewed as unseemly to profit in the giving of charity (although modern corporations do it all the time and get tax deductions for it, besides good public relations). Furthermore, the property (i.e., the substance of the money) lent was viewed as being inseparable from its use (i.e., as a means of exchange). The substance of money is its use, according to that view, so charging more than the money itself (i.e., the principal) is undeserved surplus. Such profit was historically reckoned as being theft. It is not good form to steal from the poor to whom one is giving alms. It is like biting someone while handing him a $20, which he needs to buy lunch (and will return later).  “Hey, I forgot my wallet today and I didn’t bring my lunch. Can you help me out? I’ll pay you back tomorrow.” If of charitable good-will, the acquaintance would reply, "Sure, here you go." If of ever greater (i.e., self-less) good-will, the lender would add, "and don't worry about paying it back." This is lending at its finest. Demanding that the borrower pay more than simply returning the $20 would represent far less than accepting the principal back. Beyond unfairness, taking interest regardless of the borrower's circumstance evinces self-idolatry.

Specifically, for a lender to receive surplus (above the principal) without labor or uncertainty (having transferred the risk to the borrower by requiring repayment) is not only unjust because it violates the risk/return relationship (i.e., a higher return is justified by assuming more risk), the certainly assumed (artifiically) by refusing to accommodate or share in any losses incurred by the borrower is rightfully only that of God. That is to say, it is self-idolatry to assume a divine quality like certainty. Furthermore, the power that some lenders presume to have over delinquent borrowers can be interpreted as an attempt to claim God's power (omnipotence) for oneself. Altogether, arrogance and the infliction of harm come from making oneself an idol (i.e., as if divine).

That which usury risks in terms of morals and self-idolatry is utterly foreign to us moderns. The original charitable purpose of lending is also lost to us in part because we are so used to our own view of lending being the default and the necessary of commercial lending in our economy. Moreover, we assume our assumptions cannot be wrong, and so we do not question whether merely charging interest is inherently unjust and a sin against God. We assume we know the purpose of lending as if it had no history.

In 1612—exactly 400 years before this writing yet late enough that commercial lending was already well-ensconced in the economy—Roger Fenton, a Puritan divine in England, opined strenuously that the sin of usury is inherently unjust. “Where we finde no iustice, what hope can there be of charitie?” Salomon puts mercy as the opposite of usury. “Wherefore vsurie may well be termed a biting . . . it eateth out the very bowels of compassion.” Usury perverts the act of charity, “turning it into an act of selflove.” Usury is against “the Canon of that Charitie which seeketh not her owne, to respect the good of others; [usury] is turned to his owne proper lucre and gaine.” (Fenton, 1612, p. 106)

Injustice does not admit of mercy manifesting as charity. We moderns are so wrapped up in our self-love that we can scarcely imagine lending as an act of compassion. The Canon of Charity to which Fenton refers is the Golden Rule, whose equity guides the Calvinist view of justice as love and benevolence to all. Such benevolence is fueled by selfless love (agape), rather than higher self-love (caritas) directed to God. We moderns can scarcely recognize this theory of justice, so used are we to strict legal justice which limits one’s duty to paying for one’s crime. That the other theory of justice might be applicable to lending is apt to strike us as odd at best.

Nevertheless, the problem behind even the best bankers of today being reckless even as they advocate for deregulation may extend beyond the antiquated debate on regulation to include the making of something borne of something natural (compassion) into something artificial. That lending was designed to be a species of charity may mean that problems are necessarily entailed in using banking for leverage.

By analogy, a person might have been brought up one way and therefore have considerable trouble in adjusting to a way of life that is at odds with that upbringing. The problem facing the person would go beyond simply regulating the new life because a basic inconsistency is in such a drastic change. Were the person to know only the new life, having forgotten one’s upbringing, she would have no clue as to why she feels fundamentally ill at ease. She would look for things in her new life to assuage the difficulties, which nonetheless transcend that environment and therefore require a more basic solution.

Besides relying too much on debt for personal and business use, we as a society are cut off from the original (i.e., designed) use of lending as a means of mercy rather than to profit. Perhaps our perspective is more limited than we think, and the problem much deeper than we realize. Given that “cloudie conceits do hang in the braines of men, which cast a dye and tincture vpon the vnderstanding,” seeing usury “so much practiced of all sorts . . . men are euen thereby without further examination much moued to thinke it lawfull.” (Fenton, pp. 108-9). Yet further examination demonstrates just how limited our tiny window in modernity is—even in spite of our lauded technological development. Our “advancement,” in other words, may blind us to being so wrong about lending even as it is ubiquitous in our world.

By 2012, for example, $1 trillion in student loan debt had accumulated in the United States. Rather than the mercy of charity in waiving interest and even the principal in particular cases of dire need, such a load on poor students represented the hubris of a society run amuck on its own conceit and greed. Such a disparity exists between such selfishness and charity that the notion of debt forgiveness even for the poor is thought of as an unforgivable unfairness rather than as charitable equity that is essentially agape seu benevolentia universalis.

