Memorial Foundation for Jewish Culture
50 Broadway, 34th Floor
New York, N.Y. 10004

Tel: (212) 425-6606
Fax: (212) 425-6602

Memorial Foundation Board Briefings - Recent News April 2009

April 21, 2009

The Economic Meltdown and Halacha

Could the current fiscal crisis confronting the United States have been avoided if Wall Street firms abided by Halacha? The question is not as exotic as it appears because Judaism, like all other major religions, has a substantial legal corpus dealing with business ethics.

Prof. Aaron Levine, formerly an Associate Professor of Economics at New York University and currently the Samson and Halina Bitensky Professor of Economics and Chairman of the department at Yeshiva University deals with this issue in an article "The Recession of 2008: The Moral Factor — A Jewish Analysis" in his most recent book, soon to be published by the Oxford University Press. The same article, abstracted here, appeared in the prestigious journal, The American Economist in April 2009.

Professor Levine, who was awarded his Ph.D. in Economics at New York University, is a distinguished authority on the interface between economics and Halacha. A Phi Beta Kappa at Brooklyn College, Prof. Levine also received rabbinical ordination. His books include: Free Enterprise and Jewish Law (1980); Economics and Jewish Law (1987); Economic Public Policy and Jewish Law (1993); Case Studies in Jewish Business Ethics (2000); and Moral Issues of the Marketplace in Jewish Law (2005), all supported by scholarship and fellowship grants awarded by the Foundation in 1972, 1976, 1979, 1982, and 1998. In them, Prof. Levine makes a strong case for the relevance of Biblical ethics and Jewish law to the governance of modern capitalism. He also presents and analyzes moral dilemmas in the market place from the perspective of American and Jewish law.

Levine's exposition of the relevance of Halachic jurisprudence to the governance of capitalism today demonstrates the continuing importance of the Memorial Foundation's support to scholars grappling with some of the most complex contemporary issues that we are confronting in modern society today.

His thesis, which was highlighted on Time Magazine's website, opens with the assertion that "The current downturn is the first post World War II recession that has its roots in widespread moral failure." Prof. Levine marshals in his article numerous Halachic authorities from the Talmud, the work of medieval jurists like Maimonides and a host of Responsa to support his argument.

It is not surprising that Prof. Levine has begun to bring Jewish religious teachings to bear on the current crisis which, if not completely about ethics, certainly has a large ethical component.

According to Levine, seen through the lens of Jewish law, not only can the collapse of the subprime market be described in moral terms. Jewish law also provides a framework for preventative measures to avoid repeat episodes of the current debacle. This is especially true of proper financial disclosure on which much of the current fiasco is hinged. Moreover, in an economy governed by Jewish law, the subprime sector has very limited expansionary potential and could never have reached a level where the collapse in this sector would achieve a global dimension.

Prof. Levine begins by locating the failures of the various players in the current crisis in halachic terms.

(1) Some borrowers were guilty of taking on mortgage debt that they knew would eventuate in default. Taking on debt payment that one knows or even is not sure he can meet violates Jewish law's good faith imperative (Bava Metzia 42a and Ein Mishpat on Tosafot Betzah 15b).

(2) Some mortgage brokers mislead their clients regarding the risks they were undertaking. Proffering ill-suited advice and/or misleading someone violates Jewish Business Ethics. Moreover, the duty devolves on the lender to disclose the hidden flaws of his mortgage product. Unless the borrower agrees upfront to discover these hidden debits on his own, the seller may not shift the burden of discovery of the hidden flaws to the borrower.

(3) Lenders gave out mortgage loans based on the borrower's stated income without requiring verification. Insofar as empirical studies overwhelmingly show that not asking the borrower to verify his stated income encourages him to lie about his income, loans without documentation effectively tempt the borrower to do so. (See Bava Metzia 75b).

(4) In the securitization process that ensued, the originator of the loan typically sold the loan to loan aggregators, who also bought loans from many other originators. The loan aggregator, in turn, sold the loans to a securitizer, who sold tranches of the income from the mortgage-backed securities he issued to investors.

The securitizers failed to disclose to investors the hidden flaws in his mortgaged backed security products. Doing so would have made it clear to them that buying the securities involved great risk because the securitizer was relying on the originator for the quality of the loan.

(5) The credit rating agencies gave a triple A rating to the vast majority of tranches of the mortgaged backed securities. Since the mortgage pool consists of borrowers of impaired credit, the triple A rating makes the defect of impaired credit inherent in any one of the mortgages of the pool disappear when an investor buys a bond that entitles him to a slice of income from the entire pool. In accordance with the moral obligation to disclose hidden flaws, the credit rating agencies should have explained why the mortgage-backed securities make this flaw disappear.

Levine points out those Jewish medieval jurists like Maimonides directly linked the obligation for fiscal disclosure to these hidden flaws. Almost the entire chain of transactors in the mortgage crisis were guilty: predatory brokers for not alerting working-class borrowers to the fine print; middle-men selling mortgage debt to investment banks sliced and diced them into "tranches" that obscured their riskiness; and bankers who used hard-to-fathom financial instruments that left ultimate responsibility for the loan a mystery, even to experts.

Levine notes that no amount of wrongdoing by the primary players in the subprime market could have expanded into a global recession without a mechanism that continuously replenishes the capital of the mortgage originators. That mechanism was the securitization process described above.

According to Levine, Jewish law has much to say regarding how to negate the underlying forces that have caused the current economic downturn and thereby prevent these forces from causing another recession. The central moral dictum here is the imitatio Dei principle. This principle says that in our interpersonal conduct we should emulate the various attributes that G-d displays in His relations to human beings. In Maimonides' view, the imitatio Dei imperative applies not just to private citizens, but to government as well.

