Usury is bad business. Usury is good business.

June 15, 2018 § 33 Comments

It is worth emphasizing that personal guarantees on invested capital (usury) are indeed very bad business in entrepreneurship, where capital and labor/expertise come together to produce objectively valuable goods and services. Personal guarantees are a huge red flag that the contracts and capital structure are dysfunctional and should be re-worked before a deal is inked, or that perhaps the deal is no good at all on any terms. It is a naive and foolish business practice to give capital to a business partner under a regime of personal guarantees.

Usury is great business though when the objective is to sell things to consumers (e.g. college degrees in grievance studies fueled by five dollar lattes); things that they cannot afford without selling themselves into slavery, at prices massively inflated by the ready availability of usurious loans.

§ 33 Responses to Usury is bad business. Usury is good business.

  • Rhetocrates says:

    I’d say rather that usury in the consumer case is good business right until it’s not, because the market collapses due to too much unreality.

    But you’re right to say that simply might not happen to you at all until after you’re dead.

  • Zippy says:

    Rhetocrates:

    Put differently usury is – like any Ponzi scheme or other scam – “good” (that is, monetarily profitable) business for those who profit while they profit, but terrible for the common good in the long run.

    And yes, sometimes scammers and cheats get bitten when reality catches up to them.

  • Rhetocrates says:

    Soundbite edition:

    Usury is Amway finance.

  • fontesmustgo says:

    You’re cutting a corner here: personal guarantees are fine. Personal guarantees to pay interest are not.

  • Zippy says:

    fontesmustgo:

    In the OP, because of the specific point I was making, the phrase I used was “personal guarantees on invested capital”. “Invested capital” carries with it the intrinsic implication of financial self interest on the part of the investor. No mutuum made out of financial self interest on the part of the lender is ever morally licit.

    As always prose carries some ambiguities; but it may be that cutting context in the proposed criticism did more damage to meaning than did any corner cutting in the phrasing of the OP.

  • fontesmustgo says:

    Z:

    There is nothing illicit about the sole shareholder of XYZ Corp. personally guaranteeing the principal amount invested in a XYZ Corp. bond. This probably does not happen often in the case of sophisticated corporate transactions, but it’s not hard to imagine giving your sister a personal guarantee of the principal amount of the invested capital she places in XYZ Corp, which you are building from scratch in your garage.

  • Zippy says:

    fontesmustgo:

    it’s not hard to imagine giving your sister a personal guarantee of the principal amount of the invested capital she places in XYZ Corp, which you are building from scratch in your garage.

    In that scenario the sister is not a capital investor. She is a sister making a mutuum loan to her brother, with no intention of profiting from the loan herself. The loan is not “invested capital” to her, at least the way I am using the terms.

    It is also, independent of whether there is any pursuit of profit on her part, a huge red flag that she can’t really afford to lend him the money. If she could she would be his business partner under some sane capital structure, not a mutuum lender.

    In general, mutuum lending for a business purpose is like flirting with your secretary: even when it isn’t technically usurious it is almost always one or both of immoral or really stupid.

  • fontesmustgo says:

    She’s a capital investor. She’s supplying capital directly to XYZ Corp. (the check she writes is made out to XYZ Corp., and title never passes through her brother). She is entitled to a share of the profits of XYZ Corp., should there be any, and she wants these profits. She is motivated by them.

    But because her brother loves his sister and suspects that any failure of XYZ will be his fault, he personally guarantees his sister’s direct capital investment in XYZ Corp. He doesn’t personally guarantee a return on her investment, but he does guarantee repayment of principal.

    Anyway, I don’t want to distract further from the usury discussion (especially with an uncommon scenario) so after this I’m done. My only point is that there is nothing per se illicit about a personal guarantee. The relevant question is: what is being guaranteed? If it’s principal, there is no usury.

  • Zippy says:

    fontesmustgo:

    But because her brother loves his sister and suspects that any failure of XYZ will be his fault, he personally guarantees his sister’s direct capital investment in XYZ Corp.

    This kind of contract has been condemned by the Magisterium. See here:

    https://zippycatholic.wordpress.com/2017/06/12/recourse-to-the-magisterium/

  • ProtegeAA says:

    The “personal guarantee” Ray Kroc gave the McDonald’s brothers is a great example why I run, not walk, from anything not put in writing in a contract.

