Rejewvenate!

Since the ill-fated Camp David negotiations between Ehud Barak and Yassir Arafat collapsed into an orgy of blood and violence we now call the Second Intifada, many on the Israeli side have abandoned the principle of land for peace. This principle, which became official US policy after Russia hastily agreed to a UN-brokered ceasefire to the June War of 1967 that did not require a withdrawal to pre-war lines, remains the official policy of Israel, the US, the Quartet, the UN, the Arab League, the PA, Fatah; pretty much everyone except Hamas. So why have forty years gone by with no resolution to this conflict?

Along comes Bueno de Mesquita (no, it’s not a name for a delicious new Tex-Mex barbecue sauce, it’s a real person, and he’s a lot smarter than either of us) with an answer for not only that question, but also for the question of how to resolve the conflict.

“In my view, it is a mistake to look for strategies that build mutual trust because it ain’t going to happen. Neither side has any reason to trust the other, for good reason,” he says. “Land for peace is an inherently flawed concept because it has a fundamental commitment problem. If I give you land on your promise of peace in the future, after you have the land, as the Israelis well know, it is very costly to take it back if you renege. You have an incentive to say, ‘You made a good step, it’s a gesture in the right direction, but I thought you were giving me more than this. I can’t give you peace just for this, it’s not enough.’ Conversely, if we have peace for land—you disarm, put down your weapons, and get rid of the threats to me and I will then give you the land—the reverse is true: I have no commitment to follow through. Once you’ve laid down your weapons, you have no threat.”

Bueno de Mesquita’s answer to this dilemma, which he discussed with the former Israeli prime minister and recently elected Labor leader Ehud Barak, is a formula that guarantees mutual incentives to cooperate. “In a peaceful world, what do the Palestinians anticipate will be their main source of economic viability? Tourism. This is what their own documents say. And, of course, the Israelis make a lot of money from tourism, and that revenue is very easy to track. As a starting point requiring no trust, no mutual cooperation, I would suggest that all tourist revenue be [divided by] a fixed formula based on the current population of the region, which is roughly 40 percent Palestinian, 60 percent Israeli. The money would go automatically to each side. Now, when there is violence, tourists don’t come. So the tourist revenue is automatically responsive to the level of violence on either side for both sides. You have an accounting firm that both sides agree to, you let the U.N. do it, whatever. It’s completely self-enforcing, it requires no cooperation except the initial agreement by the Israelis that they are going to turn this part of the revenue over, on a fixed formula based on population, to some international agency, and that’s that.”

(Good Magazine via Marginal Revolution)

Not bad, huh?

I was reading this thought-provoking article in the New York Times about the actual economic meaning of making charitable donations tax-deductible. The article is worth discussing on its own merits, but I want to talk about the implications it has for private Jewish education.

The bar for becoming a tax-exempt organization is set relatively low. Among the examples quoted in the website is an organization to help S&M fans who lost their gear to Hurricane Katrina get new whips, chains, manacles, and ball-gags.

Many private schools have ancillary foundations that raise funds to support the parent institution. Here’s my plan. Let’s say that tuition is $20,000 at the local Yeshiva (or, Hebrew Academy, lo aleinu). You can set up a foundation to support the Yeshiva, and only offer admission to members of the foundation. Have the yeshiva charge $5,000 tuition, and have membership in the foundation cost $15,000 per child. Voila, 75% of tuition at the Yeshiva is tax-deductible!

In the past, I opposed tax relief for private school tuition. Let me clarify the apparent contradiction. I have no problem with taking advantage of current laws and tax avoidance techniques, I just think we shouldn’t vote in new benefits for ourselves without considering he broader community.. That’s our system, and rational people should try to pay as little in taxes as legally required. There is no legal or ethical requirement to be a sucker on taxes and pay more than what is legally required. It’s the government’s job to make sure that the tax system is structured appropriately to collect what is needed.

The other key difference is that my plan makes tuition dollars deductible from your federal income tax as well as your state income tax, and it does not limit the deduction to families making under $150k.

I’m sure that there’s an accountant out there, or a tax lawyer, who will explain why this idea doesn’t work or is illegal. And yes, if all private schools used this we’d have to re-write the tax code. But that’s what I’ve been saying all along! If this is legal, let’s do it!

Please make sure to refrain from doing business with www.succah.com or www.succah.safewebshop.com, as they are owned by Mr. Sam Rosenbloom, who continues to refuse to give his wife a get, leaving her an agunah.  He continues to be subject to a seruv (i.e., he is in contempt of beit din), and it is thus halakhically prohibited to engage in any contact with him, economically or socially.  See http://www.ouradio.org/images/uploads/rav_hauer77.JPG.

