Equity vs. interest/usury: effects of changing the banking system?

[Die Neue Zeit]

As it is today, the global banking system earns revenue mainly through interest. Awhile back, however, I read some UK business articles on "Islamic banking," and more recently I read Paul Cockshott's material on Venezuela and his suggestions on eliminating interest.

There are popular demands to nationalize the Federal Reserve (though obviously not listened to by any "serious" bourgeois politician), so what would the effects be if a nationalized Federal Reserve were to operate on "equity, not usury"? ["Equity" being an appeal to financial "fairness" using legal terms and being the actual basis of Islamic banking, under which collateral is secured through equity stakes before financing is provided]

Would ownership stakes expose banks to more legal ramifications?

[ckaihatsu]

Jacob,

As soon as you have profit-making you have the need for finance capital. And as soon as finance capital enters the picture you have interest rates.

I'm surprised to see you entertaining such a notion of economic reformism, unless you're just throwing it out there to generate discussion and/or play 'devil's advocate'.

(Really!) (%#[email protected]!!!)


Chris




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[Die Neue Zeit]

Jacob,

As soon as you have profit-making you have the need for finance capital. And as soon as finance capital enters the picture you have interest rates.

I'm surprised to see you entertaining such a notion of economic reformism, unless you're just throwing it out there to generate discussion and/or play 'devil's advocate'.

(Really!) (%#[email protected]!!!)


Chris

Comrade, I was merely asking what economic ramifications would result if this potential minimum demand were implemented. By "potential," I mean that I don't know whether this reform meets both criteria in this thread:

http://www.revleft.com/vb/begin-redefining-minimum-t90683/index.html

[ckaihatsu]

So basically you're talking labor-hours here, right, Jacob?

[Die Neue Zeit]

^^^ No I'm not, unless this scenario occurs in conjunction with tying currencies to labour hours performed by society as a whole. :confused:

[ckaihatsu]

Well, it may as well, if we can pull off the nationalization of the Fed / U.S. Treasury / World Bank / International Monetary Fund...!

If the nationalization of the Fed happened in the same way as the nationalization of AIG, then we * would want to * push for the implementation of labor-hours currency, as opposed to the implementation of any other capital-oriented currency / securities, even if it *is* sans interest....

[ckaihatsu]

I mean, the point of the nationalization of AIG is that the U.S. government had to swoop in like Superman to underwrite all of the risk that the devalued securities had accumulated through this ongoing credit crisis.

As usual, this is all supply-sided, since it is the policies of capitalists.

However, this is a huge political win for the working class, because the real world now reflects that the "free market" is untenable -- in their darkest hour the capitalists had to run to the public coffers, which is basically *our* argument for transforming the economy -- but without the private property thing, of course.

So what I'm saying here is that we would want the nationalization of risk (AIG) to springboard the nationalization of the money supply (Fed / Treasury / IMF / WB), and then implement a worker-sided solution, namely, labor-hours, thereby cutting out the private-property parasites.

[Lynx]

Consider using Canada's banking system as a minimum standard.

[Die Neue Zeit]

^^^ But it operates on the basis of usury, not "equity" (and it doesn't meet the Kautsky criterion one iota). ;)

[Lynx]

Yes, but one has to start somewhere. Preferably in a country that does not have its currency as the de facto world standard. If the US banking system were equal to Canadian standards, how would you proceed to reform it?

[Die Neue Zeit]

Prolly along the lines of my suggestion above. In the UK, there's all the talk about SWP (Socialist Workers' Party) opportunism regarding Islamists. It is "social issues" opportunism ("right to wear burqas"), in spite of the fact that Islamic banking is more popular in the UK:

http://www.dofonline.co.uk/strategic-finance/islamic-finance-and-banking-will-win5525874.html

IF the suggestive material above is raised as a minimum demand ("equity, not usury"), this would be a more effective way to woo Muslims while deflecting charges of pro-Islamist pandering:

http://www.cpgb.org.uk/worker/739/antibig.html


Like the Green Party and the BNP, some Islamists are also calling into question the continued existence of the global system of banking capitalism. For example, Daud Pidcock, former leader of the Islamic Party of Britain, was to debate Eamonn Butler, director of the Adam Smith Institute on October 2. The title of their debate? ‘Credit crunch ... or crunch time for capitalism?’

The debate promised Islamic answers (dialoguewithislam.org). There is, of course, a well-established ‘anti-capitalist’ Muslim publication widely in circulation - The Koran.