  • MMPeregrine says:

    Here is one personal guarantee that we can count on –

    “And I say to thee, thou art Peter, and upon this rock I will build my Church, and the gates of hell shall not prevail against it” (Mt 16:18).

    From the gospel on the feast of St Peter and Paul.

    Zippy, I thank you because reading your blog has helped me in many ways, but none more so than helping to strengthen my faith in the above promise given by our Lord to St. Peter.

  • Artifact says:

    Ought one get a mortgage? Should one avoid paying interest in almost all situations?

    Are there small scale battles that can be won? Like a set of tactics for dealing with usurious institutions when they usurize a person? That has a spiritual dimension.

  • As a matter of intrinsic morality, usury – insisting on interest when making a mutuum loan – is a sin on the part of the lender, not the borrower.

    And there’s where it all falls apart. For someone who insists on holding to truth, there is remarkable ignorance of human nature.

  • tmlutas says:

    It is perfectly possible to have a defective understanding of economics and get into Heaven. It is not good, however, to pass off bad economics as a moral imperative. Objective value is not a thing. The linked article describing objective value is not correct. We do pay people to destroy buildings. Occasionally we do it via fire. Please stop saying economic nonsense.

  • Wood says:

    natewinchester,

    How, exactly, does the argument fall apart? I do not believe Zippy is always-and-everywhere being a big softee on the borrower’s behalf if that is the contention. I believe he is in a sense re-stating what usury is from the perspective of intrinsic morality.

  • donnie says:

    It is perfectly possible to have a defective understanding of economics and get into Heaven.

    It is perfectly possible to have a defective understanding of any moral issue and get into Heaven – such is the nature of invincible ignorance. And yet, instructing the ignorant is still a work of mercy.

    Your counterpoints that in some instances destruction of property is objectively valuable does not support your claim that “objective value is not a thing.” Quite the opposite, actually.

  • donnie says:

    Artifact, natewinchester, and Wood,

    I think there is a parallel with NFP here. Practicing NFP for other than serious reasons is morally wicked. But provided that you and your wife have a genuine serious reason to delay conception, it is not a sin.

    Likewise, entering into a usurious contract is scandalous, and therefore morally wicked if done for other than serious reasons.

    What constitutes a serious reason? Like couples discerning whether they ought to practice NFP, we are left to discern this for ourselves.

    A possible starting point is for one to examine his current relationship with usurious lenders and ask himself, ‘could I ensure my needs are met through some other way that doesn’t require me to become a victim of usury?’ One step he might take is to switch from using credit cards to using a debit card or prepaid credit card. Or, better yet, perhaps he just uses cash for his day-to-day purchases (this has the added spiritual benefit of ensuring he’ll almost always have some spare change in his pocket for the poor box at church or the beggar on the corner). Maybe he even goes out of his way to take out a home mortgage in a state that prohibits deficiency judgements (very few do, but it’s possible).

    Those are just some initial thoughts. There’s probably a lot more you could do with some thought.

  • How, exactly, does the argument fall apart? I do not believe Zippy is always-and-everywhere being a big softee on the borrower’s behalf if that is the contention. I believe he is in a sense re-stating what usury is from the perspective of intrinsic morality.

    Because it absolves the borrower and ignores any role they play. It’s an argument that Bernie Madoff shouldn’t be in jail, but his victims. (Or Zero Mostel and Gene Wilder if you prefer.) His advocacy that lending contracts shouldn’t be enforced is basically a license for con men. If Usury is really like all the other sins of the age, well one of those that involves two people is fornication. So to say the sin is on the part of the lender is like saying in fornication that sin is on the part of the man, not the woman. A moment’s thought should demonstrate the insanity of such a proposition.

  • Zippy says:

    Because it absolves the borrower and ignores any role they play.

    No it doesn’t. Lending at usury is intrinsically immoral, thus always and everywhere morally wrong. Borrowing at usury is not intrinsically immoral; but it is material cooperation with evil, and is therefore only justifiable with proportionate reason.

