Thinking Biblically about the Banking Crisis

17 comments | Permalink The column on the left is Thinking Biblically about the Banking Crisis from the blog Between Two Worlds. The column on the right is a Vine & Fig Tree response.
David Kotter is the Executive Director of The Council on Biblical Manhood and Womanhood. I've found him to be a reliable, insightful voice on the intersection of theology and economics. He has an MBA, has taught economics, served as a finance manager for Ford Motor Company, and has done a lot of thinking on the topic. So I decided to ask him a few questions in an attempt to think biblically about the banking crisis that is currently underway. Kevin Craig is the founder of of Vine & Fig Tree. He has an MA and a JD. He passed the California Bar Exam but was not given a license to practice because he refused to give unqualified allegiance to the government, reserving ultimate allegiance to God. More on the case. More on the author. More on his views on economic issues.
What is happening in the present banking crisis? I object to the academic, neutral language: "the banking crisis." Calling something a "crisis" is loading the issue in favor of government assistance. This is actually something that was caused by "government assistance." "Banking crisis" makes it sound as if something is happening to the banking system, rather than because of the banking system. And it's not really a result of what most people used to call "banking," that is, storing money from depositors and never loaning out more than savers have deposited in the bank. A married man who visits a prostitute and picks up a few STD's doesn't have a "marriage crisis." Marriage isn't his problem, and marriage didn't cause his pain.
Last night the federal government committed to lend $85 billion to the insurer American International Group (AIG), on top of the $200 billion of capital promised to keep Fannie Mae and Freddie Mac solvent in July and $30 billion for Bear Stearns in March. In other words, more than $1,000 for every man woman and child in the country has been directed in various ways to resolve the present banking crisis. At this point, you might be wondering why this happened and what benefit you can expect to receive from your thousand-dollar share.
Why is this happening?
Why is what happening? Do you mean,
"Why is the government taking an average of $1,000 from every man, woman, and child in America and giving the money to rich Wall Street Bankers?"
Why is that happening? Because Wall St. Bankers have a lot of influence in Washington D.C., that's why. More accurately, Washington D.C. is bankers. Henry Paulson, Secretary of the Treasury who has arranged to take $1,000 from each American and give the money to Wall St. Bankers, previously served as the Chairman and Chief Executive Officer of Goldman Sachs, one of the world's largest and most successful investment banks. Bill Clinton's Treasury Secretary, Robert Rubin, was Co-Chairman and Co-Senior Partner of Goldman Sachs. Prior to the Clinton Administration, Wall Street had loaned billions of dollars to Mexico, probably thinking it was a sure bet because Mexico had the power to tax the Mexican people to pay back the loans. But raising taxes is politically dangerous, so Mexico threatened to default on the loans made by Wall Street. The Bankers in Washington tried to convince Congress to "bail out Mexico" (which, of course, means bailing out Wall Street), but Congress balked. So the Goldman Sachs representative at the Treasury Dept., Robert Rubin, used the "Exchange Stabilization Fund" to bypass Congress and the Constitution, sending billions to the bankers. The ESF was one of many projects nursed during the New Deal by Harry Dexter White, a communist agent.
Little girl become "big girl" with pierced ears.

Little girl gets ears pierced
to become "big girl."

Little boy gets new toys
to become "big boy."

Or do you mean,
"Why do the American people allow the government to take an average of $1,000 from every man, woman, and child in America and give the money to rich Wall Street Bankers?"
Why is that happening? Because the American people want to be the slaves of bankers. They believe that if something bad happens to the bankers, they won't be able to buy their SUV's and HDTV's. They have been brainwashed into believing that if the government doesn't bail out the bankers, the "Money Machine" will "grind to a halt" and they won't be able to buy their "adult toys."

"The rich ruleth over the poor, and the borrower is slave of the lender."
Proverbs 22:7

"But suppose the slave should say, 'I love my master and my wife and children—I don't want my freedom,' then his master is to bring him before God and to a door or doorpost and pierce his ear with an awl, a sign that he is a slave for life."
Exodus 21:2-6

There are plenty of root causes for the present crisis, depending on whom you ask and where you look.
• Some point to the several years of artificially low interest rates from the Federal Reserve Bank. These led to an explosion of home building and enabled families to stretch into larger houses.

