THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, May 20, 2009

On Usury and Other Dishonest Profit, Part I

Back in 1745, Pope Benedict XIV issued Vix Pervenit, an encyclical condemning the charging of interest on loans of money made for consumption or speculation, that is, spent on things that do not generate an income to repay the loan. Often misunderstood as a condemnation of all interest, Vix Pervenit left intact the scholastic distinction between investment (loans made for projects that resulted in the production of goods and services), and consumption and speculation (loans made to purchase goods and services that are consumed instead of used to produce other goods and services, and loans made to gamble).

The confusion over interest and usury results from the fact that the pope did not address the issue of loans made for productive purposes. That had always been legitimate, a positive good, so there was no need to justify it again. Genuine investment has a "built in" ability to repay a loan by its nature, as the lender shares in the risk, and only gets back what is his or her due in justice as a share of production. The pope's concern, however, was the many ways people had devised to circumvent the moral prohibitions against usury by disguising loans of money made for consumption or speculation, as loans made for investment.

Unfortunately, the discussion was extremely technical, and the language and concepts used were unfamiliar to many people. The problem was exacerbated by the fact that the discussion brought in financial, legal, and philosophical terms without clearly distinguishing between them. The bottom line, however, was the unstated point that honest or legitimate interest consists of a share of the profits to a lender, based on the pro rata value of the loan to the production of goods and services. If, for example, a lender's contribution was determined to be, say, 10%, the lender was due in justice 10% of the profits realized from the project, or had to bear 10% of the losses. A fixed rate of interest on the principal was deemed usurious, if not actually usury. Any rate of interest on a loan of money for something that did not result in the production of goods and services was deemed usury, regardless of the finagling, word games, or other circumlocutions involved.

The reason for bringing this up is the release of news story by the Associated Press that the Pension Benefits Guaranty Corporation, the PBGC, the institution charged with insuring "defined benefit" retirement plans, is projecting a deficit in the billions as a result of the economic downturn and resultant flood of bankruptcies. ("Deficit surges at agency that insures pensions")

A "defined benefit plan" means that a plan participant is legally guaranteed a specific level of benefits on retirement, regardless of the value of the assets in the retirement trust or the ability of the Plan Sponsor to fund the obligations of the trust. "Defined contribution plans," which do not come under the PBGC, are obligated to pay out only what exists in the trust.

In accounting terms, a defined benefit plan is a "fixed cost," while a defined contribution plan is a "variable cost." Thus, a defined benefit plan has an inherent usurious character, while a defined contribution plan, by sharing in the risks of ownership, takes on the character of genuine investment.

When things are going well and a company is making large profits, a defined benefit plan is more advantageous to the company if they can keep worker or union demands for increased retirement benefits within reasonable limits. As demonstrated by the PBGC current deficit of $33.5 billion (three times the accumulated deficit of six months ago) and the projected underfunding of defined benefit plans in the hundreds of billions, however, high fixed costs for retirement plans are bankrupting companies at an accelerating rate. Companies are being forced to borrow money, take government bailouts, or sell new equity to finance not investment in new plant and equipment to generate future profits, but to pay accrued costs for something that did not result in the production of goods and services even when they were incurred.

This has put America's companies — and thus the jobs they provide the majority of workers — in serious and immediate danger of going bankrupt, with the resultant loss of jobs. The problem is that everybody seems to be blaming everybody else for the situation, with the result that nobody really knows what to do about it. Without knowing how this situation came about, however, a solution becomes impossible.