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WHAT CAUSED THE FINANCIAL CRISIS….
The Borrower is Servant to the Lender
By Glen Becker
Article 1 of 3

The recent news has been filled with stories of home foreclosures, bank failures, giant financial firms being taken over, government bailouts, and credit freezes.  The news has also been filled with accusations of what caused it:  greedy financial institutions, too much government influence in banking, too little government regulation, too much credit, lies, fraud, and plain old-fashioned stupidity.  This article looks at the problem from a biblical perspective to get a clear insight into the problem.

First the facts:  Beginning in 2002, lenders began mortgage lending to people with very poor credit, and to make home loans that required little or no up-front money.  Partly because so many people could now buy homes that they previously could not, and for other reasons, the demand for homes grew very rapidly, which caused prices to rise rapidly.

Speculative Bubble.  If the price of something rises rapidly, people tend to buy it, hoping to make a profit as the price rises.  The buying pushes up the price, which confirms the prediction of rising prices, so more people buy.  This self-fulfilling prophecy is called a speculative bubble.  Eventually, when people are no longer willing or able to pay the ever-higher prices, the bubble pops.  Those who bought in only for profit see falling prices and try to sell out quickly.  The massive sell-off causes prices to fall much faster than they rose.  This has happened several times in history, beginning with the Dutch tulip bulb mania of 1637.  There is no question that happened with housing, because in many places prices continued to increase even as rents were falling, which proved that the rising prices were not caused by more people really wanting live in the houses.  The speculative bubble in housing was inflated by greedy buyers, not just greedy lenders.

Political Fallout.  Liberals and conservatives blame each other for the problem.  Liberals say that lack of regulation allowed predatory lending practices, allowing risky loans to be packaged as mortgage-backed bonds, and the lack of good regulation hid the risks from the buyers of these supposedly high-grade bonds.

Conservatives answer that the government was to blame.  The Affordable Housing Credit gave Fannie Mae an incentive to buy loans from people with poor credit.  Some in Congress pressured Fannie Mae to buy loans made by people with poor credit, or loans that had lower down payments, because they wanted more low-income people to become homeowners.  Fannie Mae itself began to steer political contributions toward candidates who agreed with this policy.

Others blame the Federal Reserve for making interest rates too low, thus forcing investors to seek ever riskier investments to get a decent rate of return.   Each side claims that the problem was caused by the political philosophy of its opponent.

Biblical Perspective.  In reality, the problem was caused by massive blindness to Biblical principles of Finance.  The Bible repeatedly warns of the dangers of debt.  For example, Proverbs 22:7 says "The borrower is servant to the lender."  But in the last decade, the entire nation behaved as if debt were the secret of perpetual prosperity.  After the collapse of the Dot-com bubble in 2001, our continued prosperity was funded mostly by rising home values.  The home building and remodeling industries boomed, creating lots of jobs and income.  Homeowners took out second and third mortgages against the increasing equity in their homes to buy whatever they wanted.  The result was six years of prosperity and ample employment, all financed by borrowed money.  It couldn’t last, and it didn’t.  Now the whole nation must stop spending and repay all those debts, and live with the consequences that many will never be repaid.

The Bible has far more to say about the causes of this financial crisis.  The next article, "Biblical Perspectives on the Financial Crisis...The Wicked Borrows and Does Not Repay" goes into more detail.


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