After I picked my son up from football practice yesterday, he asked me how things were. I let him know that the stock market had dropped 777 points. “Wow, Mom,” he replied, “that’s God’s number.” I had to chuckle – at least he’s paid attention to a few things he’s heard me explain – but that’s about the only chuckle I had yesterday. If God is using this economic crisis to get our attention, he certainly has mine. I’ve been studying Zephaniah, and his words are reverberating: “Neither their silver nor their gold will be able to save them on the day of Yahweh’s fury.” (1:18) It’s a stern warning.
In the context of the risen Christ, however, it’s not only a call to repentance and reevaluation, it’s also a call to do what we can to alleviate looming human suffering. I’m deeply concerned about our immediate future, and the failure of our legislature to have acted in our best interest yesterday. The no-voters are flirting with the disaster of all Americans - and indeed, all citizens of the interconnected world. Here’s why:
The primary provision of the economic rescue legislation is to permit the government to purchase the written down mortgage assets now creating such weight on bank portfolios. That’s purchase assets, not hand over cash. The problem is not that there is no value in the assets, but that it is impossible to determine with accuracy how much value there is. As mortgages were bundled, sliced, and sold off as CDOs (collateralized debt obligations), they were traded, and when the music stopped, landed as assets on the balance sheets of banks and investment houses many steps removed from the original real estate and the mortgage borrowers that gave rise to them. The problem now is a combination of uncertainty about their real underlying value and conservative accounting regulations requiring “marking to market.” Since today’s holders don’t have a quick, reliable way to accurately determine what they’re worth, “market value” is a very low number. But note: there are properties and mortgage cash flow behind these assets. Not knowing what they’re worth is very different from worthlessness.
So if the government, which won’t be trying to make money on trades as the private sector had been doing, purchases these very marked down mortgages at fire sale prices with tax dollars and holds them, there are plenty of scenarios which have not only most of its investment money coming back, but even a substantial profit if and as the economy settles down.
Why is this necessary for what many believe is properly a free market economy? That’s for another post – or better – another blog. The conditions that have given rise to this particular moment are unique, but the problem is that we are here. As trust evaporates from the financial system, no one is willing to lend money. That means businesses can’t get their working capital loans to smooth out cash flow. That means that educational institutions will not be able to borrow to cover cash flow needs between tuition and gift inflows. That means that banks can’t do their normal business because they are unwilling to work with one another for fear of another failure. In short, that means that the economy has seized.
What are the implications? It’s like a set of dominoes. Let’s assume a trucking company is responsible for moving produce from the farms to the local grocery chain. It gets paid monthly. The grocer borrows mid cycle to pay the trucker, but this month, it can’t get the working capital loan it always gets because the bank isn’t lending. The trucking company doesn’t get paid. It can’t buy gas and give out paychecks, so it lays off drivers, and its business halts. The produce doesn’t move. It rots in the warehouse, and the farmers don’t get paid . . . You can see where this is going. It’s a small example, but when capital can’t move, things collapse in very short order. It’s the 21st century version of massive destruction.
This bill is essential for restoring some order to the markets so that they can move. The more days that go by without a bill, the more urgent the situation will become.
This isn’t about politics and theoretical free markets. It’s about keeping our country from falling apart to the extent that we could be looking at riots, food shortages, massive unemployment, and a collapse of our savings and investments (which has already begun; $1.2 TRILLION of market capital was wiped out yesterday). To borrow from Zephaniah again, we ought to be very concerned about our streets being laid to waste.
I’m a Republican. I learned yesterday that my Democratic congressman voted for the bill. For that reason alone, I’m voting for him in November; he gets it. This goes way beyond the things that concerned me last week.
It is true that silver and gold won’t save us. As Christians, we must grab hold of the righteousness of Christ, and remember that our trust is not in the assets of this world, but in him. He and he alone is our salvation. That said, as those called to speak and work redemptively in a sin-cursed world, doing we must do what we can to head off the kind of suffering we might never have imagined possible.
October 7, 2008 at 6:41 pm
I totally agree about greed. Ultimately I think that’s the real problem among all parties.
