Sunday, September 30, 2007

Fifties and Hundreds

Moses chose capable men from all Israel and made them leaders of the people, officials over thousands, hundreds, fifties and tens. They served as judges for the people at all times. The difficult cases they brought to Moses, but the simple ones they decided themselves (Ex 18:25-26).
The Law of the Somalis describes a justice arrangement that is remarkably similar to the arrangements described in Exodus and Deuteronomy.

I was struck when reading about this that a biblical system of justice will not work in Western Society, because urbanisation, industrialisation and the democratic state have destroyed the extended families and tribes that still function in many other parts of the world. In the western world, the fifties, hundreds and thousands no longer exist. All we have is millions loosely attached to the democratic state, with nothing in between.

Before Gods justice system can be restored, the fifties, hundreds and thousands will have to be restored to Western culture. In my book Being Church Where We Live, I describe how Christians can build real community by choosing to buy houses and live in the same locality as other members of their church.
Church is something we are, not something we can attend. To be the body of Christ in the place where we live, we must live close to the rest of the body. Our Church should be a central part of our being, so we must belong where it is.

Each Church should be attached to a particular locality, so there can be as many Churches as there are different localities. Ideally, there should be one Church in each location and each location should have one Church. To have a number of different kinds of church in the same locality is inconsistent with the New Testament.
Radical Christians should begin being the fifties and thousands back into our culture. If a group of Christians establish a beachhead in a neighbourhood and win many of their neighbours to Jesus, they are establishing a fifty or a hundred. If this process is repeated, it will eventually become a thousand. God’s system of justice could gradually be established in these neighbourhood communities

Neighbourhood Christian communities will become the fifties, hundreds and thousands that are the western equivalent of the extended family and tribe.

Saturday, September 29, 2007

Laws of the Somalis

I am currently reading a book called the Law of the Somalis by Michael Von Notten. He married a Somali woman and lived there for many years. His book is one of the most significant, I have read for a while.

Von Notten describes how a set of customary laws and tribal judges can work to establish a peaceful society, without any need for a national parliament, statutory legislation, national police and other state paraphernalia. The customary laws of Somalia are quite similar to God’s laws in Exodus and Leviticus, including restitution for theft. The system of judges is similar to that described in Deuteronomy. What the Laws of the Somalis shows is that God’s law works, even if he is not acknowledged.

The sad thing is that attempts by colonial powers and world powers to impose democracy on a tribal culture is destroying a legal system that worked effectively. God has never given democracy a tick (Ex 23:2) but he has given his approval to tribal culture (Gen 49). Democracy just does not work in a tribal culture.

When the electorate is composed of close-knit tribal, religious, linguistic or ethnic communities, the people invariably vote, not on the merits of any issue, but for the party of their own community. The community with the greatest numbers wins the election, and the minority parties then put rebellion and secession at the top of their political agenda. That is nothing but a recipe for chaos (p.127).
The winners use the power of government to benefit their own members, which means exploitation of the members of other clans. Consequently when there exists a governmental apparatus with its awesome powers of taxation and police and judicial monopoly, the interests of the clans conflict. Some clan will control that apparatus. To avoid being exploited by other clans, each must attempt to be that controlling clan.
A democratic government has every power to exert dominion over people. To fend off the possibility of being dominated, each clan tries to capture the power of that government before it can become a threat. Those clans that didn't share in the spoils of political power would realize their chances of becoming part of the ruling alliance were nil. Therefore, they would rebel and try to secede. That would prompt the ruling clans to use every means to suppress these centrifugal forces… in the end all clans would fight with one another (p.136).
Efforts to impose democracy on a tribal society actually produces rule by warlords.

Friday, September 28, 2007

Neither Greek Nor American

A political commentator recently complained that many American Christians are Americans first and Christians second. He implies that they should be Christians first and Americans second. Galatians 3:28 says something quite different.

There is neither Jew nor Greek, slave nor free, male nor female, for you are all one in Christ Jesus.
We need to think about what this means.

There are not Greeks in Jesus Christ. That means that there are no New Zealanders in Jesus Christ, and there are no Americans in Jesus Christ.

Many Christians believe that God will use America to expand the Kingdom of God. This is not true. As the Kingdom of God expands like a mustard seed into a mighty tree, the nations will shrivel up an rot like a shrunken prune. As the Kingdom of God grows, the United States will have to wither away and disappear.

