by Dr. Meir Tamari
The relationship between borrowers and lenders has engaged the attention of moralists, religious and social reformers since the earliest days of history. In most cases the borrower is poor and the lender wealthy so that claims of compassion, morality and charity tend to transform an economic transaction into an ethical quandary. Does income earned solely from the extension of credit or from the use of idle money represent some form of immoral gain or economic oppression? Shall the creditor waive his rights in favor of the hard-pressed or insolvent borrower? Is the debtor unethical when he profits from the use of other peoples’ money? Does the banker as a creditor, by virtue of his wealth, possess such great economic power relative to the individual borrower which would justify debtor protection over and above that normally provided to consumers?
By and large, the resolution of such moral issues, affecting the whole gamut of modern life, is determined in the western economies by cultural, social, and religious stereotypes that favor the borrower and stigmatize the lender. This bias is clearly demonstrated in present day bankruptcy law, in credit and banking regulation, and in macro economic policy. In developing countries, subsidized credit has long been used to promote economic growth; in developed countries it is used for the benefit of depressed areas, industries, or ethnic ,groups. The “bail out” of economically unviable firms or industries for socio-political reasons, primarily entails the cancellation of debt or its assumption by the public sector (ultimately the tax payer). For many years such bailouts had been the preserve of socialist economies. The Savings and Loans debacle in the U.S.A., the treatment of soft loans to South American countries and the “achievement” of the Polish economy in avoiding repayment, are evidence, however, of its adoption by free market economies. Legislation such as Chapter Eleven in the U.S.A. that permits the continued operation of failed firms or others that limit the protection of creditors, have become commonplace in many countries. All these solutions have one central theme in common, namely, enabling the debtor to avoid his responsibilities.
Unfortunately, however, they create ethical problems no less severe nor in any way less pervasive than those they purport to solve. Subsidized credit is like any other subsidy. It is not always possible to make sure that only deserving parties benefit. At the same time its cheapness encourages the recipients to waste the subsidized good. In both cases, public sector resources are wasted. This waste is compounded by the distortion that subsidies introduce so that economic resources are not allocated in the most efficient way which would be to the benefit of the whole society. When “bail outs” in any form become a normal market condition, a general moral weakening occurs in the investment process; a weakening which of necessity pervades the whoIe social fabric.
Borrowers become involved in debt which they know that they will ultimately not have to repay, with all the resultant immoral effects. Freed from the risk of loss and bankruptcy, entrepreneurs are encouraged to make uneconomic investments which again represent a waste of the public funds needed for the bail out. In order to become eligible for bail out, callous use is made of the threat of the unemployment which will result from closure; workers thereby become allies in the waste of tax payer money.
In all these cases, the cost is borne by the taxpayer. If we agree that citizens have a moral duty to pay their share of the social costs, then surely this imposes an equal moral duty on the state to minimize any wastage of this ‘holy money.” Whenever this is not done, experience has shown that tax evasion becomes rife, creating an underground economy with all its resultant immorality.
The immoral effects of enabling the debtor to evade his responsibilities should not be used by society or by creditors to evade their responsibilities to the poor, inefficient, or failed members of society. While insisting on full payment of the debt, it is also necessary to find a method to extend charity. It is not necessary to return to debtor prisons, nor to macroeconomic policies and legislation which will ignore the plight of the bankrupt or weaker members of society.
What seems necessary would be a moral perspective which allows for the rights and obligations of debtor and creditor to be preserved, while at the same time enforcing charitable acts, both individuai anci communal. The following discussion of Judaism’s treatment of the debtor-creditor relationship could provide such a perspective.
A JEWISH PERSPECTIVE
There is no stigma or immorality attached to borrowing or lending, the borrower is not seen as a ne’er do well, nor is the lender seen as a robber or exploiter. After all, credit and loans are simply examples of the legitimate use of capital, similar to the hiring of horses, land or the ancient form of machinery – draught animals. In all of them all the parties concerned benefit – the biblical verse in Leviticus “and thy brother shall live with thee ” referring to loan transactions, refers equally to the lender and borrower. In all of the capital transactions both parties have rights and obligations. To its insistence however, that these rights and obligations are symmetrical, favoring neither rich nor poor, Judaism has added the element of charity, to the capital made available in the form of money and credit.
The injunction against taking of interest must be seen as a demand of charity rather than of an anti-capital bias or a derogatory view of a creditor class. Al! the Jewish codes view the interest free loan, for any purpose, as a major form of charity, breaking the poverty cycle, preventing descent into poverty and available both to the poor, and to the rich in temporary illiquidity. Furthermore, there same codes see the interest free loan as an obligatory mitzvah, rather than an act of voluntary philanthropy. In no way however, does the halakhic recognition of loan capital as a positive mitzvah imply, a waiver of the rights of the creditor to receive payment of his loan or absolve the debtor from his obligations.
Also one may not waste nor dissipate loans obtained-an ancient warning against international loans used for grandiose unproductive projects, personal enrichment of the rulers of the recipients, or for needless military stockpiling. Irrespective of the cause, one may nor default on loans, so that the right of the creditor is clearly upheld in all of the Codes . The wording of the injunction requiring the courts to sell the assets of the debtor to satisfy the creditor’s claims, “irrespective of whether the debtor is poor and the creditor rich, ” clearly demonstrates the denial of bias in favor of the poor. At the same time, debtors’ prisons or physical punishment are unknown in Jewish law, excepting for short periods in central Europe in the 16th century, an application of the halakhic distinction between economic crime and damage to human beings.
Modern corporate or individual bankruptcy poses a further problem for the debtor. Financial ratio analysis models all show that bankruptcy, not due to natural disasters, can be forecast 3-5 years before it happens. This means that often the debtor has continued to borrow money, even though he knows that he is bankrupt economically if not legally. Since this constitutes fraud, it negates the halakhic recognition given to the limited liability aspect of the corporation thus making individual shareholders’ assets available for the satisfaction of creditors’ rights.
Dr. Tamari is the former chief economist of the Office of the Governor at the Bank of Israel, and the founder of the JCT Center for Business Ethics and Social Responsibility.