The question I ponder is whether new legislation can really prevent something like this from happening in the future. My gut feeling is no: no matter how creative legislators get and no matter how vigilant oversight could become, government lacks the offensive posture it needs to resolve problems in advance, and companies with big-money lawyers and consultants will find creative loopholes for making money and abusing the shareholders and average citizens. Everybody’s greedy and in it for themselves. This is partially why I’m so pro wealth redistribution. It feels like the quickest way of making sure things don’t go haywire (or go less haywire).
I had an interesting conversation with a colleague a couple nights ago. She confirmed a concern I’ve had for years. We both were convinced that unless the USA changes it’s self-perception–meaning, that in a capitalist market, you’re only worth what you’re able to produce and sell (nobody’s “entitled” to anything), and that pursuing greed instead a working system hurts everyone in the long-run–our country could very well suffer a significant degree of social and economic collapse. Think of healthcare. What would it take to go to socialized medicine? A complete upheaval of the entire way hospitals, pharmaceuticals, insurance agencies, and lawyers do business. Not something one can do in one full swoop, and quite possible things are too intrenched to reorganize the system without destroying the whole. And of course, even if a sensible plan could be reached, no politician would dare suggest it for fear of failure and blame. We’re risk averse. So, in all likelihood, what will it take to change healthcare? Probably a total failure of the legal system for the general public. More and more “private” hospitals are popping up in the US, and more and more people are going to good hospitals in Malaysia w/ US-trained doctors for treatment because their legal systems don’t carry all the baggage and are therefore a fraction of our domestic costs.
It’s a friggin disaster. Makes me terrified. I was in the UK on a research grant this summer and I seriously thought about whether I’d move long term. The possibility definitely lingers in my mind.
October 7, 2008 at 9:42 am
Anger is an appropriate emotional response to all this. The testimony of Dick Fuld, the CEO of Lehamn Brothers yesterday made me ill. He and his cronies were shoveling millions off to themselves even as they were seeking redress from the government.
But, as disgusting as all that is, we can’t do much about it now other than encourage our leaders to hold them accountable. We can, however, turn towards the people whom they’ve hurt.
The anxiety index is off the charts. Psychologists and counselors are overwhelmed with calls from people who are panicked. I heard this morning on the news that a man in California murdered his wife, three children, and mother-in-law before he took his own life, calling it the only honorable option in the face of their financial ruin. We’re only just at the beginning of the tragedies flowing from lifetimes of misplaced trust.
It’s a call for those of us who have surety in Christ to speak into the despair the only lasting and certain hope there is. When the things in which people have put their trust crumble around them, they will cast about for answers, comfort, and soemthing to hang on to. Let us be there for them.
TM
October 7, 2008 at 3:33 am
JD says: ‘the sad thing is that the US gov’t is far more reactive than proactive. Most gov’ts are.’
This is very true. In Europe the governments are only acting when something happens, and then many of them get angry at the first who fully guarantees citizens’ savings (Ireland) because it forces them to act in a similar way.
Once their butts are adjusted to the purple, elected politicians will do anything to prevent having to wear blue jeans again.
That said, the real cause of this specific issue remains, of course, the greed of many who work in financial institutions and their indifference to the suffering that white colar robbing causes the public. Are the pirates operating in the waters off Somalia really any different?
Well, if the International community can agree on sending warships to Somalia, why not sending special overseers to the offices in Wall Street and Frankfurt and the City of London?
October 7, 2008 at 12:42 am
If you have the time and inclination, may I suggest listening to the 2.5hr house hearing on the bailout, available on c-span http://tinyurl.com/478tjm. It’s really really educational. PS, there are actually 2 sessions–the first is only 2.5 hrs, the 2nd actually contains the CEO of Lehman…
i’m basically with both you TM and Nick. I’m outright pissed that things got to this and there was abundant evidence that this could happen (I live in NYC and I’m friends with tons of Wall Streeters and I constantly heard about it for 2 yrs at least). But one of the witnesses on that committee pointed out that given that the market “looked” as though it were doing well, even though it’s success was entirely predicated on bad loans, anyone who would’ve suggested the gov’t should take measures would’ve been severely criticized or just ignored. I think that’s probably true: the sad thing is that the US gov’t is far more reactive than proactive. Most gov’ts are. The only way more oversight might make any difference is if the gov’t was willing to back overseers, though unfortunately they’re more concerned with public perceptions and elections than caring for the people. If you do something proactive and you’re wrong, you might not survive; if you do something reactive and enough of you point fingers, you might confuse the public enough to get off the hook and ultimately avoid accountability. I think that’s partially what’s going on in all parties.