So spake my rabbi, and I pass it on to you. Can’t help but feeling like it’s a drop in the bucket though.

The New York Times had an article today covering payday loans, which have replaced credit cards as the most egregious form of legal usury sanctioned int his country (though I am fortunate to live in New York, one of twelve states to ban this sort of chicanery).  Here’s how it works:

For Ms. Truckey, as for most payday borrowers, the loans began as a stopgap. After losing her job in 2002 she borrowed $500 from a payday store, which charged $22 per two weeks for every $100 borrowed, or the equivalent of 572 percent annual interest. When the loan came due in two weeks, she could repay only the $110 finance charge, so she rolled the loan over, adding another finance charge.

That’s right, 572%! That’s  more than twenty-five times the already-ridiculous rate your credit card company is charging you - and at least they offer you a grace period of a few weeks before the interest kicks in. But wait, all hope is not lost - there’s a company taht’s trying to make it better:

At GoodMoney, tellers encourage borrowers to consolidate their debt in lower-interest term loans, and to use other credit union services like automatic savings. If borrowers cannot repay a loan after rolling it over twice, they can get the loan interest-free by attending a free credit counseling session with a nonprofit service.

What a relief. I wonder what the kind folks at GoodMoney charge for a lone. They seem so understanding, so helpful, so in touch with the needs of the community. Let’s find out.

But alternative payday loans have also drawn criticism from some consumer advocates, who say the programs are too similar to for-profit payday loans, especially when they call for the principal to be repaid in two weeks. At GoodMoney, for example, borrowers pay $9.90 for every $100 they borrow, which translates to an annual rate of 252 percent.

Holy Mackerel! What a business! I wonder how much of that 252% interest they actually manage to take home. According to Ken Eiden, president of Prospera Credit Union, the folks behind the GoodMoney program (along with Goodwill), almost half goes to writing off bad loans. Which leaves a whopping 126%, that Mr. Eiden claims goes to database and administrative services. The GoodMoney program is supposedly non-profit, which leaves me wondering where all the money is goign. Credit card companies and banks don’t gross a fifth of the 125% that GoodMoney nets, and since banks and credit card issuers do run credit checks and do verify income, they presumably have more overhead than GoodMoney. Something doesn’t smell right to me.

One things is for certain, and it’s that America is drunk on credit. On the one hand, access to credit markets is a tremendous boon. It allows businesses to open and expand, enables families to purchase homes and cars, and empowers cities, states, and nations to meet unexpected needs. However, as many before me have analogized, debt is slavery. Owing money controls your choices, limits your freedom, and constricts your personal autonomy and dignity.

We all know by now of the predations of the credit card industry, with their outrageous interest rates, hidden fees, double-cycle billing, incomprehensible terms and conditions, and policies designed to keep customers in debt forever. We’ve recently learned about similarly deplorable conditions in the education loan market, where complicit colleges have turned their campuses into private game reserves for unscrupulous lenders (though, as GoodMoney demonstrates, I’m not even sure what a scrupulous lender looks like anymore, or even if one exists).  And you’d have to be off at some kind of foreign military quagmire not to have heard about the orgy of delusional lending and borrowing that has led to a major crisis in the international credit markets.

And that’s what’s so infuriating. When the ordinary borrower is finally drowned in that vicious whirlpool of fees, penalties, and astronomical interest rates, there’s nothing to be done. Even bankruptcy no longer offers a new start. But when banks and hedge funds get burned while speculating with borrowed money, in comes the Fed, offering billions of dollars in loans at below-market rates. All you have to do is pull up to the discount window and take what you need! Bailouts for everyone! This isn’t capitalism - you know, the kind where the losers of the ferocious competition for fiscal survival get carried out on stretchers - this is socialism for the rich! I don’t see the Fed lending money to people whose adjustable mortgage rates have readjusted three or four points higher.

Maybe the Torah was on to something when it spoke of interest-free loans secured by collateral. Sure, it’s not a away to make money. It’s a form of charity. But isn’t the Fed offering charity right now too? Only they’re offering it to the rich, who, by their own choice, took foolish risks and have now gotten burned. There’s a distinction between those who use credit and those who need credit. For many of us, credit enables prosperity, but for some, credit is a matter of survival. Isn’t it time we started drawing that distinction with a bit more sense, and a bit more humanity?