    Aquinas:

    Accordingly we must also answer to the question in point that it is by no means lawful to induce a man to lend under a condition of usury: yet it is lawful to borrow for usury from a man who is ready to do so and is a usurer by profession; provided the borrower have a good end in view, such as the relief of his own or another’s need. Thus too it is lawful for a man who has fallen among thieves to point out his property to them (which they sin in taking) in order to save his life, after the example of the ten men who said to Ismahel (Jeremiah 41:8): “Kill us not: for we have stores in the field.”

  • Zippy says:

    Consider another scenario: a professional slaver offers to pay Bob to become a slave, in return for money to pay for an operation to save Bob’s son’s life. Bob accepts. Who has sinned?

  • Your counterpoints that in some instances destruction of property is objectively valuable does not support your claim that “objective value is not a thing.” Quite the opposite, actually.

    Sure, if there’s a God there is objective value.

    So where is the price report from Him?

    Let’s put it another way: I have an object in my hand. Tell me: What is its price? If I ask you to tell me it’s mass, you can say, “sure it’s ‘m=W/g’.” And if we were to measure those things we would both get the same value. Yet if a loaf of bread has objective value, then we should get the same money for it whether we sell it to a starving man or to a person allergic to gluten. If the bread’s value does not change, then how can it be that for one person it’s life-giving sustenance, and another person life-ending dangerous poison?

  • Zippy says:

    The argument isn’t that economic value is trivial. The argument is that it cannot be reduced to nothing but subjective preferences. Economic value is (contra Austrian relativism) always and necessarily rooted in objective reality.

  • Still Different T says:

    In one especially amusing comparison, MacIntyre likens Nietzsche to King Kamehameha II, who in a single stroke abolished the taboo system on the Hawaiian islands in 1819. Even in the previous century, visitors like Captain Cook could get from the native population no satisfactory answer to the question why certain items were “taboo”—or even what taboo meant. By the time of Kamehameha, the whole system had lost its hold on the people. If the natives had had the benefits of Anglo-Saxon philosophy at the time, MacIntyre wryly observes, they could have come up with the answer: “Had the Polynesian culture enjoyed the blessings of analytical philosophy, it is all too clear that the question of the meaning of taboo could have been resolved in a number of ways. Taboo , it would have been said by one party, is clearly the name of a non-natural property . . . . Another party would doubtless have argued that ‘This is taboo’ means roughly the same as ‘I disapprove of this; do so as well.’” And so on.

  • Still Different T says:

    IOW, the reason you’re able to draw out this specific definition and [b]meaning[/b] of usury is precisely and only because this legal regime does not enforce the prohibition on usury. You are already aware of the ways past legal regimes dealt with lending (or more accurately, consuming products whose title the consumer did not possess and was unable to obtain); including but not limited to indentured servitude, slavery, debtors prison, and the prohibition of contracting (like a peasant in a feudal system).

    Or put another way, is it usury to offer a mortgage on the borrowers home only if he offers his daughter in marriage to the lender?

  • Zippy says:

    Still Different T:

    I know, I know: the difference between sodomy among “friends” and marriage is just so enigmatic, so socially and historically conditioned, so confusing. The important thing is that it can’t possibly be possible to gain any sort of even kinda clear understanding, especially not by reading actual, you know, authoritative magisterial documents: clear understanding is modernist analytic philosophy, understood as a slur.

    /sarc

  • Still Different T says:

    You undoubtedly know that the Jews also have a ban on usury. And also that it doesn’t apply to lending to the goyim. Do you see why that’s important to you?

    “clear understanding is modernist analytic philosophy, understood as a slur.”

    LOL, what you’ve done is narrowly and legalistically defined usury to mean a mutuum contract at interest. Again, the reason this definition has meaning to you is precisely because this legal regime does not enforce its prohibition.

    What do you think would happen if the government enforced this prohibition, per your definition, tomorrow?

  • Zippy says:

    Still Different T:

    My reaction to your latest comment is pretty much the same as if you had said:

    “LOL, what you’ve done is narrowly and legalistically defined marriage to mean a permanent union between one man and one woman. Again, the reason this definition has meaning to you is precisely because this legal regime does not enforce its terms.”

    “What do you think would happen if …”

    etc.

  • Still Different T says:

    And that’s why.

    Zippy as the anti-King Kamehameha II.

  • Zippy says:

    Oahu is my favorite island. But they are all great!

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