Anyway, I’m convinced a large sum of money needed to be entered into the economy to help correct the system. I think the way it was done was totally shady. But unless there’s some way to curb consumer and lender greed–whether by regulation or something else–we won’t actually prevent this from happening again. Eventually the emperor won’t have clothes again.
I would’ve much preferred something like a low-interest loan that allowed stockholders to retain shares, forced companies to pay back the gov’t in a reasonable amount of time (i.e. not a long-term loan), or something like that. I’m disgusted that the congress voted for a bill that didn’t specify how the shares would be distributed other than Paulson, a former Goldman-Sachs exec, would get to decide, and the GS will prb. profit considerably from the fact that Lehman went under. Shady man. I accept that the urgency couldn’t permit the congress to come up with suitable regulations, but I sure hope they do quick.
October 7, 2008 at 12:08 am
TM you are right that Rev is apocalyptic literature but it is also an epistle and therefore addresses real problems in the church past, present, and future. Indeed verse 4 makes this explicit:
Then I heard another voice from heaven saying,
“Come out of her, my people,
lest you take part in her sins,
lest you share in her plagues.”
I’m not saying that the USA is the Great Babylon but it is a type of Babylon with similar sins. I believe that the American church has become enamored with the whore of luxury and wealth and is sharing in her sin. Indeed we “share in her plagues” in as much as we are tied to her way of life.
October 5, 2008 at 7:39 pm
Steve, since I began my post noting that in the context of what’s going on economically, Zephaniah’s warning had me unsettled, I can certainly understand why you felt moved to post this passage from Revelation 18. There are some uncanny similarities, and it calls for some serious spiritual reflection on the extent to which the sins of greed and pride and a fundamental against-Godness lie at the heart of this.
That said, it’s also important to note that this passage is drawn from apocalyptic literature, and is appropriately read and taught in its redemptive historical context before we look for ways in which it applies to us in the 21st century.
Verse 20, in particular, can feel very harsh. The rejoicing of v. 20 is reserved for a final judgment. The financial crisis and likely accompanying recession that is going to spread pain on all of us is part of life in this world, and precedes final judgment. Those of us united to Christ are called to use this opportunity to speak his truth as we beckon the guilty to repentance, and to offer his grace as we find ways to relieve suffering where it may be found.
October 5, 2008 at 12:40 am
Rev 18:11
“The merchants of the earth will weep and mourn over her because no one buys their cargoes any more— 12cargoes of gold, silver, precious stones and pearls; fine linen, purple, silk and scarlet cloth; every sort of citron wood, and articles of every kind made of ivory, costly wood, bronze, iron and marble; 13cargoes of cinnamon and spice, of incense, myrrh and frankincense, of wine and olive oil, of fine flour and wheat; cattle and sheep; horses and carriages; and bodies and souls of men.
14″They will say, ‘The fruit you longed for is gone from you. All your riches and splendor have vanished, never to be recovered.’ 15The merchants who sold these things and gained their wealth from her will stand far off, terrified at her torment. They will weep and mourn 16and cry out:
” ‘Woe! Woe, O great city,
dressed in fine linen, purple and scarlet,and glittering with gold, precious stones and pearls! 17In one hour such great wealth has been brought to ruin!’
“Every sea captain, and all who travel by ship, the sailors, and all who earn their living from the sea, will stand far off. 18When they see the smoke of her burning, they will exclaim, ‘Was there ever a city like this great city?’ 19They will throw dust on their heads, and with weeping and mourning cry out:
” ‘Woe! Woe, O great city,
where all who had ships on the sea
became rich through her wealth!
