Lending, Interest Rate and Usury - Dilemma Persists

Abstract

World has been witnessing financial crisis, emanating from the financial sector every now and then. Failed banks of bankrupt financial firms are being regularly bailed out, creating moral hazard problem and adversely affecting the health of the entire financial sector of the globe. This paper argues that the problem is fundamental and not a matter of simple management and regulation failure. The running of the system requires a pro-big borrower bias, represented by clauses like limited liability. However if this bias is reinforced by engineered low interest rate, stability of the economic system may be threatened by the behavioural response of the savers.

Keywords: Interest rates, usury, savings, investment, financial crisis, bail out

JEL Classification: B15, E32, E42