The Financial Crisis

Rev. Kortering is a minister emeritus in the Protestant Reformed Churches.

It seems that this is foremost on the minds of most people today, so if I am going to write a current article in this department, it ought to focus on the financial crisis. An alternative might be the election of ’08, but even the election is rather intimately interwoven with the financial crisis.

I do not write as an economist, nor as a financial expert. In fact, the opposite is true: I have precious little interest in money. But that doesn’t mean I am disinterested or indifferent to what is taking place in America and in the world today. It means, however, that I must turn to others and glean from them what they say and do regarding this crisis.

There is plenty of sensational writing about the crisis. An example of this is a Time Magazine, October 7, 2008 article by John Flowers entitled “Wall Street’s Crisis: When All News is Bad News.” The article reflects on the 778-point fall of the Dow on September 30, 2008, a record of all time. The efforts of the government to raise it had some success, but soon it plunged again.

Even hints from Federal Reserve Chairman Ben Bernanke, testifying on Capital Hill today, of a possible rate cut did not help. His prognosis that slow growth in the American economy, not inflation, is now the Reserve’s primary concern only added bad news to a day that included fallout from yesterday’s after-hours Bank of America announcement that it will need to cut its dividend and raise $10 billion in capital . . . .

All this took place a day after many of the world’s major stock indices had experienced their largest percentage point drop since the October 1987 crash. American investors, it seems, are still worried about what may be on financial companies’ balance sheets. The ad-hoc nature of the European response to its banking crisis has also raised concerns. Investors were clearly worried that even if a global financial meltdown is averted, a broad recession may be inevitable. And so, as governments attend to one crisis, the markets discover another to fret about—and the cycle of panic continues.

Summarizing the events mentioned above, Newsweek writer Len Hudson Teslik, connected with the Council of Foreign Relations, writes an article entitled “Europe’s Banks Buckle.”

For months, as global financial woes spread, U.S. banks stood front and center amidst the chaos. October 6 provided something of a counterpoint. Following Germany’s announcement that it would temporarily insure all holdings in German bank accounts to protect against a run, European markets led a sharp global stock plunge that carried over into the United States. Leading indices in France and Germany dropped over 6 percent, and Britain’s FTSE 100 index fell nearly 8 percent; the Dow Jones Industrial Average subsequently plunged in early trading, falling below the 10,000 mark for the first time in four years. Concerns about the implementation of the bailout plan factored into the day’s declines, but analysts say the losses also reflect an emerging recognition that financial problems in Europe are significantly deeper than had previously been thought.

No reader of the Standard Bearer can take an indifferent attitude to such reporting. Most of us are affected by this whether we live in the USA or not. When the entire world economy is deflating, we think not only of our income to pay bills, but things like job security, foreclosure on our houses and business, the effect all of this will have on our families, churches, and schools. For retired folks there is the question of 401K’s and retirement benefits. It is reported in the local press that most of them fell by up to 40% in the last few days.

It is heartening to read a sober assessment of the crisis in Christianity Today’s web page. In an article entitled “A Christian View of the Economic Crisis,” dated September 29, Al Mohler writes:

The headlines tell the story as recent days have seen the American economy and its financial system buffeted by seismic failures and the virtual disappearance of major investment banks. The debate raging in Washington these days concerns the form and extent of government intervention that will be required in order to restore stability to the financial markets.

Comparisons to the Great Depression are inevitable, but today’s crisis bears little resemblance to the total economic collapse of the late 1920s. Capitalism is not in crisis and the fundamentals of the American economy remain strong. When President Franklin D. Roosevelt took office in 1933, the nation faced a genuine crisis and economic collapse. For the most part, the banks were closed and the nation was out of business.

Nothing like that is happening now, but the financial system is clearly in need of reform and realism. The fundamentals of the economy remain intact. These include American innovation, a dedicated labor force, strong consumer demand, vast natural resources, and unlimited intellectual capital.

More than anything else, this crisis has to do with what happens when the markets come to terms with the excessive valuations. Put bluntly, wildly inflated valuations led to risky financial adventures and worse. The sub-prime mortgage collapse came as more realistic real-estate valuations forced market corrections. The vast global financial system had accepted the inflated valuations as real and traded in the risky mortgages as if the game would go on forever. This was a fool’s errand.

The question that everyone is asking is, How did we get our finances in such a mess? In attempting to answer this question, we plunge into the blame-game. This is done especially by the politicians as they face the election in November 2008. The two major parties blame each other. Both presidential nominees want to be free of any fault, especially when they have served in congress for some years. Almost all the periodicals include some sort of analysis. I found the one in World Magazine most helpful. Timothy Lamer wrote one entitled “Anatomy of a Crisis” on October 4, 2008. I quote the six steps he outlines in the article:

The current financial crisis gripping Wall Street is head-spinning in its complexity. But economists and analysts have been able to identify several steps along the way that helped lead the country to where it stood last week, on the brink of a massive government program to buy hundreds of billions worth of bad mortgages. Here are some of the steps:

Step 1: Trying to avoid a recession brought on by the bursting of the tech bubble and 9/11, the Federal Reserve under then-Chairman Alan Greenspan began aggressively easing monetary policy. From 2001 to 2003, the Fed Funds rate fell from 6 percent to 1 percent, a 45-year low.