Interest rates should be higher. This is another reason "why this is happening." Borrowers want low interest rates. Lenders want low interest rates to attract more borrowers. In a culture such as ours, where there are lots of people wanting to borrow money now, and few people who are saving their money for the future, interest rates should be high. It's the law of supply and demand: a large demand for a small supply = high prices. "Interest rates" are the price of borrowed money.

In the past, savers deposited their money with the bank to be paid interest, and the bank would loan the savings at a higher rate of interest to make a profit on the difference paid back to depositors. But there are no depositors anymore; everyone is spending, not saving. When borrowers approach lenders, lenders should be saying, "Sorry, nobody has saved any money for me to lend to you." But the bankers, who have taken over the government, have a nice arrangement. They skip the depositors. When a borrower comes to a bank, the bank creates a deposit for the borrower. Out of thin air, not out of someone else's saved funds.

Let's look at a statement or two from a book published by the Federal Reserve Bank of Chicago (a branch of the U.S. Central Bank), entitled, Modern Money Mechanics: A Workbook on Deposits, Currency and Bank Reserves.

The actual process of money creation takes place in commercial banks. [D]emand liabilities of commercial banks are money. These liabilities are customers' accounts. They increase when the proceeds of loans made by the banks are credited to borrowers' accounts.

Banks can build up deposits by increasing loans and investments.

Expansion [inflation] takes place only if the banks . . . increase their loans or investments. Loans are made by crediting the borrower's deposit account, i.e., by creating additional deposit money.

Expansion continues as the banks . . . increase their loans . . . crediting borrowers' deposits - creating still more money - in the process.

There is nothing "conspiratorial" here. The Feds (the Federal Reserve System) have nothing to hide. The System was created precisely to manipulate the money supply and allow the government to buy the things it wants - including the votes of the middle and upper classes - by giving "the People" the power to buy the things they want - "at low, low, interest."

And the most important fact to remember: every act of "credit expansion" which is undertaken by borrowing, is an act of currency debasement, making every other dollar held by everyone else worth less -- an act of creating false weights. It is an abomination to God.

   "Low interest rates" removes the problem from its cause. Interest rates were lowered by the government by creating new money out of thin air.
   The root cause of our problems is the debasement of the currency, false weights and measures, or fractional reserve banking, all of which are phrases which describe the same root cause.
• Others blame lenders for creatively introducing no-documentation and interest-only loans as a temptation to over-extended buyers. There is certainly individual responsibility involved whenever anyone signs the imposing mortgage document packet.
• In any case, many people borrowed money to purchase houses and this increase in demand increased the price of houses.
   A second root cause is the willingness of borrowers to make commitments they can't or won't keep:
"The wicked borroweth, and payeth not again" Psalm 37:21

   The final root cause of the "banking crisis" is the willingness of bankers to use the powers of the government to confiscate money from utterly unrelated, innocent parties to avoid the consequences of the bad loans they made. This confiscation comes from threats of violence or fraud which hurts the poor the most. Even if 51% of the People are borrowers and want to use the government to take money from the 49% who do not, the bankers should not accept the money.
At the most basic level, a $100,000 mortgage loan on a house (at 6%) is a promise to pay back about $215,000 over the next 30 years in 360 convenient payments. This promise is obviously valuable to a commercial bank, and can be sold to other banks or even consolidated and sold to large investors as a Mortgage-Backed Security (MBS). If the promise is not kept, the lender gets the house to offset the decreased value of the promise. Everyone who uses a mortgage to buy a home pays the bankers more in interest than the house is worth.

For a good (funny as well as morally incisive) explanation of "structured" or "consolidated" debt, see the video at the bottom of this page.

