Friday, June 12, 2009

Causes of the Global Financial Crisis

As with any problem, there are immediate causes and then there are deeper, longer term and more systemic causes. It is the thesis of this paper that many of the underlying causes are deeply spiritual in nature, and that therefore God’s Word speaks powerfully to the needs raised by this crisis.

Immediate causes
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.[1]

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.

[1] http://www.ft.com/cms/s/0/7793fa94-5a09-11dd-bf96-000077b07658,dwp_uuid=d355f29c-d238-11db-a7c0-000b5df10621.html

Friday, June 5, 2009

The effects of the Global Financial Crisis

The financial meltdown has practical implications for ordinary families as well as for financial institutions and the big end of town. The effects are manifold and include loss of value in superannuation by 20% or more, mortgage stress, an increase in mortgage defaults, increased unemployment as businesses shrink, and as retrenchments take effect.

Businesses of all sorts are affected. All the big car makers are in difficulty both in the US and Japan. In the UK household name businesses such as Woolworths and Waterford Wedgewood have gone into administration. Large employers like Rio Tinto are shedding thousands of employees worldwide. Smaller businesses are also affected, some of which will fail, with business owners facing the stress and anxiety of bankruptcy. Financial institutions such as the ANZ bank are laying off staff. The failure of ABC Learning Centres is affecting many families with children. The economic climate for sound businesses is more difficult, and those businesses already on the edge are likely to fold or be taken over.

Individuals and families are also affected. As unemployment increases, former wage earners find themselves on a vastly reduced income. For those with high mortgages and tight budgets this leads to increasing debt, maxed out credit cards, and the possibility of mortgage foreclosure. Pensioners and those approaching retirement have seen the value of superannuation fall by as much as 20% in one year.

Unemployment will increase across the world. “The global economic crisis will push up unemployment by up to 25 million by 2010, the OECD chief has forecast, saying there has been a "truly scandalous failure" of regulatory supervision.”[1]

[1] http://business.theage.com.au/business/world-business/world-jobless-could-hit-25-million-20081223-73qz.html

The significance of the problem

Many terms are used to describe this crisis. Phrases such as financial meltdown, the credit crunch, and so on, are commonplace. On 23 October 2008, Mike Smith, the head of the ANZ Bank in Australia, described it like this in an interview with ABC radio.

At our first earnings update in February, I used the word "Armageddon" and "bloodbath" to describe the situation facing the world's financial system. At the time, those comments raised a few eyebrows, but I think if you were a bank in the United States, of if you were in Europe, you may have well very thought that "Armageddon" had happened.[1]

The use of such strong biblical language implies that he for one, thinks this is the end of the world, or at least the end of some aspects of the financial system as we now know it. If the head of a bank thinks it is a big problem, then perhaps the rest of us should take note.

So if this is a problem that deserves our attention, what are the causes, what does God’s Word say, and what is an appropriate response for Christian believers, Christian leaders and local churches? I will suggest some possible responses in later posts.

[1] http://www.abc.net.au/pm/content/2008/s2399635.htm