Thursday, September 27, 2007

Silent Prophets

The Old Testament prophets were quick to challenge kings that did not obey God’s law. The prophets did not let the kings off the hook, because they were leaders of God’s people. In fact, they demanded a higher standard from the people of God.

Modern prophets seem reluctant to test the current government of Israel against God’s law. The law protects all people living in the land.

When an alien lives with you in your land, do not mistreat him. The alien living with you must be treated as one of your native-born. Love him as yourself, for you were aliens in Egypt. I am the LORD your God (Lev 19:33,34).
Israeli treatment of the Palestinians has been unnecessarily harsh and cruel. God requires his people to be kind to the strangers living in their midst.
The law also protects the property of everyone living in the land.
Do not move your neighbor's boundary stone set up by your predecessors in the inheritance you receive in the land the LORD your God is giving you to possess (Deut 19:14).
Cursed is the man who moves his neighbor's boundary stone. (Deut 27:17).
The Israeli government has steadily confiscated more and more land that belongs to Palestinians and Arabs, usually for security reasons. Security requirements do not come above God’s law. If Ahab had claimed to have taken Naboth’s vineyard for security reasons, the prophet’s response would not have been any different.

God has preserved the descendents of Jacob and he requires Christians to bless the Jewish people, but that does not give the Israeli government the right to ignore God’s law. Therefore, I cannot understand why the prophets who have so much to say about God’s purpose for Israel are silent on these issues.

More here.

Wednesday, September 26, 2007

Healing and Evangelism

Modern evangelistic campaigns are often held in a church building, so a powerful publicity campaign is required to get people to attend. The evangelistic method is worship, sermon and altar call. These methods do not exist in the New Testament.

New Testament evangelism is healing the sick/casting out demons and preaching to the crowd that gathers. This method was very successful for the early church, so we are unwise to do something different. Sickness is the key vulnerability of the modern world. Our affluent lifestyle has given people almost everything they need, but modern medicine has not been able to conquer sickness and pain. A gospel confirmed by healing of the sick will be well received by the modern world.

More at Healing Evangelism

Tuesday, September 25, 2007

Wrong Model is Not Working

Many Christians have been praying earnestly for healing, but their prayer has not been answered. Many pastors have been praying for people who go forward at their meetings to be healed, without getting victory. The problem is that we have our spiritual wires crossed.

Most Christians are using the wrong method when they deal with sickness. We are trying to use the gifts of healing for Christians, when we should be using them for the lost in evangelism. Christians are asking God to heal them, when he has already done everything that is necessary for salvation (healing). Christians are asking God to heal them, when Satan is the one they really have to deal with.

Christians should not be asking God or to heal them. They do not need to plead with Jesus for healing. He has already provided healing for us when he was whipped and beaten. We do not have to ask for it, but we do need to appropriate what he has already been given to us. We receive what is our by faith. We also need learn to resist Satan, standing in faith.

More at Healing for Christians.

Monday, September 24, 2007

Healing Models

I have always been fascinated the healing miracles in the gospels and the Acts of the Apostles. The way the Holy Spirit worked was really exciting. However, I was always really puzzled by James 5. I could not see how it fitted with the rest of teaching about healing in the New Testament. James message seemed so tame in comparison to Acts and the Gospels.

A couple of years ago, I discovered that there are two streams of theology about healing in the Bible and then suddenly everything fell into place. If we split the teaching of the scripture into these two streams, we get a clearer understanding of God’s healing. The two themes are:

1. Healing and Evangelism
The gift of healing is primarily for unbelievers as a demonstration of the love of God. A major theme of the New Testament describes how the gift of healing works in evangelism. Jesus brought good news to apostate Israel, so his ministry demonstrated this type of healing (for more see Healing and Evangelism).

2. Healing and Believers
The second healing theme explains how God’s people can walk in health. Healing is part of salvation, so it should be a normal part of every believer’s life. James is actually a key passage in the second stream (for more see Healing for Christians).

The healing of an unbeliever and the healing of a believer have a different basis in the work of Christ. One is based on mercy and the other is based on covenant. Since they have a different basis, they are appropriated in different ways. We need to understand this difference to receive the full salvation of God.

Saturday, September 22, 2007

The Money System

I have just completed a reworking of my article on the Money System. If you are interested in this topic, or want to understand the current credit cruch, follow this link.

