Loans for the Poor

Go to a poor neighborhood and notice the pawn shops, the check cashing services, the rent-to-own furniture stores. Note the usurious interest rates. The neediest pay the highest interest rates. It’s criminal!

Or is it? If all these high interest rates are “exploiting” the poor, why don’t legitimate banks and other lenders do some arbitrage and make some serious money? It isn’t as if the American Association of Loan Sharks has an effective lobby in Congress, able to exclude big business competition in low income neighborhoods.

Come to think of it, the major banks and other lenders did try to muscle in on the “predatory lenders” – and promptly went bankrupt, sending the entire economy into a tailspin. Lending money to the poor at a profit, or even at breakeven, is not easy. The reasons are many:

• The poor have little collateral, by definition. When a poor borrower defaults, the lender loses big.
• Business loans require significant skilled human hours to evaluate. When the business is tiny, this overhead dwarfs the interest to be received – unless the interest rate is very high.
• Many poor people are poor for good reason: they are unwise or irresponsible with their money. These poor people are likely to squander loans received.
• Even the diligent poor are a worse risk because they are more easily forced into default when hit by a run of bad luck.

All these factors raise the cost of lending. Interest rates (or origination fees) need to be high to cover these costs. This holds even if the lender is altruistic. . Even the Grameen bank needs to charge a high interest rate. But with higher interest rates, the odds of default go up. It’s a vicious circle. Breaking out is not easy.

The Biblical Way to Lend to the Poor

The Bible has a solution, a way to get cheap loans to the poor without bankrupting the economy. But you’re not going to like it. The solution makes the rich blush with embarrassment and progressives flush with self-righteous anger. The solution turns many away from the Old Testament Law, to focus mostly on the New Testament or to turn away from the Bible altogether. The solution gives me qualms; I fear to even write of it. But since I’m not running for office any time soon – if ever – I will.

The Biblical solution was slavery. That is, if you were reasonably able-bodied, you could pawn yourself; i.e., put your future labor up as collateral. This took away much of the risk for lenders. It also discouraged deadbeats from borrowing recklessly. With lower risk, lenders could lend at low interest without having their wealth frittered away.

Actually, the wealthy were expected to lend at zero interest to their neighbors in need. These were hard money loans, however, so the modern equivalent would be loans at the current inflation rate, or perhaps the T-Bill rate, so if all loans were paid back, the rich lost nothing other than the opportunity to lend elsewhere. But they still lost something. This was a form of mandatory charity, albeit a form affordable in a low-tech society. When a borrower did default, the lender got a slave for up to six years. And if that slave turned out to be a lazy deadbeat, the lender could legally cure the problem with a measured beating. Ouch!

Biblical Slavery vs. Wage Slavery

Slavery – even voluntary temporary slavery – can be a nasty thing indeed. I am by no means suggesting we fully restore the Old Testament Law in this regard. We are rich. We can afford more deadbeat loan defaults. We can even have our financial system collapse every few decades without going hungry. Furthermore, the New Testament calls on Christians to forgive debts. For the rich, the New Covenant comes at a price: a self-imposed wealth tax. Liberal Christians are hereby invited to neener dance whenever conservative Christians try to weasel out of that provision.

Nonetheless, we can learn much from the old system. And we shouldn’t be too smug: the old system could be harsh – it was legal to beat a lazy debt slave – but our system can be rather harsh as well, in many respects more harsh than the Old Testament system.

The Bible allowed indentured servitude, yes, but this was not the norm. Free agency was the norm. In our society wage slavery is the norm. Most of us live by selling ourselves by the hour. This allows more freedom than selling ourselves by the year, but it is selling ourselves nonetheless. True free agency, owning a farm or business outright, is a dream fulfilled by a minority in this country in this age.

Under Old Testament Law, all laborers were entitled to free capital at zero interest. (And free land as we shall see later.) The have-nots did not pay rent, interest or profits to the haves unless they failed at farming or business. Only then were they subject to servitude. In our system the have-nots start in a state of partial servitude (or welfare) and have to earn their way up to economic freedom.

