Not All Financial Instruments Are Alike

Not All Financial Instruments Are Alike
Rabbi Jonathan Jaffe, Congregation Emanu-El
4.30.2009

Although our modern economy has unraveled largely by the abuse of fraudulent financial instruments, similar mechanisms have historically allowed the Jewish community to make prudent use of the Torah’s laws. While the Torah maintains altruistic goals through commandments such as the jubilee or sabbatical year, Judaism demands a pragmatic and moral approach that recognizes that society cannot function with perfect ideals alone. At the same time, Jewish law must remain mindful of the poor and address the needs of potential debtors. Here we may explore Judaism’s practical and merciful approach in four areas.
First, The Torah forbids us no less than three times from lending at interest to our brethren (Exodus 22, Leviticus 25, Deuteronomy 23). But if our modern economic turmoil has taught us anything, it is that borrowing and lending provide the essential fuel for a healthy marketplace. A capital based society cannot flourish without the foundation of borrowing at interest.
In Baba Metzia 104b, the Talmud introduces us to a financial instrument labeled the heter iska. Under this provision, the lender does not simply loan the money. Rather, he buys a stake in the borrower’s enterprise. When the business succeeds, the lender shares in the profits. The Talmud goes so far as to give the lender the right to weigh in on the borrower’s business decisions. This legal partnership allows one to lend money in order to make money.
Second, The Torah instructs that all private debts be forgiven every seven years. (Exodus 23, Leviticus 25, Deuteronomy 15). Once again, this threatens the enterprise of lending for profit. Take away all incentive or security from borrowing and economic activity will surely ground to a halt. Thus while laudable in intention, the law of shmita creates a clear disincentive for lending, especially to the poor who are most likely to default on such debts.
Hillel the Elder’s famous prezbol allows for private debt to be transferred to the court because public debts are not subject to shmita. The court may then empower the lender to collect the debt on its behalf. In this way, the lender is able to avoid the shmita and the debt forgiveness every seven years. Mishnah Shevi'it 10:3 even rationalizes the prezbol as a necessary vehicle to ensure credit to the poor is not cut off.
Third, the heter mechirah permits the Jew to dispose of his chametz by selling it to his gentile neighbor at an inflated price. At the end of Pesach, the Jew inquires about the debt. When the borrower neglects to pay it, the chametz returns to the lender. Thus a Jew whose livelihood depends on chametz (say, a baker or a brewer) is able to observe Passover without forfeiting his inventory. It is upon the basis of the heter mechirah that the Israeli Chief Rabbinate regularly sells its supply of chametz to a Muslim resident for the festival week.
Fourth, Exodus 25 teaches that if a lender takes the borrower’s coat as collateral, it must be returned before nightfall. From a legal perspective, the lender seems to have justification to seize such collateral in lieu of repayment. However, without the coat, the borrower may die and compassion trumps legality. Just because one can do something, doesn’t mean they necessarily should. This is one lesson our recent profiteers failed to adhere.
Such financial instruments underscore the underlying truth: when considering financial matters, religion must prioritize practicality and compassion. The perfect ideals as promulgated by the Torah are mitigated by carefully designed structures in order to ensure that society remains afloat and conscious of the most vulnerable. Though we have come to demonize financial instruments as a cause of our current downturn, Jewish society has survived and even thrived due to such tools. If only our modern day financial alchemists had been so mindful of their effects upon the greater community.