Thursday, September 20, 2007

Council Elections

Potential politicians put up a sign with a photo of themselves under a meaningless slogan like "City Vision" or "For Positive Change", and expect people to vote for them. They must think the voters are suckers.

Wednesday, September 19, 2007

Council Elections

Elections for our city council are underway.

Voting in elections for the city council is like choosing which thief will rob you, or choosing which bully will push you around.

Tuesday, September 18, 2007

Banks (5) - Flight to Quality

The Northern Rock bank in the United Kingdom has experienced a run with depositors queuing to withdraw their money. The same thing has happened in New Zealand as depositors have withdrawn their money from finance companies.

Experts speak of a flight to quality, but quality is relative in this game. Northern Rock and the New Zealand finance companies all borrow short and lend long. This is why a flood of withdrawals is such a serious problem.

People are moving their deposits to more established banks. However, they should understand that these banks play the same game. They also take deposits for short terms and make loans for long terms. If all depositors tried to withdraw their money at the same time, they too would struggle to meet the demand.

Commentators are saying that the subprime problem is confined to the United States. That is not true. Banks throughout the western world have been competing to throw money at homebuyers. They are not called subprime here, but plenty of people have borrowed ninety percent or more of the value of their house. These people often had no savings even though they had been working for several years, so they must be a high credit risk. If house prices fall or unemployment becomes a problem, they will struggle in the same way.

The central bank is expected to come to the rescue as lender of last resort. But the only way that central banks can deal with a run on the banking system is to print money. In a situation where inflationary pressures are increasing, expanding the supply of money might only exacerbate the problem.

The full series can be viewed at Bank Deposits and Loans.

Monday, September 17, 2007

Banks (4) - Its Our Money

Depositors should start asking banks what they will do with their term deposits. They should ask if the money will be loaned for a longer term than the term of the deposit. If the bank says yes, they should ask how the bank will repay their money when the term of the deposit has ended. The bank will say that it will obtain deposits from other people or borrow the money from other institutions. This kind of questioning will expose the dangers in what the banks are doing.

If enough people ask for a different service, an innovative bank will be able to get an advantage by providing that service. If consumers start enquiring about a bank that matches the terms of it loans with the terms of its deposits, a bank should emerge to provide that service. If that is what most depositors really want, then that bank should grow quickly. As more and more depositors choose this service, other banks will have to start providing it, so that they do not lose market share.

The power to change the banking system lies with depositors. If enough people demand a better service, banks will have to change their practices. All that is need is for one bank to provide an alternative service. Depositors can then use the power of their money to reward that bank and punish those that refuse to change. Power rests with those who own the money and the money is owned by the depositors, not the banks.

Sunday, September 16, 2007

Banks (3) - Changing the System

Modern banking practices are largely shaped by government policies. Governments have supported the common practice of moving demand deposits onto their own balance sheets, so we should not count on governments to resolve this problem. Fortunately, individuals can resolve the problem without waiting for their government.

We should start asking our banks who owns our demand deposits. They will tell us that that the money belongs to us. We should respond by asking them why it appears on their balance sheet, if it belongs to us. They will respond with “weasel words” about modern banking practice and banking laws and deposit insurance. However, if enough people persist in asking these questions, banks will start get concerned.

When there is sufficient demand for a true safekeeping service, some banks will start to provide it. A bank that has an eye for opportunity will see an opportunity to get a head start in a niche market.

The customer is king. Once a few banks start offering this service, people who want a genuine safe-keeping service will switch their business to those banks. If enough people are serious about honest banking, the other banks will get worried about losing business. Many will start offering a true safe-banking service, so that they do not lose customers. Some will set up separate institutions in attempt a significant share of this business.

Saturday, September 15, 2007

Banks (2) - Clarity and Separation

Banks and their customers should be very clear about the service that is being offered. The problem is that most modern bank accounts operate their demand deposit accounts as if they were term deposits. Depositors have accepted this blurring, because they want interest on their money, even when it is stored for safe keeping. However, they are allowing banks to commit theft with their money, in return for an interest payment. Depositors should be much clearer about what they want from a bank. Do they want safe keeping or do they want interest?

Banks should keep these two types of transaction quite separate. Demand deposits should be kept separate from funds that that have been deposited as term deposits. In practice, it would be better if there were two types of bank. Some banks would provide a safe-keeping and payments service. They would do this for a fee. The money should always be available on demand, so they will not pay interest.

