Ten Years Later—How Possible Is Another Financial Crisis?
“Unless you act, the financial system of this country and the world will melt down in a matter of days.” Those are dire words for anyone to have to say, but that is what United States Treasury Secretary Henry Paulson told a meeting of senior lawmakers of the House and Senate on Sept. 18, 2008.
The investment banks had created and sold financial assets built on mortgages from homebuyers who could not afford the loans. They cut up those mortgages, mixed them with stable mortgages likely to be repaid, creating new assets to buy and sell. On the surface it all looked safe, but it was rotten in its core, and few in the industry bothered to understand what they were trading as long as profits kept soaring. It was all built on toxic subprime mortgages.
When homeowners began to foreclose in great numbers, the entire industry came within moments of complete collapse.
The Almost-Meltdown of 2008
Paulson and Bernanke had been battling a developing crisis with bailouts.
First, in March 2008, Paulson and Bernanke rescued investment bank Bear Stearns by facilitating a buyout by JPMorgan for $2 per share and a $30 billion loan to cover Bear’s debts. Three months earlier Bear’s stock had been close to $170 a share. Now the entire company was being sold for less than the value of its New York headquarters building.
In July, Paulson asked Congress to have taxpayers guarantee $25 billion of bad mortgage debt held by Fannie Mae and Freddie Mac, the two largest mortgage lenders in the world, holding $5 trillion in mortgages, more than the entire gross domestic product of Japan!
But it wasn’t enough. On September 7, Paulson and Bernanke had to nationalize to keep the two lenders alive, purchasing $100 billion of their stock and their debts with taxpayer money.
One week later, the fourth-largest investment bank in the U.S., Lehman Brothers, went bankrupt. Paulson said there would be no further Wall Street bailouts.
This bold stand lasted for only a day.
The next day, the world’s largest insurance company, aig, faced bankruptcy. It had bet the company that investment banks like Lehmann wouldn’t fail. Paulson and Bernanke went back into bailout mode, providing $85 billion to aig while taking control of 70 percent of the company.
The crisis kept growing—banks stopped lending to each other, and the economy faced a meltdown.
The $700 Billion Fix
Paulson and Bernanke knew they needed drastic action to avert financial meltdown. Two days later, they went to Congress, seeking the bailout to end all bailouts. They asked for an unprecedented $700 billion. Understandably, the reaction was heated. You’d have to spend $1.9 billion a day, every day, for a year to spend it all.
Sen. Christopher Dodd told pbs Frontline, “There was literally a pause in that room where the oxygen left.”
In 2008, it was still un-American to bailout companies that were facing bankruptcy by their own recklessness. Politicians, especially Republicans, attacked the bill on principle. On September 29, the bill was rejected.
But after news of the bailout rejection hit Wall Street, the stock market suffered its single-worst point drop ever.
Since no government official wants to go down in history as the cause of the second Great Depression, enough Congressmen put aside their principled opposition and passed a revised version of the bill four days later, which President George W. Bush signed into law.
This version allowed the government to inject billions into failing banks to prop them up and get them lending again. The price, in part, was a partial nationalization of the U.S. financial sector and a violation of free enterprise principles. Nine of the largest banks were forced by Paulson and Bernanke to take a combined $125 billion of government money on October 13.
That was only the beginning: Citigroup, General Motors and Chrysler were bailed out later.
By the end of the crisis, over $620 billion in taxpayer money was spent by the government to prop up failing businesses.
There was much anger over the bailout: It didn’t help the American public to see the executives of failing companies compensated with millions while the unemployment rate crept up to 10 percent.
U.S. lawmakers then passed the Dodd-Frank Act, which placed regulations on the financial industry to make a repeat impossible.
But, exactly 10 years after that meeting, could we already be racing toward another financial crisis? It’s not the most pleasant question to ask when the economy is in a boom.
The U.S. economic growth rate for the second quarter of 2018 was 4.1 percent, the first time the growth rate topped 4 percent since 2014. U.S. President Donald Trump called the report “amazing” and said, “As the trade deals come in one by one, we’re going to go higher.”
