Wednesday, September 17, 2008

Good Credit/Bad Credit

Today's Squeak From The Wheel™ has to do with the campaign seemingly being waged against all forms of credit, as opposed to realizing that there is a substantial difference between credit used to buy something that pays for itself, and credit used to buy something that does not generate income. As always, I encourage you to plagiarize these ideas mercilessly (they aren't mine, anyway), and write your own letter or two.

Dear Sir(s):

The quote from Charles Kindleberger in Tuesday's Wall Street Journal ("Review & Outlook: Surviving the Panic," WSJ, 09/16/08, A24) while correct, left out a very important qualification: financial manias throughout history have shared one trait: the excessive expansion of credit . . . for the wrong reasons. There is nothing wrong with credit extended for financially feasible projects, that is, for the purpose of capital formation, "capital" being (in this context) something that pays for itself out of its own earnings. Extension of credit for productive purposes was, as Dr. Harold G. Moulton of the Brookings Institution pointed out in his 1935 classic, The Formation of Capital, how the United States financed the explosive growth it experienced between 1830 and 1930.

Examining financial panics throughout history, whether Holland's Tulip Mania, John Law's Mississippi Scheme, the South Sea Bubble, the Panics of 1819, 1837, 1873, 1893, and 1907, the Florida land rush, the Crash of 1929, or the current sub-prime mortgage debacle, we find that in each and every case the bubble resulted from diversion of credit away from productive purposes and, often, into non-productive, speculative ventures. Subsequent drying up of credit for productive purposes — capital formation — plunged the affected economies into recessions and depressions, from which in some cases the economies took decades to recover . . . just in time for the next round of speculative frenzy as people eschewed hard work and sound credit for capital formation in a quest for the fast dollar financed by other people's money. The perverse insistence on expanding bank credit to finance speculation and government debt, while leaving industry, commerce, and agriculture to seek financing out of existing savings or do without, has crippled economic growth ever since the beginnings of central banking in the 15th century.

The problem is not that credit is bad, but that the wrong kind of credit is bad, as Aristotle pointed out twenty-five centuries ago. Lending or creating money for something that does not generate income to repay the loan and charging interest is called "usury." Pagans, Jews, Christians, and Muslims have condemned usury from the dawn of recorded history. Lending or creating money for something that generates income to repay itself is not, however, usury, and is even in some circumstances considered the eighth or highest form of charity.

A proposal that would allow the Federal Reserve and the commercial and investment banking systems to function as intended is "Capital Homesteading for Every Citizen," from the book of the same title. It is certainly worth looking at, especially since no one has managed to come up with anything other than a New & Improved socialism.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):


Janet Baker said...

I'm not prepared to comment on the content of this entry, but I just wanted to say hello. I am presently reading through various sources on social justice and found your blog through a google search, but I didn't note all the terms I used, 'distributism' being one, as I recall. I combed your site for some indication as to what 'kind' of 'social justice' activist this blog is. I guess I was looking for the link to commonweal. Not found--not yet.

I seem to be a hybrid, myself. I think capitalism will fall in on itself and return us to barbarism without the kind of intervention Pius XI was speaking of, but at the same time I am conservative on social issues. I mean philosophically and concretely, as I spend much time outside abortuaries, sidewalk-counseling. It's that experience that causes me to support the two apparent polarities of what superficially appears to be liberal economics and traditional values. I haven't found anyone else with that position, yet. You might find my blog interesting,
I think it's a shame that you have not a single comment to this excellent material (although you are not presenting it in a particularly accessible way, let it be said; I feel I dropped into a rather private conversation, whereas the whole world is hungry for a third way. Just hungry period, actually.) I have ordered two books mentioned on the site and will return and perhaps can begin to comment on the material.

I was thinking this, though: why do you not feel it is necessary to touch on morals at all (unlike Pius XI, who made the firm teaching of morals by the Church a cornerstone of his practical proposals, in Quadragesima Anno)? Are you thinking that perhaps that would only be necessary in a Catholic state? Or that it is possible to achieve social justice in a secular society (to borrow a phrase from yesterday's news, a 'healthy secular' society)? I myself, an activist all my long life, rather wonder if it is.

Michael D. Greaney said...

Thanks for dropping by. If the blog entries sound like a private conversation, it's probably because we haven't gotten enough people like you paying us a visit -- it's hard to include people in the conversation when no one else is talking!

Your comments are all well taken, and I might even be able to answer some of them. The best place to start for our understanding of social justice, however, is the website of the interfaith Center for Economic and Social Justice, "CESJ," (there's a link over to the right on the home page of the blog). The "Glossary" gives our definitions, but you might also want to read Father Ferree's "Introduction to Social Justice," available as a free download.

You're right on the mark with the need for a moral revival in today's world. We're an interfaith bunch, so the most we can do is recommend that people listen to the teachings of their particular faiths as (at least with respect to civil society) the role of religion is to teach moral values. Not being a religion (thank goodness), the Global Justice Movement has to take as a starting point the assumption that organized religion has done its job. We therefore are more in the realm of moral philosophy than theology.

You might find the August posting about the First Social Justice Collaborative in St. Louis interesting, as well as the text of the keynote address I gave at the centenary of the Catholic Central Union of America, also available on the CESJ web site.

I'm probably going too long here, but we expect to get a new book to the printers in the next week or so, compiled from articles I published in "Social Justice Review," the official journal of the CCUA.

Finally (and, I hope, briefly), "social justice" itself we define as the particular virtue directed to the whole of the common good, of which the commonweal or general welfare makes up one part. The common good is that network of institutions within which we as human persons acquire and develop virtue, and so fit ourselves for our true end, or (in other language), become more fully human.

Jether said...

Do I have your permission to translate this letter to Portuguese and post it in my blog?