Other banks will become loan brokers. They would pay interest, so they would only accept term deposits. All those dealing with this type of bank would understand the risks involved in lending money to other people.

Distinguishing between true demand deposits term deposits would allow people to make explicit choices about which service they want. Some will choose to keep their money safe. Others will choose to put some of their money in time deposits, so they can earn interest.

Friday, September 14, 2007

Banks (1) - Clear Contracts

Modern banks are not very clear about the contracts they offer. Some savings accounts pay interest, but have a variable term allowing the money to be withdrawn on demand. Some cheque accounts offer interest on positive balances. The problem with these bank accounts is that it is not clear whether the money is being deposited for safe keeping or being loaned for a fixed term. The distinction between demand deposits and term deposits has become blurred. In reality they are two different things.

They are different for the bank and have different legal consequences. The bank is entitled to lend money in a term deposit to someone else for the term of the deposit. It has a duty to lend the money in away that will minimise risk of loss. The situation with a demand deposit is very different. If the bank lends money deposited in a demand deposit, or even records it as an asset in its accounts, it is stealing something that does not belong to it. To avoid being guilty of theft, an honest bank should be very clear about what type of account it is offering.

Understanding the two types of account is also important for the person making the deposit. When making the demand deposit, they are giving their money to the bank for safekeeping. Security and convenience is their priority, so they will be willing to pay a fee for that service. They also expect to be able to go to the bank and withdraw their money at any time. They want to be absolutely certain that their money will be there whenever they need it.

When a person makes a time deposit, they understand that they that their money will no be available to them for the length of the specified term. They understand that the bank will be lending the money on to someone who can use it effectively. They expect the bank to be careful and lend the money wisely. However, they know that there is some risk that the person borrowing the money may default on the loan. This risk is shared with other term depositors at the bank and with the owners of the bank, so a small default will not affect them. However, if defaults become widespread, the risk to the depositor may increase. The interest paid on the term deposit is in part compensation for this risk. Generally this risk premium will be quite small.

The full series of articles can be viewed at Bank Deposits and Loans.

Kingdom of God

The Kingdom of God is everything wrong with the world made right again in Christ (Don Stephens).

Thursday, September 13, 2007

Term Deposits (11) - Bankers Benefit

When Banks borrow short and lend long, depositors do not benefit. Borrowers do not benefit either. The benefits all go to the bankers. They are working for themselves, not for their clients.

However, this policy is also risky for the bankers. The practice works as long as the flow of withdrawals and deposits roughly match each other. In a time of uncertainty or panic, a large number of people may try to withdraw their deposits. As there is an advantage in getting in first, there may be a run on the bank. If the bank cannot call up all its loans it may run out of reserves. This could push the bank into bankruptcy and many people would lose their money. Panics and bank crashes have been common throughout the history of banking.

The full series can be viewed at Bank Deposits and Loans.

Wednesday, September 12, 2007

Term Deposits (10) - Borrowers Perspective

The person borrowing from a bank that lends long and borrows short also faces uncertainty. They have agreed to a mortgage with at twenty year term, with a bank that has only organised the finance for the first six months of the loan. The bank presumes that it will continue to be able obtain the money as it is needed. This is probably true, but the bank does not know what rate of interest rate it will have to pay to obtain the money in the future. That is why most banks will generally not hold mortgage interest rates fixed for more then about two years. They do not know how the interest rates will move in the future, so they pass the risk on to the borrower.

The adjustable or floating rate mortgage is the solution to this problem. The adjustable rate mortgage is really a series of short-term loans. The bank is implicitly saying to the borrower, I can only loan you this money for a couple of years. At then end of that term, I will renew the loan, but I do not know what the interest rate will be. I will always be able to borrow some money, but I cannot control the interest rate. I will have to adjust the interest rate that you pay to allow for this. So really an adjustable rate mortgage is really a series of short term loans with different interest rates, but with the same security remaining in place.

If the borrower is willing to take the risk of committing to a twenty or thirty year mortgage, without know what the interest rate will be, that is their business. However, taking on an unknown risk in this way is not very wise. The Bible suggests that we should not make commitments beyond five years. Making a commitment to make payments in thirty years time is serious enough. The fact that you do not know what the amount you have to be, makes the uncertainty even worse.