Step 2: With interest rates low and money easy, mortgage lenders started marketing loans to people with questionable credit histories. These “subprime” loans often required no down payments, had adjustable interest rates, and featured exotic elements like “negative amortization” (in which “homeowners” would initially pay less than the interest owed each month, causing the loan’s principal to grow with each “payment”). With these loans fueling demand, housing prices rose, prompting speculators to enter the market and “flip” houses (buying them with debt and then selling them quickly at higher prices). A speculative bubble began to inflate.

Step 3: Mortgage lenders sold their suspect loans to others, especially Fannie Mae and Freddie Mac. Congress had over the years allowed the two government-sponsored enterprises to grow very large and become major players in the mortgage market, and in the name of increasing home ownership the two behemoths encouraged subprime lending. Fannie and Freddie packaged these loans into mortgage-backed securities and sold them to investors. The pair “fueled Wall Street’s efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools,” writes economist Kevin Hassett for the Bloomberg news service. “In addition, they held an enormous portfolio of mortgages themselves…. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.”

Step 4: With investment banks using these subprime assets to take on high levels of debt, the financial health of Wall Street became linked to the ability of people with poor (or no) credit histories to make monthly house payments.

Step 5: Interest rates couldn’t remain at historic lows forever. As interest rates began to rise, housing demand fell and the bubble deflated. Subprime borrowers found interest rates on their mortgages adjusting upward at the same time as the value of their houses either fell or flattened. Unable to make payments, many defaulted. Investment banks on Wall Street were left holding the bag—the bag being debt backed by assets with falling values.

Step 6: Fearing a full-scale collapse and severe recession, the Bush administration began engineering bailouts of some of these firms and, finally, proposed a $700 billion macro-bailout. Under the proposal, the Treasury secretary will buy the bad assets from the banks and then sell them. (How much the government makes selling them will determine how much of the $700 billion the government will recoup.) “This staves off judgment day,” Anthony Sabino, professor of law and business at St. John’s University, told the Associated Press. “This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them.”

The plan gives the Treasury secretary (currently Henry Paulson, most likely someone else in January) enormous power, which prompted a debate last week in Washington about how much oversight he or she should come under and how much time he or she should have to get the government out of the real estate business.

The fundamental dynamic is this: Washington and Wall Street helped people buy houses they could not afford on such a massive scale that simply letting the lenders and debtors take their lumps would arguably do grave harm to the economy. They will take some lumps (Wall Street isn’t exactly a hot job market right now), but most of the losses will be “socialized,” or spread out among everyone who pays taxes. This includes those who exercised restraint during the bubble. That’s how it is.

It is too early even to speculate where all of this will lead. It is useless to speculate whether the efforts put forth by those who are in positions of power and influence will really work. From this point of view, it is important that we as Christians come to terms with who really is in control of this crisis. There is here an amazing demonstration of God’s sovereignty and man’s responsibility. God is sovereign over all the nations, over governments, over peoples, all of whom are involved in some way to contribute to this financial mess. From the point of view of God’s sovereignty, He has a divine purpose. And He accomplishes that purpose in two ways. He works judgments upon the wicked and chastisements upon His people. He does this through the works of man’s hands. Man cannot simply shake his trembling finger in the face of the Almighty and challenge Him for bringing to the earth a way that man does not want or like. He has to look at himself and see that God’s judgments and chastisements are always right and good.

We do not deserve any divine favor in ourselves. We all deserve judgment and justice, of which this financial crisis is a harbinger for future destruction. Ultimately the words of Revelation 18:2ff. ring true: “Babylon the great is fallen, is fallen, and is become the habitation of devils, and the hold of every foul spirit, and a cage of every unclean and hateful bird. For all nations have drunk of the wine of the wrath of her fornication [the great whore of chapter 17], and the kings of the earth have committed fornication with her, and the merchants of the earth are waxed rich through the abundance of her delicacies.”

Only the Christian who flees to Christ as a refuge has any hope that even though this world must needs come to an end under the judgment of the righteous God, the words of Revelation 18:4 apply: “And I heard another voice from heaven saying, come out of her my people, that ye be not partakers of her sins, and that ye receive not her plagues.” The people of God know that their redemption comes in the final appearing of Jesus upon the clouds of heaven, when He will destroy this world with fire and create a new heaven and earth for them.