Source:

Fenton, Roger, A Treatise of Usurie (London, 1612). In The Usury Debate in the Seventeenth Century: Three Arguments (New York: Arno, 1972).

Wall Street CEOs Suffering with Lower Pay: Self-Preservation or Greed?

As much as the titans on Wall Street pull in during a year, they still want more. It must be human nature. If so, nature may be at odds with narrowing economic inequality. Even as 2014's compensation figures show such a narrowing, I suspect that such a case is an exception rather than being indicative of a fundamental shift.

The CEOs of the five largest U.S. banks made on average 124 times the average worker at the banks in 2014. The corresponding figure for 2006 is 273 times. The CEOs were not hurting in 2014, however; collectively, they got $92.5 million ($18.5 million per CEO on average). The collective figure for 2006 is $173.6 million.[1] Meanwhile, the banks’ employees saw their compensation rise by 17% to $148,740 from $127,379. According to The Wall Street Journal, the increased reserve requirements under the Dodd-Frank Financial Reform law of 2010 made it costlier for the banks to increase profits by taking on more debt (i.e., leverage), and the CEO pay suffered accordingly.

Suffering may not be the best term to describe a CEO’s average pay of roughly $18 million per year. How much of that figure can even a person awash in luxury spend in a year? Doubtless, a significant amount is invested. Were I among that elite cadre, I would lean toward investing as much as I could so that one day I could live comfortably and with security of mind off the investment income. A job cannot be relied on in perpetuity. Even investing in just one company (e.g. Enron) or even one industry entails some risk. Moreover, I would diversify my portfolio internationally with security of mind foremost in mind.

I mention “security of mind” because the economizing instinct does not turn off after a certain level of income or wealth has been achieved because the future is almost by definition uncertain. Put another way, you never know for sure whether what you have stored away in a savings account will be enough even for survival needs. So the bank CEOs were probably scrambling in 2014 to come up with non-leveraged ways of increasing earnings per share as if $18 million were not enough. This is an instinctual rather than a rational dynamic although reason does confirm that nothing in the future is absolutely certain.

Profit-seeking activity and accumulated wealth do not necessarily indicate the presence of greed, or love of economic gain.[2] So it is possible to go on with the economizing instinct without necessarily being greedy. Where the instinct is exaggerated or multiplied into an obsession, however, love of gain is very likely in the mix. For the 5 CEOs, reaching the point of being able to live off very well diversified investment income is quite possible. At that point, whether or not the CEO continues on with the instinct may give us a sense of whether greed has taken over.

From my own experience, I have struggled with whether to stockpile too much food in case I ever need it. For instance, I spent Easter 2015 volunteering at a Christian church’s meal for the impoverished and food pantry. I was selected for heavy labor on the tables since I was the youngest among the volunteers (which really says something). Before the meal, I could go through the pantry myself to get some food supplies. Even though the volunteer taking me through the pantry would not have curtailed my appetite to stockpile, I kept well within the allotment that anyone would get.[3] The following day, however, I could have returned to the church and helped myself to still more, but I asked myself, How much is enough, really? Sure, I could have used the additional food, but I could not shake that question, so I did not avail myself of the church’s generously-stocked outdoor cabinet that was always open; I would not abuse the church’s openness, which I had seen so little of when I had volunteered at food pantries in my rather sordid hometown. My point here is that I felt the instinct to stockpile and I could see its relation to food-security, yet I could not cleft the presence of the economizing urge from what greed might have been in me at the time. At any rate, a normative constraint can indeed be efficacious against the instinct and/or greed, though I don’t think a society can rely on such a check.

That even a Wall Street CEO cannot be absolutely certain that he or she would not want for necessities ever again leaves open the possibility that the economizing instinct—being inherently without a limit (i.e., a maximizing variable)—could still be operating rather than or more so than love of gain. Distinguishing the motive of self-preservation, which Thomas Hobbes emphasizes in Leviathan, from loving economic gain (not to mention taking it as an end in itself) is difficult. Whether a person seems to be obsessing on getting as much money out of other people as possible, especially if coupled with a willful disregard for related harm, however, can be taken as a good indicator of greed.

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[1] Peter Rudegear, “Wall Street’s Pay Gap Slims,” The Wall Street Journal, April 6, 2015.

[2] Clement of Alexandria, a theologian in early Christianity, stressed that a person can be rich and yet cap his or her desire for more at the level of necessities. Augustine would disagree, and thus place limits on wealth before it can be taken as being indicative of underlying greed. See Skip Worden, God’s Gold: Beneath the Shifting Sands of Christian Thought on Profit-Seeking and Wealth,” ch.s 3 and 4.

[3] The ham supper was excellent, by the way. Just before the meal, people wanting food from the pantry were given tote bags with numbers attached, As they were called during the meal, the individuals would go to the pantry room and quickly return to their meal. I had the pleasure of sitting with a mix of low-income people and church members. I was impressed that everyone got into a discussion of the U.S. Civil War. We even had a confederate!  Our table was a microcosm of society re-integrated. In contrast, the Wall Street CEOs doubtless live in their own world, and sadly so do most poor people.