In one hour she has been brought to ruin!
20Rejoice over her, O heaven!
Rejoice, saints and apostles and prophets!
God has judged her for the way she treated you.’ “
October 4, 2008 at 4:40 pm
The Netherlands this week bailed out the main Dutch bank (which had been sold a year earlier to another bank which, is now transpires, has choked on the purchase. The bailout failed. So in the second round, three days later, the Netherlands has nationalised! the main Dutch bank ABN AMRO. Nationalised, as in what we learned in school about railroads and bonds becoming worthless overnight. From the UK Newspaper the Independent: ‘The nationalisation was necessary to ensure “the continued proper functioning of vital financial functions for the Dutch economy”, the government said.’
If the Netherlands had not done this, the bank would certainly have failed, causing 40.000 employees to become unemployed overnight with no chance of a new job anytime soon. Plus I don’t know how many people losing their life’s savings, company’s uanble to trade and a host of domino effects no one can foresee.
There are no easy solutions to this problem. There are easy solutions on how to prevent this thing happening again, but it would require burying Adam Smith once and for all. Somehow I don’t see that happen, so we will witness governments bailing out banks to sort this mess and tax payers footing the bill.
Darryl, the two profs are wrong. They assume that home owner’s inability to pay on their mortgages is the problem. But mortgages are merely subject, not cause. The real problem is that greedy bankers and brokers have sold on these mortgages, and again and again, each time making profit on them without in any way increasing their intrinsic value. So, in a sense, a mortgage for a house worth US$ 50,000 eventually ended up being traded for US$ 80,000. Or US$ 120,000. The difference was pocketed by the banks and the brokers, and the last buyer in the line ended up having spent 120,000 for a collateral of 50,000.
It may appear considerate to give money to the mortgage owners, but that only addresses the initial 50,000, which, incidentally, has real value (a real house) to balance the debt. The reason the financial system is on the brink of collapse is because the difference between the real value and the virtual value, totalling billions of dollars, has left the building so to speak, safely stashed on the Cayman Islands.
Robert
October 4, 2008 at 9:54 am
TM, I don’t know if you read the Post. I don’t really but a friend told me about an op-ed on Wednesday from two Yale profs which recommended that the govt. hit the problem in the most direct way possible — give money to home owners who are in arrears on mortgage payments, and put a moratorium on foreclosures. The agency to adminster such a bottom up program — why, Freddy Mac and company. The thinking behind this proposal seemed to be that by running this bailout out of the Treasury Dept., the feds are too far removed from both those in real need, and from the financial institutions who can use the bailout to write off the bad assets and keep the profitable ones.
But what do I know? I voted for Mondale.
October 4, 2008 at 8:10 am
TM,
You Said…
Somehow, home ownership in the eyes of social engineers joined the list of inalienable rights. It’s not. It’s a responsibility, and clearly, not one that everyone is financially fit to assume.
Amen, it was a simple case of greed. In the early 2000′s People were more than willing to invest money in real estate but they werent willing to buy bonds or invest in the market after the dotcom burst. I would also suppose that for many people the home is a tangible investment while stocks and bonds are not well understood. So the big banks, wanting their money, gave them investments they would actually buy into; subprime mortgages.
Its going to be a mess – hopefully just a recessive economy; but with things happening like what is happening in NC right now with gas shortages and people literally not able to go to work I wouldn’t be surprised to see some looting and such.
Pax Christi…Nick
October 4, 2008 at 3:47 am
Hey Nick
Thanks for the shout out. Unfortunately, there won’t be too much blogging during the semester.
TM
Thanks for the kind words. I appreciate your comments since you have been the first person I’ve heard that endorses the bailout (beside the mass media) and its good to interact with a different perspective.
October 4, 2008 at 12:12 am
I’m glad for the ongoing interaction on this topic. One thing we can agree on, Nick, is that there is plenty of unethical behavior to investigate and bring to accountability. I support that. Where we disagree is on the need for action, and now. The shenanigans with subprime mortgages have already had a tremendous ripple effect on the economy. As I indicated above, it doesn’t take much to wipe out the equity of a financial institution when whole categories of assets are forceably marked to market, and market is unknown, and therefore very low.
