The big picture is not that an interest-based banking system is a problem. The big picture, from a Christian perspective, is how to reduce deprivation in a lasting and sustainable fashion, while also ministering to immediate needs.
Why is the Church not demanding or at least requesting that the “too big to fail” banks do the “Christian” thing and forgo the interest payments on all loans?
Because the delinquency rate in the U.S. is only around 10%. To forgo interest payments on all loans is overkill, fails to reward behavior that is expected (paying on time), and can cause catastrophic damage to Banks that are “too big to fail”. I agree we need rework on many of the 10% that are delinquent, and that efforts by the government and banks have generally been half-hearted, too little, and too inconsistent. But the need to fix the 10% doesn’t legitimate ending the 90%.
If the Christian initiative is taken from Lev 25 (or the other passages that you cite) then the Christian initiative is to end foreclosures or at least introduce serious and real remedies to households who are behind on their payments. The Christian thing is
not to forgo interest where mortgage payments are affordable and households are not in danger of missing payments. Even Banks that are “too big to fail” will fail if they do not receive revenue because they themselves must make their own debt payments, including paying their own employees.
Let’s take an alternative perspective - in lieu of an interest-based lending regime, how would the foreclosure crisis be handled differently in an Islamic lending regime? Under Islamic banking, mortgage payments are considered as leases on property that is owned by the bank, with a portion of each periodic payment going towards eventual purchase of the property. From my understanding, these mortgages are priced similarly to prevailing interest rates on conventional mortgages but are amortized in a form that is different from pure interest calculation. The form of a mortgage in a shari-a based financial system is thus not interest based, but in content it is nearly indistinguishable.
An Islamic banking system would avoid the use of variable-rate mortgages, and Islamic banks would not seek capital in the form of credit-rate swaps or other interest-rate derivatives, but otherwise would not differ from a Western banking system. In other words,
foreclosures in an Islamic banking system would increase as unemployment increases and household finances suffer, just the same as in a Western banking system. And Islamic banks with unoccupied housing in a depreciating market face the exact same problems as Western banks.
If we see a difference in foreclosure rates between Western and Islamic banking systems, it reflects a different perspective towards money and personal finance in these systems, not the presence or absence of the interest mechanism. Americans and Europeans are spendthrifts who are comfortable borrowing heavily. Most Muslims, I’d gather from the research I’ve read, are not, and debt within Islamic societies carries a heavy social penalty, or may not be allowed at all. If Islamic bankers are more skittish about lending that Western bankers, then we’d expect to see lower default rates purely as a result of that skittishness without regard to any other factors.
Incidentally, the things which have created such devastation and havoc in the financial markets like ‘compound-interest’, ‘mortgage-baked securities’, ‘credit default swaps’ etc. are all considered forms and instruments of usury
No, these are not usury in the Christian understanding. Compound interest doesn’t push anyone in the hole - it’s the means by which cash investments grow and is functionally no different from reinvesting the profits from a loan into the debtor’s business in Islamic financing.
Mortgage-backed securities only became a problem because too many investors - buoyed by irrational expectations that housing values would never drop and mortgage delinquencies would not rise - bought into them so that overall exposure to mortgage payments became a systemic issue. This is no different from excessive investment by otherwise-responsible Islamic banks into one industry (say, oil or soybeans or communication technology) that decreases diversification such that when that one industry suffers unexpectedly, all Islamic banks are pulled into crisis.
Credit default swaps are actually a means of protection against asymmetric portfolio exposure. Speculators who have no ownership in credit portfolios but who bought into credit default swaps deserved to lose their shirts, the same way that speculators in foreign exchange swap futures must understand they’re risking 100% of their investment.
The main problem in the U.S. has been untenable debt financing. Debt, when managed well and kept to a minimum, causes no problems and enables a higher rate of growth and prosperity by opening capital purchases sooner. Without access to consumer credit markets, we’d be like Japan - paying rent for 25 years until we’ve saved enough to purchase a house with cash. Mortgages - whether Islamic or Western - allow consumers to purchase homes and live in them while paying them off, enabling them to enjoy a higher standard of living for the same cost. What I mean by this is that the mortgage on our three-bedroom 1500 sq-ft home would rent a two-bedroom 900 sq-ft apartment in our town. Yes, I’ve priced this.