Should Entitlement Programs Be Cut?

If human beings have survival among our inalienable rights as citizens for whom both rights and duties apply, then we as a society must grapple with how sustenance can be guaranteed to those among us who are not meeting their own needs. I put it this way to highlight the lack of conditionality in the right. That is to say, if it is inalienable, then it is irrelevant whether the person is lazy or of a bad temperament.

 Sustenance or "extra" cash? Only one is a human right.   (Image source: timthethief.com)

To be sure, in 2 Thessalonians 3, the Apostle Paul  declares, “For even when we were with you, this we commanded you, that if any would not work, neither should he eat.” I suspect that many moderns, particularly in America, agree with Paul here. Unpacking the quote, I submit that a number of subterranean assumptions lurk just below the surface. We naturally assume that Paul was not referring to a woman who cannot work because she was so brutally gang-raped that she is mentally and/or physically unable to work. We assume the Apostle did not have a blind and mute old man in mind. Rather, we assume that the person is a deadbeat, seeking to have others work while he enjoys himself, or that the person has a pernicious personality and therefore cannot secure even a menial job because no one could stand being around him. The punishment we dish out against the deadbeat and the rude man is a death sentence, in effect.

That the rest of us might be engaged in self-idolatry in setting ourselves up as Judge goes without punishment in our convenient scheme. Our presumed entitlement to omniscience (all-knowing) goes under the radar screen. We presume we are fit to know why some among us do not meet their sustenance needs on their own in an interdependent modern economy, and we feel at liberty to pronounce judgment based on the motives of others that we presume to know. Perhaps the poorest among us should pronounce judgment on the rest of us! The unassuming poor in spirit could quote the following from Matthew (19:30), “But many who are first will be last, and many who are last will be first.” This line refers to the Kingdom of God, which in crucial ways turns the world’s logic upside-down or ties it up like a pretzel so the worldly wise are confounded into fools even as they count themselves as clever.

The typical rationale made by those citizens among us who do not regard sustenance as an inalienable human right in a civilized society hinges on the assumption that charity can fill the gap. Even though human beings need at least one meal a day (many of us used to three!), the assumption here is that such a demanding requirement can be met by chance as people give to charity. The fallacy here lies in presuming certainty in something that is not.

Indeed, an examination of the giving pattern of the wealthy in America suggests that sustenance is not even a priority. According to the 2011 report of the American Association of Fundraising Counsel, 32 percent of the $298 billion given away by Americans went to religious organizations, 13 percent to cultural organizations, and only 12 percent to social services. It cannot be assumed that the bulk of the money going to religious and cultural organizations went directly to sustenance for the poor.

Furthermore, the Chronicle of Philanthropy indicates that the top five donations, totaling $190 million, in New York went to Columbia University’s business school, the Metropolitan Museum of Art, and the Brooklyn Bridge Park Corporation (for the building of an indoor cycling track). Not one of the top 49 gifts went to support social services explicitly, yet somehow charity can be relied on to bridge the gap in health-care, housing and food for those who would otherwise die without such sustenance.  Rarely if even do we as a society ask whether an indoor cycling track should be conditioned on the sustenance of every citizen (or legal resident) having been satisfied. A new terminal or runway is typically viewed, at least implicitly, as having an equal (or higher) claim on our resources, societally.

Were sustenance treated as an inalienable human right to which an explicit duty of citizenship would correspond, society would be more than an aggregate of individuals out for themselves. Lest we assume that no one would work if a basic security based on the value of solidarity were known to be met, personal ambition would doubtless show itself as going beyond a concern for mere sustenance. In other words, enterprise would not falter. We have no idea how it would feel to live life with a basic, or existential, security in knowing that if the worst were to happen to us, we would not starve or be homeless or go without needed medicine for want of voluntary charity by others. We have no idea how such a basic psychological security would permeate and thus impact society, not to mention something called "quality of life."

Instead of exercising statesmanship for the good of each other, we as a body politic make it harder on even ourselves than need be because we presume that such a basic security would be at our expense and undeserved by the beneficiaries. In other words, our selfishness is ultimately at our own expense, and society itself is held back in the process. In other words, we get the cities we deserve. The sad thing is that the perpetuation of the existential insecurity is so unnecessary and ultimately in nobody’s interest. Even so, we keep stumbling over ourselves in avarice so to keep what we have, and relatedly in fear that someone might possibly get something for nothing at our expense.  In our presumed omniscience, we conveniently assume that we cannot be wrong, and this seals the deal on our small fate.

Source:

Ginia Bellafante, “Bulk of Charitable Giving Not Earmarked for the Poor,” The New York Times, September 8, 2012. http://www.nytimes.com/2012/09/09/nyregion/bulk-of-charitable-giving-not-earmarked-for-poor.html?hp