The problem of free money (Hamodia, September 24)
Erev Rosh Hashana of the shmita year is the ideal time to discuss lending and borrowing money. The original concept of the sabbatical year was that it would not only involve no agricultural work but would also have a distinct financial component: all outstanding loans would be voided when the seventh year rolled round.
That system proved impossible to maintain in practice. As with the injunction against charging interest on loans made to Jews, methods were invented — and approved — to find ways round these laws, so that loans generated income for the lender and were not automatically voided by the shmita year. The rationale for these takanot was that otherwise people would stop lending money altogether, and needy borrowers would be left high and dry.
This logic is very compelling, but it is noteworthy that the rabbinic concern was with the needy borrowers — not with the lenders. In simple terms, the lenders are the ‘haves’ and the borrowers are the ‘have-nots’. Clearly, the need of the borrowers to obtain access to loans, whether for personal or business use, is more urgent and can even be desperate. But that does not mean that lenders do not have needs as well. The ‘haves’, the potential lenders, have to do something with their money, they can’t just let it sit around idly.
As recently as the eve of the last shmita, in Elul 5767/ September 2007, the financial world was operating under what might be called ‘standard conditions’. Savers and investors — people with excess money — were able to make bank deposits, buy government or corporate bonds, or make other loans, and receive reasonable, even attractive, rates of interest. Borrowers could approach banks or other financial institutions and obtain loans, whether these were personal, mortgage, or business loans. This was considered the normal state of affairs: people with money could make it grow and banks’ main business was borrowing from ‘haves’ and lending to ‘have nots’.
That world was disrupted by the global financial crisis of 2007-2009, but what is truly amazing is that today, more than five years into the supposed ‘recovery’ from that crisis, the ‘old normal’ has still not been restored. In what is often called ‘the new normal’, interest rates are extremely low, almost zero for short periods — and even below zero (negative) in some countries. Yet, although money is effectively ‘free’ and banks are flooded with it, they have little desire to lend, at least not to small businesses which are known to be the most important engine of growth in modern economies. They don’t lend much to individuals either, unless these are rich.
In short, in ‘the new normal’, the financial world has become unrecognisable and, many would argue, dysfunctional.
In this environment, the classic problem of the ‘have-nots’ — where to find sources of finance — is as severe as ever, with the added frustration that potential borrowers know that there is ample money available, just not for them. But the situation of the ‘haves’ is most unusual, almost unprecedented: if they want to put their money in the kind of investments that have always been considered safest, such as bank deposits and government bonds, they will get next-to-nothing in return. This pushes them into riskier and more speculative investments, in what is termed “the search for yield”. But many of them do not understand the level of risk they are assuming and hence are unready for potential negative developments.
Others, especially in Israel, have persuaded themselves that real-estate and housing is risk-free. Despite the recent experience of the US, Spain, Ireland and many other countries, and the historical record in Israel too, they claim that “real estate never goes down”. They therefore load up on mortgage loans that are currently very cheap and buy apartments that are, by any accepted measurement, very expensive.
Is it not possible, even probable, that over the next seven years, interest rates might revert to the levels considered normal until 2007, or that housing prices fall to levels considered reasonable — or both?