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.

Bailout 16: Thoughts on Describing the Problem

As mentioned earlier, I am working on the problem of analyzing the current economic situation in light of biblical and theological concepts related to Jubilee, the Sabbatical year, the denunciation of usury, etc. Below are a few short paragraphs in which I have tried to describe the problems of the economy in order to begin this sort of analysis. Obviously, this is a work in progress.

1. Hard economic times place people and institutions in jeopardy. In 2009, there is plenty of pain to go around. People are losing their homes. Banks are closing. Businesses are failing. Workers are losing jobs. Families are uprooted.

2. Some call the economic woes a credit crisis. Some focus on the housing price bubble. Others emphasize the irresponsibility of financial institutions eager to sell “creative” investment products. Still others highlight the complexity of financial instruments divided, bundled, and resold again and again so that no one is sure who owns what. Many recognize that consumption had outpaced income, and too much of the economy depended on overextended debt. Others criticized the deregulation of financial institutions which allowed them to take inordinate risks with other people’s money.

3. A major part of the problem had to do with a collapse of home prices. Loans had been written with the assumption that housing values would rise steadily and without interruption. Some people borrowed more than they could afford, but others who could afford their mortgages found that they were making payments on a mortgage for an amount that was up to twice the new value of their home. They could not afford to keep paying double for a house that had originally been priced in an inflated market. In a weak economy, workers losing jobs also could no longer meet their mortgage payments.

4. All these mortgage problems led to a crisis of confidence in the mortgage-based securities and the financial institutions investing in them. As the seriousness of the mortgage problems became apparent, the more people became concerned about many other forms of debt, including credit card debt which has grown exponentially. A crash in the stock market followed up the crash in home prices, and many people who had thought they were in good financial shape now saw their pensions, their homes, and their investments lose value dramatically. People losing health insurance coverage were building mountains of debt for medical care.

5. When the economic situation became too severe to avoid, former Treasury Secretary Paulson and Federal Reserve Chair Bernanke recommended a massive bailout of major financial institutions. With only a bare sketch of a plan, the engines of government shifted into high gear to authorize transferring hundreds of billions of dollars directly to banks and other financial institutions to prop up their endangered portfolios of assets.

6. Their idea was to stabilized the financial system by providing cash to banks and other financial institutions who owned securities based on delinquent loans. They said that this would set things in order so that banks would be willing to lend money to grease the wheels of commerce. However, the banks and financial institutions took the money and held it. It did not slow down the pace of foreclosures of mortgages. It did not pump up the economy. Homeowners kept losing their homes with no relief. Credit card companies pressured small borrowers with tightened terms and higher interest rates.

7. What kind of a solution leaves giant banks standing while the average worker’s life gets harder and harder? That is not a solution. It smells like collusion. Whose money bailed out the banks? Who is an economy supposed to benefit? Who says billions can bail out executive jobs but nothing can bail out labor jobs? Who says tax dollars can pay off banks’ bad debts, but the average taxpaying citizens are on their own? Debt relief for millionaires and homelessness for working people—that’s not the kind of economy we believe in.