DovBear et al: Glatt kosher investments in the stock market?

A guest post on DovBear raises the issues of stock ownership and Jewish law. The gist of it is that since owning a share of stock is ownership (and usually voting rights) in a company, and since Jews are prohibited to benefit from a variety of behaviors, such as labor on the Sabbath, stock ownership is fraught with problems for the traditionally observant Jew.

To get around this problem, some Israeli hedge funds have created portfolios out of index funds, bonds, and stock options. In all three cases, the instruments owned do not represent an ownership stake directly in any business, nor are the instruments traded on Shabbat or holidays by the hedge  fund. However, the options purchased are options to buiy or sell stock of companies that do violate any of the variety of problematic prohibitions.

I wonder how many Jews are attuned to this issue. Most of the investors that I know invest in indexed mutual funds, not in individual stocks. However, I know lots of people who made money in the IT boom by buying individual stocks of companies whose employees were most certainly working on shabbat, and were most certainly Jewish. Is this something we should be paying attention to? The technical connection between business ownership as envisioned by the Talmud and stock ownership is quite solid. Owning stock gives the rights to a share of future earnings, and comes with voting rights to help set company policy. True, you can’t run the business from the floor of a shareholder’s meeting, but is your inability to make the company conform with Jewish law an excuse for not observing it yourself, or  is it an indication that you shuld not involve yourself with such a business?

If you want to be technical, then you must ban ownerhsip of those stocks, even as you embrace ownership of bonds and options in those same companies. On a technical level you’re free and clear - there’s no bar on lending money to someone who violates the Law (though priority should be given to “your nation, the poor who live among you”), and trading options carries no ownership stake whatsoever (unless you need to actually exercise the option rather than just trade it in, but even then your holding time is so short as to be de minims, imo).

If you prefer taking a broader, non-technical view, you wind up becoming a values-investor. Though the extent of ownership that stock confers may not rise to the level where you would avoid it because of halachic  concerns, investing in companies that clash with your values is a larger problem. It also stops mattering whether the investmen is stocks, bonds, options or more complex derivatives. Benefiting from a company’s performance when that performance runs contrary to your ethics is repugnant in any form. I suppose short-selling would be ok though…

I’ve recently taken a renewed interest in economics and finance, and I find myself wishing that there was a good blog about Judaism and economics. I read plenty of Jewish blogs that are interested in economic issues, like the JSpot blog run by Jewish Funds for Justice. What I’m really looking for though is a blog that addressed the economic implications of Jewish social justice and mitzvot.

A couple of months ago, my friend Yechiel Newman gave a wonderful dvar Torah about charging interest, and I have adapted it, with his permission, for this blog. I hope to one day convince him to blog about Judaism and economics, but for now, all we get is a taste:

Shabbat Shalom

One of the classic rivalries between Jewish thinkers is that of the Rambam (Maimonides) and the Ravad (Rabbi Avraham Ben David of Posquieres). These two great Jewish philosophers found little they agreed on and went to great lengths to discuss their disagreements. In fact, when I was teenager growing up in Brooklyn, the rabbis at my yeshivah would joke that the proof of God’s existence can be easily deduced. The logic was simple — The Rambam stated that God exists and the Ravad did not disagree.

If truth can be deduced from the absence of disagreement between rivals, then, it follows, there can be no greater truth than of the evil of charging interest on loans. For Islam, Christianity and Judaism universally agree that collecting interest is prohibited.

The Koran in Sura Al-Imran verse 130 states

O you who believe! Devour not interest, for it goes on multiplying itself and be mindful of your obligation to Allah that you may prosper; and safeguard yourselves against the Fire which is prepared for disbelievers. (Koran 3:130)

The prohibition against collecting interest is seen in the Torah a few times. For example, in Exodus 22:24

The New Testament, in the Parable of the Talents seems to suggest that interest was actually acceptable. Briefly, the Parable speaks of three servants, each of whom was entrusted with a sum of money during their master’s absence. Two of the servants used the money in the service of some business venture, and doubled the initial sum. The last servant, who was given the least money, feared that he would lose what little was given to him, and so he buried the money to ensure that he could return it to his master when his master returned to collect it. In Matthew 25:29 we see the last servant being chastised by the master for this act: “Then you ought to have put my money in the bank, and on my arrival I would have received my money back with interest.”

However, in spite of this verse, in the Middle Ages, the Church eschewed their own teachings and declared the charging of interest as usury, and, therefore, illegal.

