31 August 2014

Our Response to the Federal Reserve and the World System in General (1/3)

Not long ago I was having a conversation someone and the topic of money and business came up. It was an aside to a larger discussion, but we found agreement in the seemingly self-evident notion that many people, including Church leaders (the immediate point of the discussion) often do not understand the way the business world works. He was in conflict with some elders over his financial situation and was frustrated in that they seemed to lack an ability to grasp how the realm of business operates. The accusations and demands they were making were not rooted in reality.

They were accusing him of impropriety. We agreed that the very idea of propriety in business is pretty laughable. Why is this the case and how do we respond?

In the realm of interest and debt, investment and risk there are times when businesses settle with creditors for less than the agreed for amount. While to some this seems less than ethical, the truth is (as usual) a bit more complicated.

An agreement is an agreement... right? At least Tevya thought so in Fiddler on the Roof until he was proved wrong. Sometimes it's not that simple.

For example a lender may look at a situation where they've received payments with interest, and they may have already generated a profit but are now willing to break the contract and make a final settlement.

Why would they do this? If the debtor is about to collapse or reach a point of being unable to pay they run the risk of all payments stopping. They would rather 'settle', squeeze a little more money out of the deal and let the debtor go free and walk away. In many cases they're still making money, just a bit less that they would have if the agreement had been allowed to mature or finish the term.

While on the one hand it looks like an agreement is being broken, on the other hand it just makes good sense. The Capitalist ethic demands a maximizing of profit coupled with maximum efficiency and in that particular case... settling does that.

Is the debtor still under obligation to pay back the full amount with interest?

Many Christians would insist that he is. Why? Those were the terms of the contract. But if the lender's interests are to tear up the contract and negotiate a settlement, then what's the problem?

You gave your word.

Really? Is it that simple?

In a world of exorbitant interest rates is this always that easy? What about the concept of risk? Capitalism and the whole notion of investment are rooted in risk. That's why the purveyor of Capital is supposed to reap the greater reward. Can risk be eliminated? If every business that collapsed left the lender with an obligation to pay back every dime, not only would American business law with respect to corporations have to be changed, but you would find very few people willing to risk taking a loan.

Well, that's good some would argue. People shouldn't go into debt.

At this point I might agree with them, but in terms of the Western economic system you have to just smile. They don't understand how it works. The whole thing would quickly collapse.

Ironically in the American system the individual borrower is burdened with a great moral obligation but the corporation is exempt. The 'smart' business people have learned how to insulate their personal borrowing and risk by putting it in the context of business and corporate law. Does this mean they're more ethical or have they just learned how to work the system? Very few people, even the church elders would say that an individual is responsible for paying back the lingering obligations of a collapsed business.

The ethics here get a little fuzzy. There are arguments to be made for structuring the legalities in this way. It allows individuals to take risks by forming corporations or partnerships without risking self-destruction. Is it moral? It depends how you define morality.

Capitalism as a coherent system is a child of the Enlightenment. The principles are viewed as laws of nature akin to mathematical concepts and physical laws like gravity. Because there are 'laws' attached to the concept of the market, then those laws carry a moral and ethical weight. A Christian Capitalist can argue the consequences are also moral and Christians have laboured to prove this system is Biblical. If they're wrong, then the ethical implications are pretty staggering.

Some are ardent advocates and believe in the morality of the system while others seem to realize the system while supposedly perfect on paper operates in a very flawed way in a real and fallen world. Some turn Consequentialist and say that's the way the world is, let's make the best of it.

Is that the approach taken in the Gospels and the rest of the New Testament? Are we to just go along and get along? Not a few Scripture twisters will argue this is the case. Others suggest we need to exploit the 'loopholes' of the fallen world. Many just refuse to look reality in the eye and have never really wrestled with these issues.

Now if they're willing to admit the whole thing is one big farce, an immoral racket that we (as Christians) should have as little to do with as possible I will happily agree with them.

But for Christians that means economic disenfranchisement. It means Christians are going to be at the bottom (where I believe we belong), and we certainly won't be the movers and shakers in society. This presents a theological tangle for many of these folks. A substantial number of people have embraced a theological paradigm which equates piety and Kingdom growth with cultural advancement and success.  I would argue you can't have it both ways.

It's even more problematic if they're going to agree with me and still try and maintain the fiction that the West is somehow representative of this nebulous (and erroneous) concept called Christendom.

What if you're struggling along to pay your debt and the lender decides to sell your debt to someone else? Did you contract with the other party? Are you still obligated? Maybe the contract stipulates that they're permitted to sell your loan to a third party. Okay, but in many cases the Third Parties are little more than bottom feeders paying pennies on the dollar to purchase delinquent loans. They know that 99% of the time they're not going to get anything near the full amount. They're purchasing the loans of people who are in financial straits. They're deliberately targeting people they know can't pay. That's why they only pay pennies on the dollar. The primary lender is just dumping the loan and try to squeeze the last little bit out of it before they wash their hands and walk away.

The Bottom Feeders/Third Party now harasses the debtor and seeks a settlement. For them it's almost all profit. They often employ ex-convicts to man their call centers and a sleazy law firm to back them up. They get you to pay something, and your incentive is that they'll remove the thing from your credit report.

It's all a dirty business....on all fronts. Yes, we shouldn't take out loans that we can't repay, but business and investment contain elements of risk. That's the nature of our society.

Again just to re-emphasize, as Christians maybe we should re-think that. I'm all for such a review. But it will have social implications for Churches and individuals that are looking to move within not only influential circles but even the middle class itself.

After settling with a third party, is the Christian obligated to still pay back the balance of the loan to the first party, the original lender?

Again, if you look at how loans are structured, the first thing they do is get their money back out of it. You'll spend years paying interest before you even substantially touch the principal. By then you've already more or less repaid the original amount you borrowed. How guilty should we feel? I don't know. It's all a bit of a game.

Contractually after the final settlement your obligation (in terms of the law) is rescinded.

There are mechanisms in the business world... accounting tricks and the tax code that allow businesses to shrug their shoulders at these loan defaults. Obviously too many will hurt them, but they expect quite a few every year and use them to their advantage. In some cases the lenders would not only be confused but distressed if you attempted to pay them back post-settlement. You might generate a bit of an accounting headache for them as that money would have to be received in a different way than interest on a loan.

In the end I think there's no black and white answer. What matters is the heart. Did you set out to deceive? Are you defaulting because of indifference or for some other motive?

It's ironic because the financial industry has been spent a great deal of time carrying on about the ethics of borrowers and the more dubiousness of default... but they never question their actions. They never for a moment pause and consider the structuring of loans, the taking advantage of people in distress, charging exorbitant rates, locking up money to squeeze a quick investment dollar out of it, charging endless made up fees, not to mention the way they pay out bonuses.

Investment and brokerage houses think nothing of harming clients when it serves their own interest.

If our ethic is to do unto others as we would have them do unto us, the financial industry cannot point a finger.

Does their misconduct excuse our own? Of course not. I'm merely pleading for a little perspective. The whole system is the fruit of man's fallen conduct.

We have a problem, because we have an entire economy, an entire society that's built a model that demands and rewards selfishness and an ability to take advantage of and manipulate others.

The more you learn about the financial industry the more you will realize just how corrupt and rigged the system is. So how do we respond?