I agree with Steve that the government bears a lot of blame in this. Somehow, home ownership in the eyes of social engineers joined the list of inalienable rights. It’s not. It’s a responsibility, and clearly, not one that everyone is financially fit to assume. Add on rules like marking to market, failure to oversee the activities of Fannie and Freddie, and so forth, and the list gets long.
At this point, however, the cost of letting the market figure it out invites a domino effect of further bank and business failures that will cause, in my view, untenable suffering. I don’t intrinsically love the idea of the government jumping in to fix things, but I do see it in this situation as the only reasonable choice given the alternatives. There is simply too much uncertainty and fear in the markets without it, and those auger a downward spiral of business failures that we can’t afford to let happen.
I continue to expect, when all is said and done, that many of the assets purchased by Uncle Sam will eventually prove to have value in excess of price. The government can afford to wait on the righting of the market, however, to realize its gains. I disagree that there are private entities with enough capital and – uh – guts to accomplish the same as rapidly as we needed it to happen. There are only so many Warren Buffets, and he’s done his bit.
And Steve, I don’t know you, but thanks for serving our country, and if Nick says you rock, I’m sure he’s right!
TM
October 3, 2008 at 10:30 pm
steve
great to hear from you on a blog. for those who dont know steve his opinion might carry a bit of weight as he sppent some timein a firebase in afghanistan. he also rocks: (when are we drinking?))
October 3, 2008 at 6:21 pm
Its a sad day today. The victory for the American people by the no vote on Monday has now passed. We are now the debtors of 850 billion dollars (over 3000 per man, woman, child.)
Two primary problems: First, it was dooms day rhetoric that sold the Iraq war. It is dooms day rhetoric that is selling the bailout. Its seems the american people acknowledge the failure of the past but not the politicians.
Second, it was government intervention that was a large cause of the housing bubble. What will the consequences of this new government intervention? Most economists think that this will not help the falling prices and foreclosures. Rather the bubble must pop despite the efforts of the government.
October 3, 2008 at 11:28 am
Oh, and one more thing…the amount of pork in this bailout is amazing…
6 million dollars for wooden arrow manifactures
I kid you not…
October 3, 2008 at 11:24 am
I have to agree (shockingly enough) with Dr. Hart here.
Bailing out the market now simply shifts the financial burden to other places. We simply have to sell these companies off to investors and allow them to default and be sold off(and place holds on foreclosures.) There are plenty of functioning economies both in other countries and here that could (and will) purchase the “toxic credit” at a bargain because then it becomes worth the risk.
The real failure here, by the way, is the SEC; which simply didn’t have laws insuring loans. Actually, thats not true. They had laws insuring against bad mortgages and predatory lending; but the banks found ways of avoiding those laws to maximize profits. This was all that talk you heard a few years ago about “mortgage backed securities” and “collateralized mortgage obligation ” (or CMO for short). What these companies did (especially Mack and Mae) was to hide mortgages in hedge funds (another BS term for loophole) which technically would have been investigated by the SEC for predatory lending.
Compounding this was the use of ARMS (adjustable rate mortgages) which would fluctuate fairly wildly based on the year. So these companies hid their mortgages in loophole investments and then used ARMs for those investments. WHen the economy began to tank (due to rising oil prices and other factors) people began to default on their mortgages (by the way only a 2% increase in defaults, but it was more than enough). When they defaulted, the securities which the banks had invested in, such as bonds, became worthless. Investors withdrew, and the banks lost operating capital overnight. No money was coming in from mortgage payments but more importantly money was being pulled out in droves by bond investors.
Basically, these companies have done something unethical (and probably illegal) and we should allow them to default; slowly. ALong the way they can sell off their assets, close their doors, etc…What we need right now is not a bailout, but a slowdown measure to allow market pressures to correct.
Nick…
October 2, 2008 at 6:49 pm
Darryl, the issue isn’t so much “propping up Wall Street” as preventing the entire financial system from seizing up and shutting down. The volatility in the stock market is a symptom of a more serious underlying problem. The underlying problem is the thing that has to be addressed, and that is the presence of these so-called “toxic assets” of uncertain value on the balance sheets of so many financial institutions.
