Price movements associated with asset bubbles are usually not directly related to the underlying value of the asset but at least for a considerable part due to the build up of investor demand. Investor decisions are not solely based on facts but are influenced by other elements such as herd behaviour, limitations of the human mind to deal with increased complexity, and the limited time available to reach an investment decision may result in irrational purchase and sale decisions which are not fully thought through. The responses of politicians tend to echo those of the general public, and are generally euphoric in times when prices are up. Comparing the two most significant crises in recent history, we see that in the immediate aftermath of the Stock Market Crash of 1929 some remarks were made about the foolishness of investors, but attention was later turned to resolving the issues underpinning the crisis and the implementation of a wide range of measures. In the wake of the banking crisis of 2008, the current state of mind is still largely one of apportioning blame, although this is likely to change as emotional responses will make way to more analytical reviews.

In both cases, additional regulation was devised and implemented, some likely to be more effective than others, and some will be reversed again over time. The Glass-Steagall Act of 1933, for example, was eventually repealed in 1999 and replaced by new legislation, significantly loosening the original requirements. The Securities and Exchange Acts of 1933 and 1934, on the other hand, have been amended over time, but are still largely in place. The current crisis has resulted in new legislation as well as the development of global regulations. Similar to the 1930s however, there is one thing the current regulations do not address which is how to regulate liquidity in the market. After all, as long as all is well, parties will be happy to lend to each other, only to withdraw all credit once the trust falls out of the market.

Dr Natalie Schoon, CFA

Charging of interest was deemed to be inherently wrong since in addition to not having an intrinsic value; money does not have self replicating properties.  Aristotle’s view was reinforced by, for example, St Thomas Aquinas who was of the opinion that money cannot reproduce itself and St Bonaventure who clearly stated that “In itself and by itself money does not bear fruit but the fruit comes from elsewhere” [2].

Aristotle identified two purposes of money making. The primary purpose indentified was to provide for the household which was deemed to be necessary and honourable. The second purpose identified was retail trade, Defined as the mode by which men gain from one another, it was deemed to be unnatural. He subsequently argues that although money was intended to be used in exchange, it was not to increase at interest, since it was meant to be consumed. He specifically defines the term usury as “the birth of money from money” which he rejects as the most unnatural way of making money since the offspring is identical to the parent.

Through the ages, interest has been a controversial subject, extensively debated by philosophers. Although it was common practice to charge a fee for money or goods lend, various civilisations introduced rules to ban interest all together or to, at a minimum, limit the maximum amount of interest that could be charged. At the same time, investment in trade and partnerships in which the investor takes some form of risk were generally permitted and even promoted. In the early centuries AD the debates about usury and its permissibility were mainly led by religious scholars such as St Thomas Aquinas, Ibn Rushd, John Calvin and many others. In later centuries, with the separation of Church and State in Europe, the debate shifted to parliaments and the leading economists of the time such as Adam Smith.

[1] Aristotle The Politics in Monroe (1948) Early Economic Thought, selections from economic literature prior to Adam Smith, Cambridge: Harvard University Press, 1-30

[2] Goff, J. Le (1990) Your Money or Your Life – Economy and Religion in the Middle Ages, New York: Zone Books

 Dr Natalie Schoon, CFA