Tuesday, September 11, 2007

Term Deposits (9) - Risk of Default

Matching the term of the loan to the term of the deposits does not eliminate all risk. The person who borrowed the money may abscond or make bad business decisions. They might not be able to repay the money they have borrowed when the term is complete. The bank is to should be skilled in assessing the creditworthiness of borrowers and putting appropriate security measures in place.

The more risky the loan, the higher the interest rate will have to be. Depositors should be able to choose the level of risk they want to take on, but I suspect that most depositors would specify that their money only be lent to creditworthy borrowers.

The bank could also provide insurance against the borrower defaulting. This does not eliminate the risk, but it spreads the cost across all depositors, rather than leaving all the risk with the few depositors affected by the bad loan. Most depositors would prefer a slightly lower interest rate, if they new that the cost of any default would be spread across many depositors.

Monday, September 10, 2007

Term Deposits (8) - Matched Loans

Most depositors would prefer to deposit their money with a bank that only makes loans with a term that matches the term of their deposits. Every loan issued by the bank would be matched by a deposit or group of deposits with the same term. All loans would be for a fixed term and the bank could only make loans with a term matching the terms deposits already received by the bank. This is a much safer policy, as the bank would know that borrowers would be repaying their loan when the term deposits come to maturity. The bank would know where the money that belongs to the depositors has gone and it would know when it would be coming back. This would be a much safer way to operate, as much of the risk is eliminated.

This policy of matching loans would have the effect of raising interest rates on longer term deposits. This is reasonable, as the longer the term of the loan, the greater is the risk of loss. Very long term loans would probably disappear altogether. This might also be a good thing. The Bible suggests that Christians should not take loans with a term of more than seven years. The reason is that we do not know what the future holds. Making commitments to do things in twenty or thirty years time is very unwise, as we simply do not know what our situation will be that far into future. Limiting loans to a maximum of seven years would be a sensible policy for a bank.

Depositors need greater choice. A bank that only made loans for terms that are matched by the terms of deposits they have received from depositors would be much safer. A bank that is serious about providing services to their customers should provide this service. People choose bank term deposits, because they prefer security to high returns. I expect they would prefer a bank that matches the terms of loans and with the terms of deposits.

The interest rate for deposits with matched loans might be lower, but the risk would be lower as well. If more people demanded this service, some banks might start offering it. They would essentially become loan brokers. They would be pooling deposits and matching these up with borrowers wanting funds for the same term. They might charge a fee for this service, or they might take add a margin on to the interest rate paid to the depositors.

Sunday, September 09, 2007

Term Deposits (7) - Trust and Honesty

If bank depositors understood the risks involved, they would not have so much confidence in banks. If the farmer who borrowed the tractor for six months lent it to another farmer for 10 years, the owner would get a bit upset. He has lent his tractor to a farmer who does not know how he will be able to return the tractor at the time when he has promised to return it (after six months). The farmer might be able to borrow or buy an equivalent tractor to return, but that might quite costly. The owner of the tractor would become quite nervous and would regret leasing the tractor to this farmer. He would probably consider the farmer to be dishonest.

Depositors should view banks in the same way. Why should they trust a bank that has taken money on deposit for six months, and lent it to someone else for 10 years? Why should depositors trust the bank, when the bank does not know how it will repay the money when the term of their deposits are complete? Why are banks that behave in this way not labelled as dishonest? We should demand better behaviour from the banks that care for our money. We should not trust organisations that behave so perversely.

Saturday, September 08, 2007

Term Deposits (6) - Futures Market

When a bank accepts a term deposit and lends the funds for a longer term, it does not know where the funds will come from to repay the depositor when the term is complete. It is committing to obtain money in the future, without knowing whether this will be possible, or what the price will be. It is making a commitment to return something that it currently does not own.

A market where people buy and sell entities, which they do not own, is called a futures market. Futures markets exist for a number of commodities and for a variety of financial instruments. Such a market is legitimate for people who want to speculate on or hedge against future changes in price. All participants in the market understand that the person who is promising to sell at a future date does not currently own what they are promising to sell. There is a risk that when they try to buy what they have agreed to sell; the price may have risen so high, that they cannot afford to buy it. If that happens they might default on their agreement. Everyone in the market understands this risk.

Futures markets are inherently unstable, as prices can fluctuate rapidly and players default if unexpected events occur. This is fine for investors who understand the nature of market and are prepared to take on the risks involved. However, this type of arrangement will rarely be appropriate for people making term deposits in a bank. They put their savings in term deposits at a bank because they want their money to be safe. They are generally willing to accept lower interest rates in return for higher security. They are not choosing to lend to an entity that is speculating in a futures market.