While trying to assess the cause and outcome of this financial crisis, and also trying to assess the responsibility of all of us in it, it is too simplistic for the Christian to say with a sweep of the hand, it is all greed. This is most poignant for those of us within the church who may personally experience financial loss. Is it simply greed if we lose our jobs, lose our homes, lose our investments? There is no doubt that greed is involved in the big picture, but most of us are such little financial pipsqueaks that it is hardly fair to us to lay that responsibility at our feet. Christianity Today has the article of Al Mohler mentioned above. It is entitled “A Christian View of the Economic Crisis,” and has the subtitle, “Is the economy really driven by greed?” Some of his ideas are worthy of note.

The development of vast global economic systems simply builds upon the simple principle that all participants are willing to trade one good for another they want even more and to invest in the hope of future gain.

Is this greed? In and of itself, this is not greed at all. The desire for a profit, for income, and for material gain is not in itself greed. The Bible clearly teaches that the worker is worthy of his hire and that rewards should follow labor, thrift, and investment.

Greed raises its ugly head when individuals and groups (such as corporations or retirement funds) seek an unrealistic gain at the expense of others and then use illegitimate means to gain what they want. Given the nature of this fallen world and the reality of human sinfulness, we should expect that greed will be a constant temptation. Greed will entice the rich to oppress the poor, partners in transactions to lie to one another, and investors to take irrational risks. All of these are evident in this current crisis.

Christians should think seriously about this economic crisis and ponder what it would mean to come to a Christian understanding of what it means to be participants in this economy. As Adam Smith recognized, the economy is a moral reality. Human beings actualize their moral selves in making economic choices and through participation in the economic system—and we are all participants.

Indeed, one of the defining differences between the current crisis and the crisis of the 1920s and 1930s is that the vast majority of Americans are now, in effect, investors. Our retirement accounts are, by and large, mingled with the investments of the titans of industry. Through their pension funds, school teachers are investors right alongside Warren Buffet. This was not the case in the run-up to the Great Depression. We all want and need the stock market to do well, and the outcome of any market crisis affects both Bill Gates and the worker in the local medical clinic.

Christians should look at the economy as a test of our values. The Bible values honest labor and dedicated workers, and so should we. The Bible warns against dishonest business practices, and we must be watchful. False valuations are, in effect, lies. Dishonest accounting practices are just sophisticated forms of lying. Insider information is a form of theft.

The Bible honors investment and thrift, and Christians must be wary of the impulse for short-term gains and pressure for instant profit. Over the long-haul, the entire economy must prosper if the vast majority is to do well and realize a responsible gain.

Thus, the current crisis sheds light on what happens when things get out of control, when various pressures distort the proper operation of the markets, and when irrational valuations entice investors to make poor investments. Dishonesty enters the picture at many levels, and the individual investor is too often left in the dark.

When these things happen the economy is threatened by a lack of trust, and trust is the most essential commodity of all when it comes to economic transactions. Without trust, the entire system collapses.

The big debate in Washington is over the extent of government intervention. Prudence would indicate that the less government intervention, the better. Adam Smith was confident that a “hidden hand” within the economy would rectify excesses and punish bad actors. I think he is basically right, but the government is, like it or not, one of the actors in this economic system.

The problem with letting the markets solve this problem and letting the “hidden hand” punish the bad actors and unwise decisions is that, in this situation, the small investor is crushed along with the tycoon. Furthermore, the entire economy could face a crisis of confidence.

So watch the debates in Washington with interest and consider how a Christian should understand the economy and our economic lives. The free market is not perfect, but capitalism has brought more wealth to more people than any other system. It rewards investment, labor, and thrift and rises on innovation. Better ideas and better products push out inferior ideas and inferior products. Given the reality of human sin, we should not centralize economic control in the hands of the few, but distribute economic power to the many. A free market economy distributes power to multitudes of workers, inventors, investors, and consumers.

No economy is perfect, but the American economy remains a marvel. The present crisis is an opportunity to rethink some basic questions and restore trust. There are no easy ways out of a crisis like this, and no painless solutions. Yet, would you trade this system for any other?

This current crisis should also remind Christians that we are not called to be mere economic actors, but stewards. Everything we are, everything we do, and everything we own truly belongs to God and is to be at the disposal of Kingdom purposes. This world is not our home and our treasure is not found here. We are to do all, invest all, own all, purchase all to the glory of God.

Finally, this current economic crisis just might help Christians to focus on another issue—retirement. Where in the Bible are we told to aspire to years and decades of leisure without labor? There is nothing wrong with saving for what the world calls retirement. Indeed, that is just good stewardship. Furthermore, there is nothing wrong with workers enjoying the fruit of their labor. But Christians should think of retirement as an opportunity to be redeployed for Kingdom service.

Today’s crisis in the financial system should not be a threat to the long-term health and vitality of our economic system. There is cause for concern, but no justification for panic. Rather than hit the panic button, spend that energy thinking about how Christians should glorify God in our economic lives. We should watch the developments and debates in Washington and New York with interest, but we should investigate our own hearts with even greater urgency.