The immediate identifiable cause of the credit crunch is the collapse of the sub-prime lending market in the U.S. This was built on the concept of “liar loans”, or stated impact loans where borrowers lied about their income, falsely qualifying them for mortgages they could not afford. Wikipedia defines a “liar loan” as follows:
A stated income loan is a mortgage where the lender does not verify the borrower's income. Instead, borrowers are simply asked to state their income, and taken at their word. These loans are sometimes called "liar loans".Some of these loans had ballooning interest payments after a few years, causing significant numbers of these loans to default. These bad loans were on-sold throughout the world financial system disguised as complex financial products, such as CDOs (Collateralised Debt Obligation) and CFOs (Collateralized Fund Obligations). Thus banks and financial institutions across the globe are exposed to significant risk.
Thus, for example, on July 25 2008, the Financial Times reported that the National Australia Bank was savaged by investors on Friday after the lender’s surprise admission it would take additional provisions of A$830m ($794m) against its portfolio of collateralised debt obligations, lifting total charges to more than A$1bn.
A house of cards
It appears that major financial institutions are falling like a house of cards. Hardly a week goes by without a major bank bailout in the US, such as Citigroup, Merryl Lynch or Lehman Brothers. Here in Australia Babcock & Brown is in trouble, as is Macquarie Bank. The Opus Prime investment group collapsed owing hundreds of millions of dollars.
Bank West was quietly taken over by the Commonwealth bank, because of the difficulty of Bank West’s UK parent, HBOS. HBOS lost 90% of its share value and had to be taken over by Lloyds TSB.
The deeper causes
The foundations of the sub-prime market are lies, greed and deception. Lies in the form of stated impact loans, are compounded by greed (of the financial institutions who reaped huge bonuses from the sale of these faulty products), and deception – disguising the true nature of these products such as CFOs (Collateralized Fund Obligations) and CDOs.
Lies, greed and deception are moral issues, and moral issues are spiritual issues. Therefore God has much to say about the causes and the solutions to this problem.
More generally we in the western world have been living self absorbed lives, focussed on materialism, consumerism and a me-first mentality. We are suffering from “affluenza”, the disease of always wanting more. We have been weighed in the balance and found wanting.