Depositors might be able to get a higher rate of interest from a term deposit for a bank that borrows short and lends long, bit if they understood the risk, most would prefer a safer option.

Friday, September 07, 2007

Term Deposits (5) - Liquidity Crisis

A number of finance companies based in New Zealand been placed in receivership during the past few months. This is blamed on the liquidity crisis. The truth is that they were all borrowing short and lending long. When depositors stopped rolling over their deposits as they came due, the finance companies came under pressure. When large numbers of depositors withdrew money, the finance companies were unable to continue. The money of the remaining depositors is now at risk, and they may only get part of their money back.

Most of the subprime crisis has the same cause. The institutions concerned all borrow in short term markets and lend long term. When investors decide to do something different with their money, these institutions get into trouble, because they have made long term loans assuming they will continue to be able to obtain money. Recent events have proved that this assumption was wrong.

Commentators blame the problem on investors losing confidence in financial institutions. Investors losing confidence is not the cause of the problem. Investors are entitled to change their minds about what they do with their money. The problem is the false confidence of the banks and financial institutions that depositors will not change their minds. They were confident that they could continue to obtain the money they needed to support their long term loans, but this confidence was unfounded. Their false confidence is the real problem.

We should all understand that the entire banking system is based on the practice of borrowing short and lending long. New Zealanders are finding that trusting finance companies, which borrow short and lend long, is very risky. If we cared about the security of money, we would demand that banks give up this practice. Why would sensible people lend their money to banks and other financial institutions that have a false confidence about the future?

Americans assume that Federal Deposit Insurance will protect their bank deposits. Gary North has shown what a vain hope this is in his article Deadly Assumption.

Thursday, September 06, 2007

Term Deposits (4) - Borrowing Short and Lending Long

Modern banks tend to borrow for short terms and lend for long terms. For example, most mortgages have a term of 15 to 20 years, but some of the funding comes from term deposits with a term of less than a year. This creates problems, because banks are lending money that they do not own or control. If the bank only controls the money for 6 months lending it for a twenty year term is odd. We need to think clearly about what this means.

The depositor is in a strange situation. They have lent their money to the bank for six months. The bank has taken this money and lent it to someone for twenty years. It has taken this action knowing that it will not get the money back from the borrower, when the term deposit is due to be repaid. Unless the bank has other mortgages that will to be repaid at that time, it will have to obtain the money to repay the depositor from some other source.

A term deposits at a bank is supposed to be of the safest things that a person can do with their money. This is not true. The reality is that the bank is making a commitment to return the depositor’s money at the time when the term is complete, without knowing where or how they will obtain the money to fulfil this commitment. Most of this risk rests with the bank. They should normally be able to get the finance from another source, but they do not know what the future holds. Economic conditions might have changed dramatically by the time the term deposit matures. If economic conditions have deteriorated, the bank might have to offer a much higher interest rate to get the finance they need.

The security of a term deposit depends on the ability of the bank to guess what will happen in the future. A prudent bank might be able to manage the risks involved, but if it guesses wrong about the future, it might face significant losses. If the bank really gets thing wrong, the depositor might lose their money. If depositors understood the risks involved, they might not feel their money is safe.

This full series can be read at Bank Deposits and Loans.

Wednesday, September 05, 2007

Term Deposits (3) - Control not Ownership

Money loaned to the bank is also fungible. When a person lends money to be bank, it will mix the money up with money lent by other people, to make it more productive. This does not shift ownership of the money to the bank. It just means that the lender has shifted from ownership of a specific amount of money, to ownership of a share of a larger pool of money. The share of the money jointly owned will be equivalent to amount of money deposited in the bank.

The important point is that ownership of the money does not transfer to the bank. However it does have the right to use the money however it chooses, provided it complies with the conditions of the loan agreement. Ownership is not transferred, but the right to control the use of the money is transferred for a specific time.

The lender owns the money, but the bank controls its use. It can lend the money to anyone that it considers to be creditworthy. The loan agreement may also specify they types of uses for which the money can be loaned by the bank. Provided these conditions are met, the bank can control how the money is used. If the bank can get a higher interest rate than it pays to the lender, it can keep the difference to cover its expenses and provide a profit to the bank owners.