Problems arose last year when many people failed to keep their mortgage promises. This year a staggering 25% of all subprime loans are delinquent or in foreclosure. In essence, the valuable promises that were being bought and sold are now worth much less. Further, the houses backing the promises are often worth much less because so many are being sold at distressed prices.
Problems for whom? Suppose I invest all my money in a horse-and-buggy factory, and horse-and-buggies turn out not to be profitable. Is this your problem? Is it the problem of every man, woman and child in America? Suppose I loan my money to someone with the following profile:
• Two or more loan payments paid past 30 days due in the last 12 months, or one or more loan payments paid past 90 days due the last 36 months;
• Judgment, foreclosure, repossession, or non-payment of a loan in the past;
• Bankruptcy in the last 7 years;
• Relatively high default probability as evidenced by, for example, a credit score of less than 620 (depending on the product/collateral), or other bureau or proprietary scores with an equivalent default probability likelihood.
Is this your problem? If I did a dumb thing by loaning to such a person, should you be forced by the government to reward me? To teach me the lesson that I can make stupid judgments with no consequences? Should I be rewarded ("bailed out") by you for taking a risk and lacking a shrewd business sense? Or should I be forced to eat my losses and learn a valuable lesson?
Therefore someone has lost a lot of money (a.k.a. a crisis). The mortgage promises are no longer worth what banks paid for them and the underlying real estate is often worth less than the loans. Precisely, the real problem was that the risk of default was underpriced, or not completely [taken] into account by insurers and purchasers of mortgage-backed securities. Now that the default rate turned out to be much higher than credit scoring agencies predicted, the key question is who will ultimately bear the cost of these multibillion-dollar losses. Who should be rewarded or penalized for not taking something into account?

Looks like the answer to this last question is: You and I should be penalized, and the banks -- the guilty party -- should be rewarded.

Certainly the shareholders of investment banks like Merrill Lynch, Bear Stearns, and Lehman Brothers have realized tremendous losses. This has forced these companies into bankruptcy or distressed sales to other firms. The shareholders of Fannie Mae and Freddie Mac lost almost all of their equity when these government sponsored enterprises were forced into conservatorship by the government. AIG, which sold insurance against the risk of default of mortgage backed securities, gave up 80% of the firm to the US government in exchange for a two-year loan at 11% interest. What responsibility do investors have to put their money in businesses that are not ultimately dependent on theft, fraud, and widespread bad character?
This is where your thousand dollar contribution enters the picture: it represents your share of the government bailout to partially offset these losses and keep most of these firms afloat. If they all fail, the borrowing and lending that efficiently directs capital in a modern economy will grind to a halt. If none of them fail, the Federal Reserve will introduce a "moral hazard" that will reward risky behavior and encourage more in the future. This is a good reason to intercede for “those in authority, that we may live peaceful and quiet lives in all godliness and holiness” (1 Timothy 2:1).
Lenders who lend to people who default are bad managers of our capital. Their business needs to "grind to a halt" until wiser, more efficient lenders fill the gap. Congressman Ron Paul, leading critic of Fractional Reserve Banking and government-subsidized GSE's, said the following in a speech on September 10, 2003:
One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.
The connection between the GSEs and the government helps isolate the GSE management from market discipline.
Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.
Lending will only "grind to a halt" until new lenders who take everything into account rise up and fill the void. Those who don't do a very good job "efficiently directing capital" will get jobs as greeters at WalMart. This is exactly what needs to happen. The sooner this happens, the less capital will be mis-directed, and the easier the re-adjustments will be.
By the way, you won’t receive a personal invoice for the thousand dollars; it will just be added to the national debt. Ironically, for many people this is larger than the stimulus payment sent out earlier this year, and there is no guarantee that the taxpayers won't be asked contribute yet more as the crisis unfolds. The government will create your $1,000 out of thin air and give it to the Wall Street risk-takers. These bankers will go to the store and buy Kellogg's Corn Flakes that they otherwise could not have afforded. This will bid up the price of Corn Flakes. You will have to cut your consumption by a box of Corn Flakes. The Bankers will also buy a bar of Dial Soap with the money they get from the government printing presses. You will not. You will have the same number of "dollars," but you will lose $1,000 in purchasing power because it has been transferred to the Bankers. They believe it's better for them to have breakfast than you. And they run the government.
What effect will this have on the wider economy?  
Undoubtedly this crisis is having widespread effects on the economy, although economists disagree as to the extent at this point. AIG is one of the 30 stocks in the Dow industrials, so the evaporation of the equity in this company was a major contributor to the 500 point drop in the market on Monday. Investors are now suspicious of other banks, leading them to sell those stocks as well. Banks are increasingly reluctant to make mortgage loans and this makes it more difficult for individuals to purchase a house. A huge inventory of houses on the market in many areas is resulting in neighborhood blight and further depresses prices. Individuals whose houses are declining in value are curtailing other large purchases, and this further weakens the economy. High gasoline prices and a weaker dollar only contribute to the malaise. What makes it difficult for people to buy a house is the fact that they don't save any money, but spend it on consumer goods. It is also more difficult to buy a house if the government takes more than half of everything you earn in taxes. Bankers are willing to pay these exorbitant taxes because they get bailed out. The rest of us are willing to pay these taxes because the government is Santa Claus and will give us a low-interest, fixed rate loan for new house, even though we have a bad credit rating because we don't always pay our bills for our big houses or our new HDTV and SUV.
On the other end, we must keep this in a wider perspective. Though some laugh when they hear "the fundamentals of the economy remains strong," this is actually true. For example, the unemployment rate has risen to 6.1% (which is a challenge if you have personally lost a job), but this rate is still lower than the peak in 2003 and is better than many European countries today. Further, despite the rampant media discussion of a recession, the economy has been growing for the last two quarters. This bubble, like the “dot com” bubble and even the tulip mania bubble of 1637, will eventually be resolved as banks and investors accurately report their losses and adjust accordingly. Why is it the bankers don't have to "adjust?" Why must they be bailed out with OUR money? Millions of Americans should be required to "adjust" when they don't have the money they want to buy the things the TV says they must have.
What effect will this have on individuals?  
For believers, this is just one more reason to "not love the world or the things in the world" which is "passing away along with its desires" (1 John 2:15, 16). In Louisville we have been without electricity since Sunday, and it makes me increasingly grateful that our God is independent and powerful enough to accomplish his good will every moment. Lighting candles each night reminds me that I am not! This Bible passage is employed ambiguously. That which is "in the world," according to the Bible, boils down to "archism." But loving salvation, blessings, Eden, and limitless wealth is not a sin. People who are dependent on electricity to heat and cool their homes or who are in the hospital have been known to die when the power goes out. This is not a time to light a candle; it is a time to take action to prevent even our candles from being taken from us by a power-hungry government.
Although it will be harder to obtain aggressive mortgages, Christians who are practicing prudent financial stewardship (modest houses, large down payments, monthly payments easily within their means, diligent participation in the work force) should not have much problem. Everyone will want to verify that their savings account is government insured, but believers with a generous "wartime mindset" should have no trouble keeping their bank accounts under $100,000 FDIC limit. Above all, don't be anxious about your life, what you will eat or what you will drink, nor what you will wear. Remember that journalists, markets, and lemmings tend to move in herds. The media never reports on thousands of planes that land safely, but solely focuses on one that doesn't. In that light, if you are saving for retirement more than 10 years from now, this actually would be a good time to invest in the stock market. But don't let your IRA be a substitute god or distract you from treasuring Jesus Christ (Matthew 6:24-34).  