All this demonstrates that it is quite possible for reactionary ideas to be posed against the bourgeois mainstream. My enemy’s enemy is not necessarily my friend.

[Lynx]

I fail to see how this is a transitional demand. What is the objective?

[Die Neue Zeit]

^^^ Where did you get the idea that "equity, not usury" was a transitional demand? :confused:

I'm not sure if this demand is sufficient to be raised even as a dynamic minimum demand (reform-enabling reform, basic principles "kept consciously in view").

The general idea is that in order for loans to be made by central banks to private banks, collateral will have to be provided for an equity stake (not just collateral in and of itself). The principal is paid off by the private banks, and then those banks "buy out" the central bank's equity stake in the collateral (a complex way of saying "interest," but that's how Islamic banking works).

I think the key here, though, is that notion of equity ownership. I would think that such ownership introduces hypothetical legal risk to the lender (in this case the central bank), as opposed to "oh, this is just collateral for the central bank" (like a mortgage, for example).

[ckaihatsu]

Jacob,

If you admit that this is not even sufficient as a minimum reform, then why even raise it in the first place, especially on a revolutionary forum like this one?

Both this proposal of yours, and the Canadian banking system one, are both in line with capitalist-type ideas -- supply-sided -- not revolutionary ones.

So what gives?


Chris

[Die Neue Zeit]

^^^ Chris, I didn't say that this demand was insufficient. I said that I wasn't sure if this demand was sufficient. :(

[Lynx]

Jacob, does this link provide the context for which you started this thread?
http://21stcenturysocialism.blogspot.com/2007/09/venezuela-and-new-socialism.html

[Die Neue Zeit]

^^^ Yes, that's the one. :)

Perhaps "equity ownership" would be a better idea, after all. The Big Banks that would've paid tax-deductible interest to the Federal Reserve would instead buy back the latter's ownership stake in the collateral at full cost, I think.

[MarxSchmarx]

oops i got lost in the thread. could someone explain equity ownership to me? thx in advance

[ckaihatsu]

Cynthia McKinney: The Big Boys Got Their Bailout, But the Elected Leadership and the Voters Meet at the Election Day Showdown

[...]

Taken in conjunction with the Power to the People Committee's platform available on the campaign website at (http://votetruth08.com/index.php/resources/campaignplatform), those fourteen points are as follows:

1. Enactment of a foreclosure moratorium now before the next phase of ARM interest rate increases take effect;

2. elimination of all ARM mortgages and their renegotiation into 30- or 40-year loans;

3. establishment of new mortgage lending practices to end predatory and discriminatory practices;

4. establishment of criteria and construction goals for affordable housing;

5. redefinition of credit and regulation of the credit industry so that discriminatory practices are completely eliminated;

6. full funding for initiatives that eliminate racial and ethnic disparities in home ownership;

7. recognition of shelter as a right according to the United Nations Declaration of Human Rights to which the U.S. is a signatory so that no one sleeps on U.S. streets;

8. full funding of a fund designed to cushion the job loss and provide for retraining of those at the bottom of the income scale as the economy transitions;

9. close all tax loopholes and repeal of the Bush tax cuts for the top 1% of income earners; and

10. fairly tax corporations, denying federal subsidies to those who relocate jobs overseas repeal NAFTA;

11. Appointment of former Comptroller General David Walker to fully audit all recipients of taxpayer cash infusions, including JP Morgan, Bear Stearns, Fannie Mae, Freddie Mac, and AIG, and to monitor their trading activities into the future;

12. elimination of all derivatives trading;

13. nationalization of the Federal Reserve and the establishment of a federally-owned, public banking system that makes credit available for small businesses, homeowners, manufacturing operations, renewable energy and infrastructure investments; and

14. criminal prosecution of any activities that violated the law, including conflicts of interest that led to the current crisis.

[...]

[Lynx]

Paul Cockshott was talking about interest free loans, and varying the duration of the loans in order to control credit expansion / inflation. And this was in the context of a number of steps that needed to be taken to assist Venezuela's transition. I'm having trouble finding the hat you pulled the rabbit from :confused:


12. elimination of all derivatives trading;
This deserves an extra hell, yeah!


oops i got lost in the thread. could someone explain equity ownership to me? thx in advance
Example: If you buy a house with zero down, the bank owns all of the house's equity. As you pay off the mortgage (principle + interest), part of the home's equity is transferred to you. The bank owns less, you own more. This is how I understand it.
For more, see http://en.wikipedia.org/wiki/Ownership_equity

[Die Neue Zeit]

^^^ Thirded (re. derivatives, which actually add to a country's total debt)!