The application of the imitatio Dei principle to the conduct of the subprime players calls for reform by setting up an environment with an incentive system that tilts actors toward virtue and away from misconduct. Requiring borrowers to document ability to pay puts an end to "liar" loans. Adopting this simple "stick" immediately raises underwriting standards to acceptable levels. Insisting on the injection of a proper incentive system in the work environment also works to encourage due diligence in the identification of the "hidden risks' of financial products and the forthright disclosure of these risks to clients.

The widespread wrong-doing among the players of the subprime market, combined with Jewish law's legal and moral objection to the very low underwriting standards that prevailed for an extended period prior to the onset the 2008-2009 recession, lead to Levine's thesis that the current downturn can be ascribed to widespread moral failure.

While Prof. Levine's thesis may be debatable for some, his pioneering work on the interface between economics and Halacha helps elucidate some of the moral dimensions and dilemmas of modern day capitalism and demonstrates the potential impact of Jewish values and jurisprudence on the economic culture of our society.


Nachas Department

A number of Foundation scholarship and fellowship recipients have been honored with distinguished prizes and awards in recent months.

The Association of Jewish Studies, the prestigious society for academic Jewish studies in the United States, is awarding its first annual Jordan Schnitzer Book Award to Prof. Elisheva Baumgarten of Bar Ilan University for her volume, Mothers and Children: Jewish Family Life in Medieval Europe. Prof. Baumgarten's pioneering study explores the spiritual lives of Jewish women living in Northern France and Germany in the High Middle Ages, and provides a new appraisal of Jewish women's religious practices and their personal expressions of spirituality. A 2002 recipient of the Ephraim Urbach Post-Doctoral Fellowship awarded by the Memorial Foundation to the most outstanding recipients of the Ph.D. degree in Jewish Studies around the world, Prof. Baumgarten completed her doctoral dissertation summa cum laude at the Hebrew University in Jerusalem, where the Memorial Foundation also supported her doctoral research on "The Spiritual Lives of Medieval Jewish Women". Dr. Baumgarten currently teaches Medieval History in the faculty of Jewish History and in the program for gender studies in Bar-Ilan University.

Prof. Walter Homolka, the recipient of community service scholarship grants in the 1980's, will be granted a Doctor of Humane Letters degree honoris causa, at the graduation of the Hebrew Union College - Jewish Institute of Religion in April. Prof. Homolka is currently the rector of the Abraham Geiger College in Germany, many of whose students are currently receiving community service scholarships for future service in the rabbinate in Europe.

Prof. Aliza Lavie, who was awarded a fellowship grant from the Memorial Foundation in 2008, was the winner of the 2008 National Jewish Book Award for her volume, A Jewish Woman's Prayer Book, in the field of Women's Studies. Prof. Lavie has for the last several years also served with distinction as a member of the faculty of the Foundation's Nahum Goldmann Fellowship. Dr. Julian Levinson, the recipient of a fellowship grant in 2002, was awarded a similar honor for his book, Exiles on Main Street: Jewish American Writers and American Literary Culture, for American Jewish Studies. The third recipient of that award in the field of Jewish scholarship was Prof. Adam Shear, for his book, The Kuzari and the Shaping of Jewish Identity, 1167-1900. Prof. Shear received a doctoral scholarship in 2000.

Finalists for awards included Prof. Jack Wertheimer, the recipient of a fellowship from the Foundation in 1992, for his volume Family Matters: Jewish Education in an Age of Choice, in the field of Education and Jewish Identity; Prof. Jonathan Sarna, who received doctoral scholarship grants in 1977 and 1978 and a fellowship grant in 1982 for his volume, A Time to Every Purpose: Letters to a Young Jew, in the field of Jewish Family Literature; and Dr. Joshua Berman who was awarded doctoral scholarship grants in 1999 and 2000 for his volume Created Equal: How the Bible Broke with Ancient Political Thought, in the field of Scholarship.

Two Legacies, a film by Moshe Alafi, who was awarded a fellowship by the Foundation in 2005 to produce it, was screened at the Sephardic Jewish Film Festival in New York in February. The film is based on the lives of Rabbi and Rebetzen Yosef Kapakh from Jerusalem. Rabbi Kapakh also received fellowship grants in 1973 and 1981 for this translation of Rav Saadiah Gaon's work from Arabic to Hebrew. He also was the winner of the Israel Prize in 1969; his wife, Rabbanit Bracha, received the same prize in 1999.

Edward Zwick's recently released and critically acclaimed film, Defiance, is based on Prof. Nechama Tec's book Defiance - The Bielsky Partisans, published by the Oxford University Press in 1993. Prof. Tec's research and her preparation and publication of the book were supported by the Memorial Foundation with fellowship grants to her in 1978, 1979 and 1992. What was unique about the Bielsky group, the largest armed resistance by Jews during World War II, was that they were committed not only to resistance, but to also saving Jews.

Attached is an appendix which consists of selected excerpts of the emails from the Fellows who participated in the XXI Nahum Goldmann Fellowship in Israel this February. It is an extraordinary demonstration of the impact the Nahum Goldmann Fellowship is having on the lives of young men and women on the threshold of leadership of Jewish communities around the world. It is certainly a great source of naches to us, but also poses a major challenge to the Foundation to deepen and expand this program, which has become the crown jewel of the Memorial Foundation's work around the world.

Warm regards.
Sincerely yours,

Dr. Jerry Hochbaum
Executive Vice President