In other words, the imprudent are being rewarded (bailed out). What lessons does this teach?



Some are not quite as optimistic about the stock market. The same government-created money that inflated the housing market has inflated the stock market.

Is it right to pray for the economy?  
I think it is appropriate to pray for the economy. After all, God said to Jeremiah, "Seek the welfare of the city where I have sent you into exile, and pray to the Lord on its behalf, for in its welfare you will find your welfare" (Jeremiah 29:7). When the economy is strong, people are able to work and support their families, believers have greater opportunities for generosity, and many benefit from this common grace.  
We can pray for integrity and wisdom for government officials who are faced with the incredibly complex task of regulating investment securities and banks in a way that is transparent and serves all of the varied stakeholders. We can pray that those who are willing to work will be able to find gainful employment. We can pray that greed would be restrained at all levels, from the leaders on Wall Street to individual families tempted to live beyond their means. We can pray for ourselves that we will participate in the national economy that keeps in mind the time is short and the present form of this world is passing away (1 Corinthians 7: 29-31). "We the People" did not give the federal government power to regulate banks. The Constitution certainly does not give the banks (Henry Paulson, Robert Rubin) power to "regulate" (bail out) themselves using our money.

We should definitely pray that the needed shift from socialism to a Free Market will be as smooth as possible.

We should not be expecting the end of the world.

Many thanks to David for taking the time to answer these questions! Postscript: The claim is not being made that bankers run the entire government. Only that they run that part of government dealing with banks. Just like other businesses that run other parts of the government that ostensibly regulate their industry. The most powerful leaders in an industry are those who set up regulatory bodies within government in order to protect their market share against competitors, and use government to protect or subsidize their business.