The Islamic Post Blog

Experts Indicate Widespread Usury in Economic Struggles by Khalida

(IP)– This month, regulatory bodies are reviewing the excessive interest, or usury, being charged by credit card companies. After being pursued in an antitrust case for “non-compliance” to European Commission rules regarding cross border fees, MasterCard settled out of court. While, according to European Union regulators, the credit card company agreed to reduce fees that raise costs for retailers, the New York Times reports MasterCard said the reduction was simply provisional and that it would continue a broader battle over the level of the fees in court. Here at home, United States lawmakers moved, in turn, to provide people with credit card debt relief from abusive rate and billing practices, as reported by Market Watch. A new Credit Cardholders’ Bill of Rights would restrict retroactive rate increases on existing balances, double-cycle billing, and “due-date gimmicks,” said Rep. Carolyn Maloney, D-NY, who has spearheaded the legislation. Market Watch further noted, “The proposals approved by a House subcommittee are similar to final rules passed late last year by the Federal Reserve and other regulators… [In addition] a Senate committee approved its own set of credit card restrictions.”
This issue at stake for the European Commission and American lawmakers and regulators is the age-old question of controlling the flow of usury –the excessive rate of return charged by banks and lending institutions on interest-based loans. Financial experts recently criticized the wildfire spread of usury as being one of the major factors that led to the current economic crisis.
Usury had been strictly regulated in most countries until the late 1600s when usurious practices were first officially sanctioned by a head of state, William of Orange in Britain, who supported the establishment of the Bank of England –a private institution at the time. The practice of high rates of return gradually spread, but the institution was nevertheless widely viewed with distaste. Because it is easy for anyone –but particularly poor people and those in desperate circumstances– to find themselves in a reciprocating pattern of debt due to compound interest and the like, usury has been taken as a form of oppression. In this sense, secular and religious norms are in agreement. The major religions have been against such banking practices since their inception.
The First Council of Nicaea in 325, forbade clergy from engaging in usury which, at the time, meant interest of any kind. Pope Clement V made the belief in the right to usury a heresy in 1311. Islam has always forbidden interest, whether by modern definitions of usury or not, and continues to uphold the same prohibition. The Torah also carries prohibition of usury.
But in 2009, after many centuries, usurious practices seem to have overwhelmed religious awareness, as creditors consistently offer credit cards, mortgages and loans at extremely high rates of interest to people who are known to be unable to repay the principle, let alone the interest. The global economy has been headed toward its present state for many years, with few preventive measures having been taken against such forms of predatory business. Beginning in the 1960s deregulation of usury began to occur in the United States, and individual states initiated their own individual practices and laws regarding what were deemed usurious and illegal and what was not. In some states, debtors have been known to be charged in excess of 300% interest in extreme cases.
Author Thomas Geoghegan, was interviewed recently on DemocracyNow! regarding his work which recently appeared in Harper’s Magazine entitled “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy.” In this excerpt from the interview, Mr Geoghegan explains in a simplified form how the “real economy,” or manufacturing, was in essence destroyed over time by the financial sector.
“If you’re able to charge 30 percent or, in a payday lender case, 200 or 300 percent, you don’t care so much if the loan —in fact, you actually want the loan not to be repaid. You want people to go into debt. You want to accumulate this interest. And this addicted the financial sector to very, very, very high rates of return compared to what investors were used to getting in the real economy, the manufacturing sector, General Motors, which would give piddling five, six, seven percent returns.
“So the capital in this country began to shift in the financial sector. That’s why the financial sector began to bloat up. That’s why we ended up, by 2006, having a third of all profits going into the banks and the financial firms and not into the real economy.”
If Mr Geoghegan’s “real economy” is based in the manufacturing and sale of physical goods, the financial sector would then be a virtual economy –one whose primary method of trade and profit are loans that, having scant basis in monetary gold or silver, are based upon the trustworthiness (credit) of the financial institution granting the virtual money.
But the hardship endured by honest people struggling to make a variety of monthly payments is not make-believe. The interest (sometimes called late fees) on car payments, business loans, credit cards, mortgages, student loans, and even hospital bills and cell phones is generally billed first and compounded with each failed due date until the full debt could become impossible to repay. The creditor is often able to recover the original debt, even with a decent profit, but the debtor doesn’t always get out of the clear. If not, before the creditor writes off the remaining debt on company taxes, the institution may then sell the remaining balance to a third party collection agency. At this point, the debtor must pay the transferred balance plus any additional collection fees (more interest).
While some loan practices are being reviewed by US lawmakers in favor of the consumer, a range of consumer, community and civil rights groups recently objected to the leading bill in Congress set to deal with the issue of payday loans. Consumers Union, Americans for Fairness in Lending and six other groups say the Payday Loan Reform Act of 2009, would actually protect the “predatory payday loan business model and will stall or stop the significant progress that has been made at the state level to curb usurious lending.” In a letter to members of Congress, the groups state “Although this bill shares the same title as H.R. 2871 in the last Congress, it will have the exact opposite impact on consumers.” The Washington Independent alleges the new bill to be “loophole-ridden” and faults lobbyist influence.
The Center for Responsible Lending says interest rate caps are the only solution to a worsening predatory situation, and will cost taxpayers nothing. “Payday loans carry annual interest rates of around 400 percent. They trap people in debt to the extent that the average borrower has nine payday transactions a year,” the Center reported. “[While] Barack Obama has… proposed a combination of cutting taxes and encouraging spending to aid in economic recovery… predatory lenders are stripping cash from the earnings of working people who fall into this same demographic –at astounding rates.”
This may not bode well for an already struggling US economy.


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