So, whether you are a Muslim, a Christian, or a Jew, the evil of interest is spelled out to you in no uncertain terms.

As an aside, the Buddhists spent so much time convincing their followers to divest themselves of all worldly possessions that developing a position on the “interest issue” was not high on their agenda.

For Jews, the halachic prohibition against interest is far-reaching in scope. Jewish borrowers are not allowed to offer preferential discounts in to a lender in their business dealings, as that could be construed as implied interest (Avak Ribbit). Even something as insignificant as the borrower thanking the lender is prohibited, as this display of gratitude is considered an ill-gotten gain from the loan.

A modern day thinker may wonder, how is it possible to live in a world without interest? Surely interest, as a free-market inducement between borrower and lender cannot be forbidden under a reasonable social system. Though borrowers would certainly prefer not to pay interest, lenders do not charge it out of cruelty, but as a reflection of two factors: the risk inherent in lending money to another, and the time value of money (a dollar now is worth more than a dollar next year irrespective of risk, simply because you can exchange today’s dollar today, but you must wait until next year to convert that dollar into some good or service). What kind of socio-economic system is the Torah advocating?

The importance of interest was explored by Ludwig von Mises — one of the founders of the Austrian School of Economics and a noted Libertarian thinker. Von Mises wrote in his treatise on Human Action:

Therefore there cannot be any question of abolishing interest by any institution, laws or devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in 100 years no less than a present apple. What can be abolished by laws and decrees is merely the rights of capitalists to receive interest. But such decrees would … very soon throw mankind back into the original state of natural poverty.¹

Facilitating commerce, and in particular, loans, was something the Gemara felt strongly about. In Sanhedrin 2b the Gemara discusses the importance of judges performing rigorous due diligence of all witnesses that come before them. The Gemara ponders the possibility that a distinction should be drawn between the typical due diligence necessary of all witnesses and the due diligence necessary when witnesses come forth on monetary matters. The Gemara states that if the courts were to apply the same level of rigor in their examination of witnesses to loan contracts as to witnesses in other matters, the courts would be placing a heavy burden on lenders trying to recover their money. The Gemara therefore ruled that extensive due diligence of loan witnesses was not in the public’s interest since it will effectively “lock the doors of the lender to the borrower”.

Though normally the courts required a very high standard of proof in order to uphold a claim, in the case of loan contracts, such a high standard would greatly increase the risk that a lender would be unable to collect on his loan. Since lenders would be unable to collect interest commensurate with this level of increased risk, lenders would simply pull out of the capital market, and seek other investments with lower risks and better rates of return.

With the policy of not “locking the doors of lenders” in mind, Jews have developed a special type of loan document called Heter Iska (literally, a business permit). The Iska contract is structured like a trust or partnership, but, viewed in the abstract, has a financial outcome in line with that of loaning money for interest. The way it works is that two parties who might have normally entered into a lending relationship instead form a partnership or trust. The would-be lender becomes an investor, providing capital to the would-be borrower, who in turn becomes the manager of the trust. Profits are divided in such a manner that the investor earns a rate similar to what he would have earned as a lender charging interest. In addition, a buyout clause enables the manager to ‘repay’ the investor and end their relationship. (See JLaw.com for a standard Heter Iska form.) Note that while the Heter Iska functions well so long as the business venture is profitable, as a practical matter, the failure of such a venture leaves the lender cum investor with little halachic recourse for recovering his investment should the business fail. Such cases often wind up in secular courts - see Kenneth Ryesky’s treatment of the Heter Iska in secular courts.

It should be noted that both Christians and Muslims have also found ways to work around the prohibition against charging interest. When the Church issued its decree against usury it allowed Jews to engage in money-lending. Jews, who were left out of the formal guild system, found themselves with no other source of income than money-lending. In the long term, the results were disastrous for the Jewish people since they would eventually find themselves stereotyped as evil for conducting these very loan. In the near term though, Jewish bankers quickly became an integral and irreplaceable cog in the European economy, providing financing for everyone, from farmers to craftsmen, merchants to manor lords, and even kings and generals.

