Islam is right. Usury should be forbidden for the entire society for the following reason:
The root of current financial crisis is partly because of usury. Let me explain:
When we borrow, banks create money. They do not lend existing money. In fact, they create a promise to pay. That is what all bank accounts are. They are promises to pay. When we borrow 1 million dollars to buy a home, the bank puts that number in our account. We write a check to the home owner. We take the home and give it to the bank as collateral. Seller takes the check and puts it back into the bank. Bank moves the “promise to pay” from your account to his account. Bank did not spend a dime yet. They just made a promise, and they got the house. Now, they demand interest for the money that they did not yet give to anyone. As the seller spends his money, you will be paying off debt back to the bank. On average, bank will take your money and give it to the seller and keep the interest payments for the bank itself. This way they generate income without spending a dime of their own.
Now consider what happens when an entire society does this together. Everybody goes to the bank and borrows. This is how banks create money and give it to people. This new money inflates the money supply. Most of our money supply is bank credit that was inflated exponentially higher for the last 70 years. The extra money in the economy makes it easier to earn. Therefore the government likes it. In fact they encourage it. This bank credit expansion causes price inflation as well. Price of stocks, housing, commodities, everything goes up because there is more and more money in the system in the form of bank credit (check book money).
Most of the money was created this way. If we have about 2 trillion US dollar bank notes, then we have about 50 to 300 trillion IOUs created in similar ways through borrowing like this. These “I owe you” dollars still work like dollars as seen in the home buyer example.
Now, let us look deeper. When we borrowed, we created the money supply. It is the principal that we borrowed. Let us say it is 50 trillion for the sake of example. That is our entire money supply. Borrowed money. But we promised to pay back principal + interest. The interest portion is not even created yet! It is supposed to be created with even more borrowing. Well, what happens if the borrowing stops? Then it will be very hard, if not impossible to pay principal + interest. That is because principal amount exists, so we can earn it and pay it back but the interest portion does not even exist yet. When borrowing slows down, and we pay back more than we borrow, bank credit will deflate. That is because when we pay back to the bank, that money gets sucked out of the economy and cancels the “promise to pay” that the bank made to us. That is how deflation happens. Today, when you hear the consumer is borrowing less, that worries the government, and you now know the reason.
This is why usury should be forbidden. When it is done at large by the entire society, it is a dead end. If the entire world runs on this system, the entire world will hit a wall when the borrowing stops. You will ask, why would the borrowing stop?
Here is why: Let us take the example of Baby Boomers. They represent an abnormally large chunk of the population. After the second world war, the birth rate in the USA went up, we made a lot of babies. Then these babies became a large part of the population and as they lived on, they defined the trend. First, they demanded diapers. Then in their early years, it was time to invest in potato chips, because they liked it. Then they all worked hard and wanted to buy a home, expand their businesses. So they all went to the bank and borrowed. They bought homes, cars, and whatever they wanted. This bubble in population demographics fed other bubbles. When they invested all together, they increased stock prices. When they borrowed together, they inflated the money supply. Now when the boomers are beyond their peak borrowing and spending years, they go into pay back debt mode. As they pay their debt, the new generation who needs to borrow cannot match them in number. When the new generation borrows 10 trillion, boomers will be paying 15 trillion. And the total money supply, which is bank credit will deflate.
Deflation will make it very hard to earn the same income you used to earn. When we borrowed and created 50 trillion, we inflated the prices and salaries with the assumption that some day principal + interest, that is for the sake of example 100 trillion would exist in the future. Businesses were built with the assumption that 100 trillion would be there. People bought homes with the assumption that 100 trillion would be there. When you buy a million dollar home, and promise to pay back 2.5 million dollars to the bank, you are assuming that one day you will be able to earn that 2.5 million. Well, what if the money supply shrinks from 50 trillion to 30 trillion due to bank credit deflation? Then that leaves the entire economy far short of the expected 100 trillion.
This is why sales go down, this is why individuals go bankrupt. In fact, due to the fractional reserve and interest demand, some of us are guaranteed to go bankrupt. This is why housing market crashed. Because there not enough borrowers to sustain the bank credit inflation. In order to increase GDP linearly every year, bank credit must inflate exponentially higher. That is not possible. Here is the debt problem:
To fight deflation, the government has been inflating the money supply non-stop. They get help from housing, they made it easy to borrow. How? They allow you to deduct mortgage interest from income at tax time. Then they keep interest rates artificially low so that more people can borrow and inject new money into the economy. That inflates home prices which fits the agenda. Nobody cares about affordable housing. They want expensive housing. When they ran out of prime borrowers, they allowed sub-prime. So that more people could step up to the ponzi scheme and inflate the money supply by more borrowing. They removed 20% down requirement so that bigger mortgages could be borrowed. But they still ran out of borrowers, and the housing bubble crash started.
Here is how the government used housing to help inflate debt:
To avoid deflation, FED prints money and injects into economy. They punish savers and reward the borrowers by devaluation of the currency. An interest based monetary system coupled with fractional reserve banking does not leave any option for the government that is just and fair. They will unfortunately bailout the wrong doers and punish the savers. This is not right. The system should not lead to these injustices.