By Jim Coggins

What should Christians be doing about the current economic crisis? CC.com consulted a number of economic and socio-political leaders for faith-based perspectives on the subject. First in a series.

Click here to read Part 2 | Part 3.

IN discussions about the ongoing financial crisis, the word 'greed' keeps popping up. But that is the simple answer. According to some experts, the situation is more complex than that.

There are both a "short-term cause and a long-term cause" to the current problems, according to Paul Williams, associate professor of marketplace theology and leadership at Regent College in Vancouver.

Housing markets

The short-term cause was the collapse of the sub-prime housing market in the United States.

Essentially, said Williams, "banks sold mortgages to people with poor credit ratings on less desirable properties." Often, these mortgages offered very low introductory interest rates (as low as two percent) for the first couple of years, after which the rates would rise to above-average interest levels.

The buyers were told that, after a couple of years, the house value would rise. They would then have equity -- i.e. they would own part of the house -- and they could then negotiate a mortgage with a better interest rate. Often, the mortgage given was for 100 percent or more of the purchase price and/or value of the house -- again on the assumption that houses would continue to go up in value.

The problem was compounded by new means of spreading the risk. These means have been called "recently invented financial instruments" by Carsten Hennings, assistant professor of business administration at Tyndale University College and Seminary in Toronto.

Williams explained that banks are normally limited in how much money they can lend by the "capital ratio" -- which means that a considerable proportion of the money they lend out must be supported by money they have on deposit.

In this case, regulators allowed the banks to 'sell' the mortgages to other investors, and then agreed that these mortgages would not be included in the banks' capital ratios. This enabled the banks to issue mortgages many times the value of the money they had on deposit. The mortgages were bought by other banks and investors both in the U.S. and around the world. Bond rating agencies rated these investments as 'safe,' since they were backed by tangible assets -- i.e., the houses.

This system worked for a while. The massive infusion of credit into the U.S. housing market kept driving house prices higher. However, eventually borrowers who were unable to make the mortgage payments began to default on their loans. This caused house prices to drop, and "the whole pyramid scheme started to collapse," Williams said. Several things began to fall: the value of the investments, bank profits and stock prices.

Stock market

Something similar occurred with the stock market, Hennings said. Investment money had poured into the market, driving up stock prices and making big profits for investors. However, the investments did not increase the real value of the companies being invested in; because of this, stock prices eventually began to fall.

"What we often call investing is not what economists call investing," said Elwil Beukes, professor of economics at King's University College in Edmonton. Much of the 'investing' that was going on was "financial investing," he said -- i.e. bidding up the price of stock and houses; very little investment was put into "the real economy."

Real investing, Beukes clarified, increases "the capacity of the economy to produce more"; but even while stock prices were going up, real industrial capacity was dropping. As jobs were shifted overseas to increase profits and stock prices, "U.S. industrial indices have been in recession for a long time."

Bubbles burst

Virtually all of the experts CC.com consulted agreed that the 'bubble' in the stock market and the housing market were bound to burst, and that a recession was inevitable. However, the recession is now affecting more than the financial markets. Those who lost houses or lost money in the stock market slowed their spending, and this began to affect the 'real economy.'

As soon as banks started to report losses on their mortgage debt, said John Boersema, a business professor at Redeemer University College in Ancaster, Ontario, people started selling bank shares -- and that precipitated the stock market crash.

As well, since the transfer of debt from one financial institution to another had caused such problems, "banks were afraid to lend to each other or anyone else," said Williams -- and this also affected the real economy.

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Viable businesses could not get loans, and projects were cancelled for lack of funding. Even people with a good credit rating could not get a mortgage. This put more people out of work, and the problem began to feed on itself. It was exacerbated by an understandable fall in consumer confidence; people who still had money began to be afraid to spend, and this further affected the real economy.

The greed factor

Profiteering was not the only reason for the creation of the current problems, Boersma noted.

One of the reasons the U.S. government pushed sub-prime mortgages, he pointed out, was so that poorer Americans -- including members of racial minorities such as blacks and Hispanics -- would be able to buy houses.

However, all the experts CC.com consulted asserted that greed was certainly a significant part of the problem.

"The root behind every recession is over-valuation and over-consumption," said Paul Rowe, associate professor of political and international studies at Trinity Western University in Langley, B.C.

Greed, said Williams, was a common denominator among all those involved: salesmen, who sold the mortgages on commission; banks, which pocketed the fees for arranging the mortgages, and then passed the risk on to others; investors, who bought the mortgages hoping for a quick profit; and people who bought houses they knew they could not afford.ÊÊ

Similarly, greed motivated the stock market rise, Hennings said, adding: "There is an element of greed in every bubble." This includes everyone from investors who "wanted to get more than they deserved" to "senior [company] managers who wanted to squeeze the last penny out of stocks" in order to get performance bonuses. There was "a casino mentality," in which everyone involved wanted to get something for nothing.

The current problem is an "inevitable downturn in the business cycle," Hennings said. Such recessions usually happen about every 10 years, Rowe suggested. The last one occurred in 1991, and the last really serious one in the early 1980s. These recessions are usually relatively short; but this one, Rowe said, "might be worse -- since we postponed it."

"Nobody is sure how much longer" this recession will last, Williams said. The decline in the U.S. housing market is slowing, but has not stopped yet. Once it does, it will be "the beginning of the end of the financial problem."

'Debt spree'

However, that will solve only the short-term crisis. More serious, Williams said, is a long-term problem. "The U.S. and the West have been on a debt spree, borrowing and spending above their income for 30 years."

In the U.S., individuals, companies and governments have accumulated debts amounting to 225 percent of the U.S. Gross Domestic Product. Therefore, "this is not just the business cycle -- but a big wake-up call."

The very low savings rates in North America indicate "an unwillingness to make sacrifices to build in the long term," Hennings said, adding that it is an open question whether we can "regain the virtues of economy and prudence."

End times?

Some American preachers have declared that current economic problems are a judgment on the U.S. -- and perhaps the beginning of the 'end times.'

However, Hennings said that even though America has been "much used and much favoured by God," there is no mention of the U.S. in the Bible -- and therefore, "it is unclear what place the American empire will have in the broader history of God and mankind . . . Trying to read the tea leaves of history is complex." However, he noted, history shows that a decline in the American empire is inevitable -- whether that happens in one year or 500 years.

Whatever happens in the short term, Williams said, "the living standards of North Americans will plummet sharply over the next 20 years" because of the long-term problems.

Materialism

Rowe agreed, noting that eight years ago the U.S. was the leading economic and military power, accounting for 20 percent of the world's economic activity. He contended that Americans need to come to grips with the fact they will never again have that kind of power. He said thisÊ economic crisis is no more "God's judgment on American society than any other recession." However, he maintained, "God does judge materialism."

The real problem, the experts said, is not the debt -- but the reasons behind it. North Americans have been "seeking happiness in a materialistic lifestyle," Williams suggested. "Capitalism has offered people a freedom of choice, as the route to happiness. It has persuaded people to borrow money they can't afford, to buy things they don't need." While promising freedom and happiness, it has led to "bondage and misery. It is a false idol."

Beukes agreed. "We live in a time when people have put their faith in material things to a degree never seen before. We have abandoned every goal -- other than having things."

He added that this false worship has infected both rich and poor. "When you put your ultimate trust in possessions to give you the things that make life meaningful," that is "a false idol [which] is bound to fail."

December 5/2008