Freedom was the default, and debt slavery, though potentially harsh, was of finite duration. Every seventh year [Deuteronomy 15:1] all debt slaves were released (save for those who preferred their servant status over free agency). Not only were debt slaves released, they were released with a fresh supply of capital which they did not have to pay back [Deuteronomy15:13-14]. They were given equity! It may seem strange that all debt slaves were released at the same time, regardless of when the debts were incurred or the size of those debts. Fixed terms of servitude would appear to be fairer. Methinks the reason for the former option is that it protected those with weak legal representation from abuse. With a general year of release, debt slave owners could not perpetuate slave terms with contract finagling, and other dirty tricks.

Finally, though we may recoil in horror at the thought of slavery, even temporary slavery, let us note the potential benefits to the arrangement. Many families are financially, and otherwise, dysfunctional. Without intervention, bad habits get passed from generation to generation. Put these families together in a housing project, and the dysfunction magnifies. For details, talk to an inner-city school teacher. Or spend some time in a public housing project, where the best financial role models are the local drug dealers.

Hebrew slaves could be beaten for laziness, but they were supposed to be treated fairly—as employees—as well [Leviticus 25:40]. I doubt all slave owners were as fair as Leviticus commands, so we are right to be leery of the arrangement. The poor in our society get beatings as well, however, only they are unproductive beatings by gangs and bullies, instead of potentially educational smackings by a harsh taskmaster. In the old days, a deadbeat could be beaten to learn discipline; today, the diligent inner-city youth gets beaten for being disciplined. And we call our arrangement “progressive.”

Role models are important. A household servant gets to see the inner workings of a financially functional household. Good habits rub off. In modern terms, a maid cleaning the houses of educated professionals becomes intimately acquainted with the benefits of higher education. She is more likely to discipline her children when they are slack in their studies. Contrast this with the welfare mom who teaches her children to stand up for themselves, to mouth off when anyone in authority “disses” them. [Proverbs 12:15, 14:16, 15:5, 17:10]

This is the ideal of servitude: temporary, with lessons learned and capital to make use of the lessons afterwards. The reality has often been different: many of the rich abused justice in order to lock in the arrangement. Incredible cruelty has been meted out just to have a cheap housecleaner.

Biblical Slavery vs. Negro Servitude

Let’s make one important point clear: the Biblical laws on servitude did not excuse the brutality and lifelong slavery imposed on Africans by those of European descent. Hebrew servitude was for a limited duration, much more akin to the indentured servitude poor European colonists endured in return for a ticket across the Atlantic.

True, the Law did allow perpetual slavery for non-Hebrews [Leviticus 25:46, Deuteronomy 15:3]. Ouch! But even this provision had limits. The Canaanites had committed some pretty heinous sins to merit the genocide and enslavement allowed during the Hebrew conquest of the Holy Land. The Hebrews had to wait outside the Holy Land for four centuries before to allow the Canaanites time to complete their iniquities [Genesis 15:13-16]. So it is unclear to me that the Hebrews had a general mandate to run a general slave trade to get cheap help. Furthermore, the Law had an interesting provision for runaway slaves, which appears to be general. The Underground Railroad was complying with this Biblical provision.

But even if non-Hebrews in general could be enslaved perpetually, did this sanction Christians doing the same? The New Covenant promises blessings for the peaceful and forgiveness for the forgiving. The slave trade and perpetual enslavement are anything but. The perpetual enslavement of Africans was definitely disallowed under another provision as well: most converted to Christianity. As Christians, the African slaves became honorary Hebrews, just as the Europeans had many centuries before. As such, these slaves then fell under the law for Hebrew slaves; slavery beyond six years was illegal under Old Testament Law. Furthermore, they should have been treated as well as employees during their term of service and given capital upon the end of service.

