Friday, October 31, 2008

Economics and Faith?

So, in response to my own comment on the about the light-duty articles about churches in the WSJ (see comment on Mystery church visitors entry below), I thought I would see if there might be a heavy-duty article about economics in The Christian Century, one of my sources for thoughtful theological insight. I found James Halteman's 10/21/08 article which is a clear description of the economic forces behind the current melt-down situation. However, given that this journal would be an appropriate outlet for theological reflection, repentance, and even possibly jeremiads, I was expecting a different ending.

Instead, his answer to his own question about where the responsibility lies for this mess was the same old finger-pointing to Wall Street greedsters, with only a teeny-tiny toss of responsibility to us, the over-consumers:

The culprits? Certainly some responsibility is borne by the eager brokers who sought easy commissions, enticing financially ill-prepared people to take on mortgage debt. Responsibility also falls on the people who took out the mortgages without working out a viable budget.

But the most disturbing element in the sequence of events behind the crisis is the behavior of the Wall Street investment banks...

I say, opportunity lost. There is a heap of responsibility for this mess on this entire country's addiction to living on credit, and especially funding it through home equity.

I would want to have ended an article about economics and housing that was going to be read by a huge section of the Christian community not by blaming wallstreeters, as usual, but to point out the mantle we wear too of greed and suggest that we might need to re-gain the will to sacrifice, and advocate sounder policy and action toward those who are not able to sup at the wealth-accumulation table. Does this financial crisis hold up a mirror so that we can re-examine the true nature of wealth disparity? What are the true questions we should ask ourselves as a Christian community? What are the true economic goals we should be seeking?


Steven McMullen said...
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Steven McMullen said...

It does seem that there is plenty of blame to go around, and that pointing fingers only at Wall street falls a little bit short.

That said, it is not immediately obvious to me that the dramatic increase in the use of credit is a bad thing. Certainly people get caught borrowing too much money from credit cards and in home loans out of sheer irresponsibility. How much of this crisis is the result of this behavior, though, is not clear to me. There is some real blame that should be laid at the feet of the credit industry for the types of innovation we have seen recently in home loans that were specifically designed to lure people into buying more house than they could afford.

Kurt C. Schaefer said...

The direction of finger-pointing in this situation depends on one's analysis of the reasons behind the situation. Greed per se fails as an explanation, because greed is omnipresent and has not led to meltdowns in other areas of the economy that have tempered this downturn.
So what amplified common greed into an international meltdown? There is enough blame to go around to nearly everyone, but at the base of this particular episode is poor oversight by Congress. In the mid-90s ACORN took over congressional hearings, sometimes commandeering chairs' microphones, to insist that sub-prime mortgages be expanded by Freddie Mac and Fannie Mae, in the interest of creating access to the economy for the poor. The officer in charge of new product development at Freddie Mac had a special personal relationship to Barnie Frank (current House oversight committee chair). The new director of Freddie Mac was a Clinton appointee, removed in 1992 under a cloud of "accounting irregularities." In the same year a Congressional study found that the FMs had indeed not lowered the cost of borrowing for the poor. They saved their existence by making the case to Congress that they existed to aggressively create sub-prime mortgages; their mission was access for the poor, not expense to the poor. This argument prevailed along partisan lines in Congress, as a class-warfare wedge issue; the heartless were trying once again to disenfranchise the poor. The same logic carried the day in 2005 when some proposed basic regulation of the FMs, including basic banking reserve requirements. Again, along straight party lines, that initiative was defeated. The same happened in 2006, despite serious warnings from the Fed to Congress.
The harmful behavior of investors would have been impossible without this history of oversight by Congress. It is particularly difficult to hear this meltdown blamed on a conservative impulse to not regulate, or on failure to create access to credit markets for the poor.

John Tiemstra said...

Without absolving the Democrats for their role in the GSE problem, it has to be said that the Bush administration did not push hard for solutions either. In fact, as part of his "ownership society" initiative, President Bush pushed the industry to expand lending to low-income homeowners (see the White House fact sheet from August 2004). And Fannie and Freddie were not the first or only institutions to go--there were worse problems at WaMu, Indy Mac, National City, Lehman, Northern Rock, etc.

There is a lot more to this collapse than just subprime mortgages. A lot of actors broke the basic econ 331 rules of lending: make sure that the borrower has something at risk, make sure there is cash flow to make the payments, and never, ever take a risk you don't understand. The industry has become so fascinated with the idea of trading risks that it has become way too easy to do so.

So, was greed involved? Yes, to the extent that folks failed to understand the basic truth of financial markets, that higher returns come with greater risks. We are learning more all the time from behavioral economics about the limitations humans have in assessing risks. It takes professional skill and detachment to do so properly. Most of us get caught up very easily in "new era" stories about getting rich painlessly.