As for "ownership equity," unless I'm mistaken something similar is the basis for Islamic banking, which doesn't charge "interest" (although $$$ is made).

[Lynx]

The Wiki article on Islamic banking provides a number of examples, here is one:

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the fact that it is profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha.

[Die Neue Zeit]

I wonder how this would work out between central banks and the big banks. :D

The Central Bank buys securities or collateral from the Big Bank and resells it to that Big Bank at a profit.

Some Islamophobes say that this mechanism hides interest rates, but gee, I wonder why the finance world has a percentage figure called the "weighted average cost of capital" (the after-tax cost of debt and the cost of equity blended together on a weighted basis)? :rolleyes:

[iloveche]

well its like so which came first the chicken or the egg? no answear i thought so? [Fancy Gentlemen laugh] Ha Ha Haa [/Fancy Gentlemen Laugh]

[Die Neue Zeit]

^^^ :rolleyes:

Anyhow, for other posters, how does this sound for a minimum demand?

The establishment of a national-democratized financial monopoly in basic regards to ownership of and control over banks, the extension of that monopoly into the general provision of commercial and consumer credit, and the full application of “equity not usury” towards such activity

[ckaihatsu]

While I like Jacob's national-democratization and Lynx's reference to Islamic banking, I get this sense that -- with all due respect to comrades' best efforts -- we're just dabbling here.

My concern is that -- like many political issues -- we *have* to resolve the past with the present, in the direction of the future. This is *never* a small task.

In this context we're looking at a capitalist system of valuations that are not only virtually meaningless to working people (in the overall sense), but that are *themselves* melting down like snow on a warm day.

In other words, given the crisis of capitalist rule we * should * resolve these technical issues of valuation as much as possible because it will provide a program ready-to-go, serving as a broad, popular platform for action. This broad program of understanding could be much like the minimum reformist program in this thread, but would actually be * class *-based, founded in the working-class ownership of all assets and wealth, and proceeding from such.

So-- I would liken the scenario to one of walking into a pristine forest for the first time. Given the utter breakdown of capitalist consensus and the replacement of decisive, value-based imperial management with what is now a bureaucratic baseball game, we as revolutionaries need to have an answer to the valuation question, in addition to the well-founded Marxist political program.

In the past values centered around nation-based industrialization and development of manufacturing capacity. Why? Because, from a societal point of view, this objective was paramount. A bourgeoisie could *not* secure rule based on anything less because if so they would slip into subservience to an industrialized, developed power and would only be able to play a *proxy role* in relation to the dominant national (imperialist) power.

This imperative of historical development played out famously in the 20th century and continues to shape global politics today. However today we now have a crisis of bourgeois rule because there is nothing as materially important as * industrialization * with which to consolidate the rulers' claim to power and with which to coerce the masses into labor and warfare. Modernization and financialization have been poor substitutes, and then after that, what?

As revolutionaries we need to assert * socialization * of the surplus wealth as the next step for societal development, so that the rightful owners of assets / wealth, and resources -- the workers who produced it in the first place -- preside over it, to the exclusion of private claims.

So, to the technical point at hand: Can we, given a coming, worldwide insurrection against global absentee landlord rule, provide an orderly framework that empowers people to resettle into the existing abundance and machinery, to be administered by themselves (ourselves), in their (our) own interests?

And-- Can we also provide a program of material accounting that can legitimately serve post-capitalism, working class rule?

I will continue to maintain that, in the short- and mid- term, we need to reorient our perspective *away* from the supply-side side of things, which is what the capitalist system pushes us to do, and instead focus on the * demand * side of things, throughout the material world. This reorientation would immediately jettison finance-based valuations, along with the white-collar labor infrastructure and political buffer that goes with it.

By asserting a Bill of Material Rights we would be demand-oriented, opening the door to a full-fledged political economy free of the tangle of esoteric, finance-based valuations. The fulfillment of these demands would drive the larger politics, and worker-based industry. Please see this 1-page diagram:


Supply prioritization in a socialist transitional economy

http://tinyurl.com/5mjhhh


Chris




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-- Of all the Marxists in a roomful of people, I'm the Wilde-ist. --

[Lynx]

I would like to revisit the effects of abolishing usury as an initial reform to capitalism. The implications of such an impertinent structural change might be interesting.

For example, if money cannot earn interest, depositors will have no need for investment services. Banks would have to be nationalized, as it would no longer be profitable to operate them privately.