Reducing the Need for Loans

Not only did the Law mandate zero interest loans for the poor, the Law had several provisions to reduce the need for loans in the first place.

Capital upon release. Those who did a term of servitude were entitled to a lump sum payment upon release [Deuteronomy 15:13-14]. This was capital free and clear. (And interestingly, this capital allowance included wine! No playing the nanny here.)

Wages by sunset. Ancient Israel had no need for payday loan or check cashing services because every workday was a payday. This greatly improved the cash flow of those living close to the edge. (It also limited the ability of unscrupulous employers to change the pay rate after services were rendered.)

Free farmland. All Hebrews of legitimate birth were entitled to free land as long as they lived long enough to see a year of jubilee. This put a serious damper on the need for mortgage loans – a rather big problem of late. We will look much more deeply at this interesting law later.

Free food. Even if you didn’t have your own farm, you could legally nibble the fruits of those who did. See the Gleaner Laws for more details.

Modern Applications Already in Effect

We moderns like to think we are above such barbaric practices as slavery and debt servitude. Though we charge the poor outrageous interest rates, we also have generous welfare benefits and easy bankruptcy. Nonetheless, we still have some institutions that somewhat follow the same principles as the old system of Hebrew servitude.

Mandatory public education is twelve years of bondage. It is the equivalent to two terms of Hebrew servitude! Moreover, it is imposed by default. To escape takes extra effort: either expensive private school or closely watched home school. Public schools are an attempt at beneficial slavery to force middle to upper class habits and values to the children of the lower classes – complete with therapeutic beatings. At least, they still had therapeutic beatings when I attended. Today, we have become a bit more squeamish about the realities of using force as a tool for social improvement. So today, the bullies administer the beatings in the poorer school districts. Public education works primarily in wealthy suburbs, for precisely those families who would educate their children even if education was optional. We get the downside of slavery without the upside.

Military service is in some respects indentured servitude. Enlistees subject themselves to discipline and give up the right to quit in return for job training, pay, and instilled discipline. (They also get a chance at adventure and the honor of serving the country.) The G.I. bill functions much like the capital upon release provision of the Biblical Law.

Guaranteed students loans are getting harder to default on. We have the same lower interest in return for no bankruptcy trade-off, only our real interest rates are above zero.

Other Possible Modern Applications

Slavery, even benevolent slavery, is disturbing. If anything, I would like to reduce the use of slavery-like institutions in our society, or at least soften them. Nonetheless, this leaves avenues open for applying the Biblical principles described above, albeit with a more New Testament twist.

Conditional public education. Why take away all children by default? How about a quarterly checkup on children to make sure they are being educated sufficiently and treated well? Only those parents who fail at raising their children to minimum standards should be required to give up their children during the day to the government. We could also give education vouchers to the poor and an increased dependent tax deduction (or credit) for the not-so-poor and let responsible parents and children work out their best education options.

Unconditional capital upon adulthood. Why should the academically inclined get government grants while those who go straight to work must pay for capital? How about giving all young adults a lump sum of capital to use as they see fit? Sure, some will squander their funds, but at least they won’t be able to say no one gave them a chance.

Cash upon military release. Why should soldiers receive exit pay only if they use it for academics? Military service is educational in and of itself, and many could profitably mix that education and discipline with a lump sum of capital.

Servitude with exit pay for property criminals. Today, we impose something worse than servitude upon many criminals: jail time. This punishment traumatizes and dehumanizes. It also really ruins the resume. Servitude builds the resume; exit capital gives former criminals time to find an honest job (or start an honest business). Our current system encourages a lifetime of crime and imprisonment.

Conclusion

Equality of opportunity requires capital for everyone. Those on the Right often downplay this condition and discredit themselves thereby. The Right is correct in this, however: equality of outcome cannot be guaranteed without punishing the productive. Freedom, including the economic freedom which comes with owning capital, must come with responsibility.