The Morality of Money Lending

Moneylenders have always had an image problem. In biblical times, “usury” (money lending at high interest rates)  was viewed as an inherently evil activity and Thomas Aquinas condemned it. Dante Alighieri relegated moneylenders to the seventh circle of Hell with blasphemers and perverts in his epic poem, Inferno. And Martin Luther and John Calvin both opposed lending money at interest.

Regrettably, there have been disreputable lending practices since antiquity. But moneylenders are not the villains behind every economic problem that humanity has ever faced. Yet, from the time of Aristotle – who believed the practice of moneylending to be unnatural and unjust – credit providers have been loathed and derided by philosophers and theologians.

In the Bible, moneychangers are labelled as “thieves and marauders” and told sternly they were “wrong in what you are doing”. Even playwrights have taken aim at financiers. In The Merchant of Venice, Shakespeare focused on the relationship between a borrower and a lender in exploring the themes of money, debt and justice.

In more recent times, moneylenders have been blamed and castigated by all and sundry for causing the Global Financial Crisis (GFC). Irresponsible mortgage lending coupled with reckless financial engineering is seen as the prime culprit behind the global meltdown. In simple terms, junk mortgages were used to back triple-A rated securities.

Such poor and inexcusable lending and funding practices exposed the dark underbelly of capitalism, but to blame credit providers alone is unfair. It’s long been my contention that the GFC was also a cultural crisis. Our modern world is very materialistic and the demand for credit to finance our contemporary lifestyles is ubiquitous.

As I argued in a previous paper I wrote, Who caused the financial meltdown?, we as a society need to take a hard look at ourselves and ask whether we have become credit junkies. We need to understand that debt is not risk free and that we need to save more and encourage habits of thrift among our children. We can’t play the victim and say “it’s not my fault” when we overcommit ourselves financially.

To this end, it’s a sweeping generalisation to claim that all US subprime borrowers were innocent victims of predatory lending practices. The reality is that borrowers, bankers and brokers were united in a delusional belief that US house prices would never fall. As I explained in my 2009 piece, We’re all to blame, they all acted irrationally in expecting house prices to always rise.

At the end of the day, the GFC was caused by greed which manifested itself in financially reckless behaviour by both Wall Street and Main Street. However, while Main Street can be forgiven for its “irrational exuberance”, Wall Street should have known better. The destructive policies of Wall Street and the shenanigans of some of the world’s biggest banks were disgraceful.

I also acknowledge that in the aftermath of the crisis, Main Street felt abandoned while Wall Street was rescued. On the surface, this does seem unfair but, as I explained in In defence of bailouts, rescuing troubled institutions was the lesser of two evils. Governments could not allow their banking systems to crash, and this would have caused incalculable damage.

So, have we learnt from the excesses of the GFC? Only time will tell. What is clear is that money-lending will remain the lifeblood of our economy. Economies are creditdriven which means nations and households invariably have to go into debt in order to grow.

The good news is that, unlike in Biblical times, it’s not hard nowadays to find a prudent lender – like churches, there everywhere!

All food for thought!

Sincerely
John (JT)Thomas

This opinion piece is provided by John (JT) Thomas, a 48- year veteran of the financial services industry and since 1987 a specialist in commercial mortgage funds. Considered by many to be the father of the modern commercial mortgage fund sector, JT helped establish and then managed – for 17 years – what became the largest and most successful commercial mortgage fund in Australia – The Howard Mortgage Trust – with assets exceeding $3 billion. Under JT’s stewardship, investors never lost one cent of their investments and indeed, investors always received competitive monthly returns. JT was also Chair of the $40 billion mortgage trust industry sector working group.

JT has been proudly involved with Princeton for nine years and sits on both the Princeton Credit Committee and the Princeton Compliance Committee as well as being an advisor to the Princeton Board.