Where did the toxic assets come from? There was a perfect storm of aggressive mortgage lending to risky borrowers; the ability to bundle, securitize, and trade these mortgages so that they ended up on balance sheets far removed from their point of origin; the decline in housing values that began in 2005; and insufficient oversight of Fannie Mae and Freddie Mac by Congress. There is plenty of blame to spread around, and extracting justice will be important, but it is not as important right now as stabilizing the financial system is.
Financial institutions by their very nature are relatively highly leveraged as compared to manufacturing companies. That means that there is only so much equity on their balance sheets. All works well as long as the assets they hold are of good quality. What’s happened is that these securities are of uncertain value, concentrated in large numbers on the books of some of our most venerable institutions. Writing them down or off is a direct hit to equity. Too many write downs all at once has the effect of wiping out a bank’s equity, rendering it insolvent.
So now, there is rampant mistrust in the system, and banks are unwilling to lend to one another – a crucial component of maintaining liquidity in the system. On top of that, they are far less willing to lend to engage in their regular bread and butter business of lending to responsible businesses for fear of getting burned as these businesses discover their customers are suddenly in trouble, and therefore, so are they. It’s a vicious cycle that causes regular commerce to all but cease.
The economic rescue package is designed to permit the government to function as a purchaser of last resort – that is, one who is willing to buy these “toxic assets” at a reasonable price, and both inject cash into the system, and relieve the uncertainty that’s hanging on out there.
As Robert pointed out, Europe is already up to its eyeballs in doing the same thing. These assets are now around the world.
The situation is so dicey right now that there is no reasonable way for the market to right itself without underfoing a massive collapse. The consequences of that are so overwhelming, that avoiding it no matter what the immediate cost is one of the few things about which thoughtful and educated Republicans and Democrats can agree.
TM
October 2, 2008 at 10:17 am
‘One more question: why can’t the Europeans or Asians buy these failing banks and insurance companies? It’s not as if the U.S.A. is the only one with money.’
Darryll, the Europeans bought into these high risk papers that are at the root of the problem. Now the European banks are being bailed out by the European governments. Belgium, Holland, France, Luxembourg, Ireland, the UK, all these countries are right now pumping billions of euros into the system to keep it from totally collapsing.
The USA is, indeed, not the only one with money, but with respect to this crisis it is mainly the USA government that has allowed these bloodsuckers in Wall Street to rob the world markets of such an incredible amount of cash.
European banks are facing ruin as well, because Europeans, too, have learned how to deal in greed. So this post is not a condemnation on the USA; Europe is not holier than the USA. But Europe is needing all its own money to bail out its own banks.
I don’t know about Asia. There’s quite a lot of money over there but I doubt if people would be happy at the prospect of seeing the banks at Wall Street being owned by Chinese State-funds?
As a side note, the name Wall Street derives from the Dutch ‘Wal Straat’, which is how the street was named when Manhattan was New Amsterdam. There are a great many ‘Walstraat’ in many cities in the Netherlands still. Wall Street was named because of it’s literal wall, built as a defense against the Brits! When the wall came down, there was no defense anymore against Adam Smith.
Anyway, Wall Street derives its name from its function as a defense. Manhattan is under attack. First 9-11, now the world of finance. Maybe the next president would consider shoring up the defenses again? Making sure Wall Street is not again eroded from within seems an appropriate first step.
Robert
October 1, 2008 at 11:01 pm
TM: I’m confused. Last Friday many warned that if Congress did not act by Monday the market could go poof. It started to on Monday. And then Congress shut down for the Jewish holidays and the markets seemed to stabilize. Granted, the loss on Monday is not good, especially for those retired. But markets do correct themselves. And if it were a case of either propping Wall St. up or a complete wipe out of the Dow, why would representatives on both sides vote against the bail out?
One more question: why can’t the Europeans or Asians buy these failing banks and insurance companies? It’s not as if the U.S.A. is the only one with money.