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March 10, 2010

Watch out for money lenders

Prof. Dr. Mohamed Elmasry

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Money-lending is an ancient human activity.

It is based on the seemingly logical principle that people whose income exceeds their spending can lend their extra cash to those who are deemed less fortunate because their spending needs exceed their income.

Those in a position to lend money to those who need it are paid for their services through the practice of charging interest, simple or compounded. Thus for the most part, this system makes the rich richer.

Historically, in cases where borrowers have defaulted on paying back their loans, lenders have had the right to take possession of failed borrowers' assets; and if these were non-existent or worthless, then lenders could take borrowers and/or their immediate family members as slaves.

Until very recently in human economic history, the dominant ethical norms of secular society as far back as ancient Egypt, as well as the values of major world religions, taught that lending money with interest was immoral.

But another form of "loan" -- investing money as a share in someone else’s business venture, with the accepted risks and potential profits - has always been considered both moral and fair.

Today, money-lending is a big business - perhaps even the biggest business on the planet, for the entire global financial sector is based on it.

Governments, corporations and individuals are continually both lenders and borrowers. In such a system, however, the "middle man" (whether an individual or corporation) is most likely to make a fortune, both in times of prosperity and recession/depression.

The current crisis in the financial sector is affecting millions (and potentially billions) around the world, mostly the middle-class and the poor.

For the most part, government intervention has come as too little too late, but it may lessen the full impact of the global economic meltdown. Adding insult to deep financial injury, however, is the fact that the West is reluctant to use the "N" word -- nationalization.

Former Malaysian Prime Minister Dr. Mahathir Mohamad has censured the United States and other Western governments for their hypocritical double standard when they criticized his country for propping up some vulnerable local businesses during the 1997 Asian financial crisis.

"The U.S. ran us down when we wanted to help some of our companies which were hard hit by the financial crisis," he said. "Today, the American government is doing the same thing and it is all right; but when we did it, it was wrong."

Right after winning the 2008 Nobel Prize in Economics, Dr. Paul Krugman said bluntly of the current crisis, "This is terrifying." The former MIT professor (now at Princeton) specializes in research linked to currency crises and comparing the ongoing panic and uncertainty to the financial mayhem that gripped Asia in the late 1990s.

"We are now witnessing a crisis that is as severe as the crisis that hit Asia ... This crisis bears some resemblance to the Great Depression," he added ominously.

Prof. Krugman has long been a fierce critic of U.S. President George W. Bush's administration, arguing that its economic policies have helped spark the current financial crisis.

In his 1999 book, "The Return of Depression Economics," he emphasized the urgency of trying "to understand how so much can have gone wrong for so many economies ... how we got into this mess, and what can be done to prevent similar messes in the future ... Even when or if financial markets calm down, the real effects of the crisis -- the damage to growth, employment, and the standard of living -- will linger on."

Apparently, no one in Washington has read Krugman's latest book, or any of his other books and articles about politics and inequality in the United States.

As expected, Western governments' intervention in the current crisis did mainly help the rich and powerful; anyone expecting a radical "trickle-down" effect of the massive bailouts is dreaming.

But can individuals really do anything to ensure that this crisis will not happen again? Or, if it were to happen, what could they do to protect themselves from its worst effects?

Perhaps keeping some cash at home "under the mattress" (but preferably in a safe!) sounds attractive.

Keeping physical possession of one’s actual wealth (cash, precious metals, gems, etc.) was practiced long before the development of the banking system and is rarely done anymore, due to fear of theft, natural disaster, etc. But the recent crisis shows that keeping some cash in a safe at home is not as risky as once believed. The retail industry is already showing increased sales of domestic-use safes and strongboxes.

A second option to consider is asking well-to-do family members and/or near relations to lend needed funds to other family members in return for some proportional equity in their homes or other assets. This can be a win-win situation for both lender and borrower as it eliminates the middle-man factor. Such transactions are routinely notarized by lawyers and can even be expanded into a model for co-op ventures to serve specific communities, which in practice operate much like a large related families.

The Mennonite and Muslim communities in Canada and worldwide have successfully maintained financial and physical co-op organizations for decades.

Thirdly, this is a good time to invest privately in the business start-up or expansion costs of a trusted family member, friend, or colleague. It is no more risky than investing in the stock market, a lot less stressful than going to your local banker or appearing on the popular Canadian reality TV show, Dragons’ Den. And better still, both investor and investee could end up creating a few much-needed new jobs!

Finally, we must teach our children that making money through fair and ethical lending or investment practices is not a sin.

What is sinful, however, is the greed-driven involvement in speculative trade which adds no real value to our economy and got us all into this gargantuan mess in the first place. We need an economic revolution; we need to understand the stewardship of Enough; we need a truly human reinvention of capitalism.

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