The bank cannot loan the money for a longer term, than the term agreed with the owners of the money, because it does not have control over the money beyond that time. It only has control for a specified time. When that period, the bank loses this control and must return the money to the owners.

Tuesday, September 04, 2007

Term Deposits (2) - Ownership and Risk

Some defenders of the modern financial system argue that money loaned to the bank belongs to the bank. This is not correct. The money loaned still belongs to the person who saved it. The bank just has the use of the money for a specified period of time.

This is obvious in the case of the tractor. When a farmer leases a tractor, it does not become his property. What he buys is the right to use the tractor for a specific time. The farmer will not list the tractor as an asset on his balance sheet. Rather he will record the rent paid for leasing the tractor as an expense in his Profit and Loss Account. Ownership of the tractor does not pass to the farmer.

The difference is that in the case the owner cannot demand the tractor back whenever he chooses. He can only demand it back, when the lease has expired. The other difference is that the farmer can use the tractor how he likes, provided that he complies with the conditions of the leasehold agreement. The lease may place limits on the load he can pull and specify regular maintenance that must be done, but provided the farmer complies with these conditions, he can use the tractor how he pleases.

The principles for leasing an productive equipment are confirmed in the scriptures.

If a man borrows an animal from his neighbor and it is injured or dies while the owner is not present, he must make restitution. But if the owner is with the animal, the borrower will not have to pay. If the animal was hired, the money paid for the hire covers the loss (Ex 22:14-15).
This refers to a productive animal. Even when it has been lent to a neighbour it still remains the property of the owner. The owner is still the owner. If the animals are lent free, then the borrower has all the duties of someone who has been given something for safekeeping. However if the animals were lent for a fee or lease, then the neighbour is required to take reasonable care. However, if something unexpected goes wrong, then he does not have to pay compensation. The lease fee will have included something to cover the risk of the animal dying. The owner must carry the risk of the animal dying. He would not lease the animal unless the fee was sufficient to compensate for that risk.

Applying this to a tractor, the person leasing the tractor remains the owner even after it has been leased. The person leasing the tractor, has control over it use, but does not have ownership. If the engine unexpectedly blows up, the person leasing is not responsible (unless the lease specifies something different). The owner of the tractor carries the risk of the tractor not performing as was expected. The lease fee should compensate for that risk. If it did not, then the owner would be foolish leasing the tractor.

These principles apply to a bank loan. When I loan some money to a bank, I still own the money. Therefore the bank should not record the money as an asset in their balance sheet. The bank should pay interest for the use of the money. Although the lender still owns the money, they cannot demand the money back at any time. The lender must wait until the end of the term for the money to be returned (unless he pays a penalty for breaking the contract).

The bank has responsibility for using the money wisely. However, if something unexpected goes wrong, the bank is not responsible for the loss. Every transaction that involves the future has risk, so risk is unavoidable. The owner of the money must bear this risk. The interest received should compensate the lender for this risk. If it does not, then the lender would be better to leave the money on demand deposit, so the banker carries the risk.

Monday, September 03, 2007

Term Deposits(1)

Sometimes when I receive my salary, I will not need it all in the next fortnight. I might build up the size of my deposits in the bank to the level where I have a couple of thousand dollars that I do not want to spend until some time in the future.

In this case, I might want to put the money on a term deposit, so I can earn some interest as a reward for not using it immediately. This is a different type of transaction from the demand deposit. I am agreeing to let the bank have the use of the money for a specified time. I am allowing the bank to decide how to lend the money. I expect them to do this in a way that will keep my money safe, while earning a good return.

This is different from the demand deposit, so the analogy of the warehouse does not apply. This transaction is more akin to someone who leases a piece of machinery. If a person owns a tractor, but has no way to make use of it, the tractor brings them no benefit. If they can find a farmer who needs, a tractor, they can lease it to the farmer for use on his farm. The farmer is better off because he has the use of a tractor. The tractor owner is better off, because his tractor now earns him some income.

The same applies with cash sitting in a demand deposit for month after month. If I do not want to spend it immediately, I am better to lease it to someone else who can use it productively. They are better off because they have capital that they did not have. I am better off, because they will pay me for the use of the money. This is the nature of a term deposit. I am making a loan to someone who can use it more efficiently in return for interest. The interest is really just the rent or lease for the use of the money.

The full series can be viewed at Bank Deposits and Loans.