Economic Recovery for All 2: Causes and Effects of the Current Crisis

THEOLOGICAL REFLECTION ON THE ECONOMY
A Working Paper for North Carolina United Power
from an Interchange Among Theological Educators
July 2009

I. The Economic Crisis 2008-2009: People are losing their homes. Banks are closing. Businesses are failing. Workers are losing jobs. Families are uprooted.

A. Causes
1. Artificial inflation of housing prices created an illusion of wealth.

2. Greed and irresponsibility made financial institutions eager to sell “creative” and high-risk investment products.

3. Government deregulation of financial markets allowed risky experimentation, gigantic financial conglomerates, and diminished consumer protection.

4. The complexity of financial instruments which divided, bundled, and resold mortgages again and again, led to confusion about their real value and to lack of accountability for following best practices in making loans.

5. Households overextended their debt as consumer acquisitions outpaced income.

6. Overinflated housing prices, the justifiers of high levels of debt and consumption, finally crashed (the "housing bubble" burst).

B. Effects
1. Many households faced foreclosure and the loss of shelter.

a. People owed more than their houses were worth.

b. Many people lost jobs in the weak economy and could not keep up payments.

c. Many households faced increased interest rates from Adjustable-Rate Mortgages (ARMs).

2. Growing numbers of foreclosures led to a crisis of solvency in the financial institutions holding these mortgage-backed securities.

3. The crisis in the financial institutions led to a crash in the stock market.

4. The value of pensions, homes, and investments lost value dramatically, affecting retirees, institutions depending on endowments, homeowners, investors, and the economy in general.