What Really Caused The Financial Crisis

I don’t get it. I read the papers and the news articles on the web services, supposedly full of wisdom from the financial experts who tell us what we must do to fix the financial crisis. The talking heads on television ramble about how we need to revive lending and free up the credit market. These so-called experts are presented as the unquestioned authority on finances and what is required to get us out of the mess that we are in.



Look, I didn’t get my MBA. I finished college with a simple (!!!) Engineering degree, and enough credits for a minor in Mathematics. The math I waded through didn’t really count toward traditional financial understanding, but I did take classes in macroeconomics and microeconomics, so I’m not a complete dunce on the subject. But more importantly, twenty years after leaving college, I spend less money than I make, and our family is essentially debt-free (discounting a very reasonable amount remaining on our mortgage). I think I have a pretty good practical sense of financial wisdom, even if stock derivatives and short-selling are not topics that I can readily explain. But let me try to detail what I see going on around us at this moment in the financial world.

We are currently in a crisis created primarily due to a number of risky mortgage loans which were made to people who can no longer pay them back. You could blame the “evil predatory lender” for offering the loans in the first place. You could blame the government for mandating that the lender offer loans to people who were not qualified to pay them back. Or you could blame the individuals themselves, who wanted a house they couldn’t afford or a car they really didn’t need. Maybe all three are to blame, but one simple financial rule should overshadow it all. If money is to be borrowed, it should be given to people who demonstrate the ability to repay the loan. It’s that simple. It’s biblical, too. Romans 13:7 - ”Give everyone what you owe him.”

Good lending practice is pretty straightforward. A lender gives money with the expectation that it is returned over time with interest. They will plan for a certain percentage of borrowers to default on their loans, but this is never the most desirable end. To make the whole system work together, the lender will develop complex models that measure the ability of the applicant to repay the loan. And when the numbers don’t add up, the lender should refuse the individual’s application. It’s painful, but necessary for sound business practice.

Designing rules for the borrower is much more difficult. Many people fail to “count the cost” before applying for a loan. Instead, they are often blinded by the prospect of a new car or a larger house, assuming that their financial situation will improve enough over time to allow them some financial flexibility. How many people wish they had never taken on the loans that they possess, choosing instead to wait for some of the things that they desired? I’ve been there in the past.

The bottom line is this – a sound financial environment relies on good financial stewardship -- not on risky loans made to financially strapped individuals who will eventually default on their debts and leave the burden to other taxpayers. So, here is where I get to the part that I don’t understand.

Several weeks ago, our government approved over $700 billion of “bailout” money to give to financial institutions, wishing them to lend this money to people. These institutions were suddenly hesitant to loan money to people under risky circumstances. Imagine that… And recently, I read that the government desires to give an additional $800 billion to the lenders to encourage them to loan even more money to people. These actions beg several questions. Should we continue to make loans to people who shouldn’t be applying for them? Is it wise to float so much credit into the market instead of encouraging personal savings? And finally, is the government simply perpetuating the crisis by loaning even more money to people who will likely default on their obligation in the future?

It seems to me that loaning more money does not solve the problem – it only makes it worse. We have reached a point in our beloved America where we need to take a step back from the wealth and affluence which crowds out the system that God designed. The Bible is full of references to economic principles, most of which discourage excessive borrowing and living beyond our means. God does not promise that we will enjoy wealth or a life free from worry if we follow Him. However, He does promise an eternity with Him and the benefit of other non-financial blessings in this life. But God wants us to follow Him first and foremost, and His principles revolve around that relationship. God knows more about economics than any man, committee, or political system. If we design a financial system that forgets this basic principle, then we are doomed to fail. And, sadly, it appears that we are doing just that.

Luke 16:11-12 gives us Jesus’ view on the proper handling of money and debt – “So if you have not been trustworthy in handling worldly wealth, who will trust you with true riches? And if you have not been trustworthy with someone else's property, who will give you property of your own?” Many of us have made financial mistakes in the past, me included. Let’s not allow our government to make the financial problems even worse. Tell them to keep their loan money away from bad borrowers. Or better yet, give it back to the place where they got the money in the first place. Where did they get an extra $700 billion anyway? Hmmmmmm…

The $2 Wal-Mart Challenge

Something happened to me the other day that’s never happened to me before. I lost my credit card. Oh, it’s somewhere in my car, because I threw it on the seat when I couldn’t get it to work in the $3 automated drive-up car wash that has become one of my new favorite places. But by the time I got home, it was nowhere to be found. All five members of my family took turns looking for it, but all that they were successful in doing was messing up the driver seat position. I’m still not sure I have it back where I like it…

Anyway, we called the credit card company right away and cancelled the card. They promised to send a new one within a week. We only have one credit card, so we did without one in the interim. It wasn’t a big deal, but I must admit I never realized how many places our credit card number is entered on-line. And we had to change all of them.