Islam, under Sharia, takes a slightly different approach than the Heter Iska. Muslim lenders enlist a third party who sells an asset to the borrower at a guaranteed profit. This profit is paid out to the seller, who is an agent of the lender, over the period of the loan. For example, let’s say Yousef wishes to borrow $10,000. Abdul is willing to lend $10,000 to Yousef at a 20% interest rate. To circumvent the prohibition against interest, Abdul purchases a car from Faisal for $10,000, and sells the car to Yousef on a payment plan of $1,000 per month. Yousef winds up paying $12,000 over the course of the year in exchange for the $10,000 he received at the beginning of the year. Neither Abdul nor Yousef ever take delivery of the car, or even see the car. For that matter, the car may not even exist! This so-called “business transaction” has created a situation in Saudi Arabia where a car dealer with eight dusty Yugos on his car lot has annual revenues greater than the Gross National Product of a mid-sized country.

So we are left with an economic puzzle. If interest is acceptable, as can be seen from the Heter Iska document, then why does it state clearly in the Torah that interest is forbidden? And, if interest is forbidden, why are we given this easy out with the Heter Iska? On the one hand we have a direct prohibition against interest up to and including receiving a spoken thank-you, and, on the other hand, we are allowed to engage in transactions that are essentially the same as interest bearing loans.

To attack this puzzle I suggest we look at the context of the laws relating to interest.

If we look at the relevant texts we will find that the laws of interest are closely related to some interesting laws about employment and collateral. We are told an employer must pay wages on the day that the work is done. We are not supposed to let the sun set without fully compensating an employee for a day’s work. Additionally, we find that if a poor person comes to you for a loan and collateralizes that loan with his own garments, then you, the lender, need to return the garment to the borrower each night before sunset, since, as the text says, “This alone is his covering .. With what shall he sleep” (Ex. 22:26). The Chafetz Chaim took it for granted that these three laws were intertwined. In fact, the first chapter of the Chafetz Chaim’s book, Ahavath Chesed, is titled “Laws of Loans, Pledges, and Wages.”

It is the proximity of these laws that helps us to solve our interest puzzle. I suggest, that The Torah is not instructing the two parties to a loan to defy the natural laws of the market. Rather, the Torah is teaching us how to conduct ourselves when there is a disparity in power between the two parties. By including the laws of loans among the laws of employment and collateral the Torah is telling us that when we find ourselves in a more powerful position, because of another person’s financial weakness, we should not exploit that opportunity.

Many people in this room may have read the works of Ayn Rand. The collection of her writings form a system of ethics known as Objectivism. Objectivism teaches us that selfishness is a good thing. Adam Smith, an economist most famous for how writings on free trade postulates that when each person arranges his affairs in the most “selfish” way an “invisible hand” causes the outcome to be best for society.

John Mackey, founder and CEO of Whole Foods, questions this worldview in an inspiring speech he gave to a recent Libertarian conference

He said:

… despite her literary greatness and many positive contributions to the freedom movement, I believe that Rand has also harmed the movement. How? She was overly provocative. The “virtue of selfishness” is an oxymoron. Selfishness is not a virtue. Now, I understand all the arguments — I’ve read all the books. I know that self-interest channeled to the social good, as expressed through Adam Smith’s “invisible hand,” is the single most brilliant insight about social organization ever made in history. That being said, selfishness (as opposed to self-interest) is still not a virtue. It is something to be discouraged, and not something to be supported.²

I believe John Mackey’s message echoes the message we are meant to take from the Torah’s prohibition against charging interest on a loan.

Interest per se is a great thing. It allows us to rise from the natural poverty, as Von Mises stated. In the form of microfinance, interest enables thousands of people from developing countries to escape hardship. In the form of a mortgage interest it allows each of us to own a home. Interest is a tool to harness risk and to temper inflation. For all of these reasons and many more, we are given the Heter Iska.

But, interest also has a darker side. As an example, there are companies in the United States that offer “payday anticipation loans - very short term loans that are to be repaid from the borrower’s next paycheck. These loans are given at very high rates of interest and are only attractive to people who cannot wait until their payday at the end of the week. Although the moral case for these loans can be made from an economic perspective, the Torah instructs us otherwise. The Torah tells the employer not to exploit his position of power and force the employee to borrow money that is rightfully his. The Torah tells the employer to pay the employee immediately.

In this week’s Parsha we are instructed “Kedoshim Tehiyu” — be holy. This positive commandment to follow a moral compass in our daily actions is a catch-all. It is recognition that we are faced with economic puzzles each day that call for moral clarity. Faced with the duality of interest as both a source of good and an instrument of evil – Kedoshim Tehiyu instructs us to use the Heter Iska where appropriate, but, also, take care to not exploit our neighbors in their time of greatest need.

1 http://www.mises.org/humanaction/chap19sec2.asp

2 http://libertyunbound.com/archive/2006_06/mackey-winning.html