We pay our credit card bill in full each month. We haven’t carried a balance in many years. Since we have stopped writing checks for almost everything (having switched to on-line bill pay), the credit card bill has become one of the larger outgoing expenses we have each month. So, I sat up and took notice when I saw that our next credit card bill was about half of what it typically totals. Was this just a coincidence or was it a direct result of not having the card for a week?

This reminds me of the “$2 Wal-Mart challenge” I sometimes like to play. You should try it sometime. First, take your wallet or purse with you to a Super Wal-mart, – complete with credit cards, checkbook and cash. Set a time limit of a half-hour to wander the aisles. The goal is to leave the store after spending less than $2. Can you do it?

Sometime later, try the experiment again, but this time leave all forms of buying power at home, except for $2 in cash in your pocket. Naturally, you can stick to the budget this way. And temptation is minimized because you are operating under a hard limit. But the way you walk through the store may be just a little different.

Why take the challenge? The first half of the challenge requires self-control. The second-half builds austerity. I believe we need to revisit the ability to buy only what we need. I can tell you that I have a tendency to add unplanned items to my basket whenever I go to a superstore. It’s not hard to walk the aisles and find things that you might need – a twenty-pack of medium-sized wood screws, ten pair of athletic socks, or an extra coffee-maker for the downstairs office. Hey, I can put all of these things to use someday. But do I really need them right now? And should I add them to stack of stuff that I already own at home? We live in a world where we can get almost anything that we desire within a few miles of where we live, or even have it delivered to our door after ordering it on-line. So why wait?

Waiting might be a good thing, considering the economic conditions that may be headed our way. Our lifestyle of wealth and overabundance may actually be reversed for some time, if not permanently. I’m willing to go without the convenience of those wood screws taking up space in my toolbox if it means I have a little more security in the years ahead. Oh, and I’m also thinking about losing my credit card every couple of months.

Maybe There Is a Reason Behind All of the Financial Turmoil?

The recent stock market decline has a lot of people nervous about their future. With multi-hundred-point swings and an overall steady decline, there is genuine fear in people’s eyes about the uncertainty ahead. It is clear that the foundation upon which many people were relying – their financial position – has quickly been eroded.

Our culture in America has certainly gravitated toward one of wealth. But, the history of our nation shows a move from ownership of property towards one of debt and borrowing. As long as debt can be freely extended with a decent chance of being repaid, the whole model hangs together. But when one piece of the puzzle begins to fall apart, the entire system reacts out of fear. The mortgage crisis displays this phenomenon, where consumers were given loans which they were not able to maintain. These high-risk loans were bundled and sold to investment banks, which attracted investors by offering better-than-average returns. But as people gradually reached the point where they could not make their mortgage payments, and balloon payments began to hit, they walked away from their obligations. The whole shell game came tumbling down, and no one went unaffected. Even if you did the right thing and refused to buy that expensive house that your lender assured you that you could afford, you will now find your tax dollars going to fund those who could not resist the temptation.

One might think that this would lead people to step back and re-evaluate what they can truly afford, and make changes to accommodate their financial position. But we continue to be bombarded by advertisements and government officials who tell us we should not give up the American dream – even if we reached out for it much earlier than we were able to pay for it. Giving up our possessions in favor of something more affordable rails against everything that the media and the advertisers tell us.

There is a trend in our culture to sacrifice long-term security for short-term satisfaction. The “investment” in material things is often seen as a kind of competition between individuals. I had the opportunity to work for a fast-paced, high-tech company a few years ago. I was about ten years older than most of the people I worked with, and was one of the few who was married - let alone one of the only ones who had children. I was amazed at the intense competition that was in play among the younger individuals for acquiring new “toys”. At the beginning of each new work-week, there was much sharing of what was purchased on the weekend. I have to admit, I never really connected with my fellow employees when I shared my own account of a successful child potty training moment!

The focus on acquiring wealth has affected America in one very important way. It has taken our eyes off our God and His plan for our lives. I genuinely believe that families in the United States 250 years ago spent more time together in simple ways. They may have sat around the fire at night in conversation with each other, reading books, or furthering their education. The time that we spend shopping, watching television, and worrying about finances was likely spent in more productive pursuits. When viewed from a spiritual perspective, the constant pursuit of financial gain distracts us from godly pursuits. Have we turned into a nation of selfish, godless individuals?

I admit that part of me thinks it would do us some good to lapse into another period of financial depression. When money is scarce, it makes us turn to things other than the pursuit of wealth. Perhaps God has a plan to revive our nation though a lesson of this nature. Perhaps He wants us to stop focusing on the new cars, the cable television shows, and the emails piling up on our Blackberries. Instead, we would be better served to recapture that time, get down on our knees, and ask for God’s blessing on our nation and families. My favorite book of all time, The Grapes of Wrath by John Steinbeck, harkens back to a time when families had nothing, where farms and possessions were wiped out, and where families had to bond together to scratch out a simple existence. Yet while reading that book, I can’t help but get a sense that people were closer and more focused on what was truly important. While the Joad family in that book suffered heartache after heartache, it seems that they were closer to God in many respects. And isn’t that the ultimate long-term investment?