A 4 percent jump in consumer spending shows that Americans are counting on the growth rate to translate into higher wages, more jobs and a better standard of living. That’s despite some economists warning of a slowdown.
Looking at debt levels—slowdown or not—the U.S. economy is speeding toward another crisis.
The government is now in debt with $21 trillion, more than twice what it owed in 2008. Loans from all commercial banks are more than $1 trillion more than in 2008. Corporate debt has reached a record $6.3 trillion, close to where it was in the previous two recessions. U.S. household debt continues to grow, and is now at $13 trillion.
The growth in the U.S. economy makes the debt less alarming than it was in 2008, but with interest rates rising, debt payments cost American companies and individuals more and more.
It’s not just debt that is weighing down the U.S. economy. The American public is more divided than ever. If the Republicans lose the House of Representatives in midterm elections this year, would the Democrats work with them to pass a bailout bill? Or would they let the economy crash to hurt their political opponents—namely President Trump?
Talk of trade war could also put pressure on the U.S. if nations decide to stop buying U.S. debt or abandon the dollar as the world’s reserve currency.
Bible prophecy warns of this. The Trumpet has warned that such a trade war is coming and will leave the U.S. besieged by other nations.
Some may balk at the Trumpet looking to Bible prophecy for direction in forecasting, but the Trumpet has a 60-year proven track record showing that it works. Skeptics would do well to look at the track record of economists trying to predict the direction of the economy.
Economists create and use complex models in an attempt to explain the unwieldy and infinitely more complex economy. They are schooled in how to think about the data and debate each other over the interpretation of it. Not all of them are predicting the future of the economy, and those who do, can use metrics to argue their points and counterpoints that would easily stump a non-economist. But in their number crunching, they overlook that behind all the data are humans exchanging goods. And humans, with their various purposes and motivations, have a nature which governs how an economy performs.
Look Out for Idiots
Few economists saw the financial crisis in 2008 coming. They focused on models to guide their predictions, but the models assumed that people are perfectly rational and the markets perfectly efficient. That’s an assumption that can be proved false by just applying common sense.
American economist and former U.S. Secretary of the Treasury Larry Summers put it this way, “There are idiots. Look around.”
That is brutally honest, but everyone from investors to homebuyers believed home prices could only go up. Even Bernanke said that home-price increases reflected “strong economic fundamentals” only two years before the real-estate bubble burst. That was an exercise of belief over facts, models over reality.
So if the experts can barely get it right, why shouldn’t we look somewhere else for the answer? The root of the problem of the 2008 crisis didn’t lie in the numbers after all, it was rooted in the motivations and reasoning of thousands of individuals making financial decisions.
The Problem Is Spiritual, Not Material
There were many reasons given for the financial crisis of 2008. Banks betting too much money. Unrealistic economic models. The lack of understanding of what was being traded by the financial industry. Financial industry leaders and employees incentivized to make decisions based on short-term gain rather than long-term stability. Incorrect ratings given by agencies incentivized to give inflated ratings. People buying homes they couldn’t afford. Mortgage brokers and real-estate agencies pushing people to view homes as an investment that couldn’t go bad.
And then there’s the government. Some economists say the government didn’t act boldly enough in letting Lehman Brothers fail. According to which economist you follow, there was not enough regulation by the government, or there was too much bad regulation. Some claim the government fueled the housing bubble by keeping interest rates artificially low to make borrowing cheaper.
The reasons typically given are varied, complex and widely encompassing. Yet with all the complexity and increased technology in the financial industry, it still is an aggregate of people trading with other people.
There is a common thread in all the typical reasons given—human nature.
Financial workers cared more about making more money at that moment than the stability of their institutions and industry. They borrowed and borrowed, using debt to give a false boost to earnings. Real-estate agencies and mortgage brokers were promoting the lie that home prices were always rising—caring more about quotas than clients. Impatient people with impractical ideas of wealth building believed the lie that home prices would go up. Government officials failed to rein in the debt, either from believing that they had it all under control or from an unwillingness to pass unpopular policies.
It all stemmed from covetousness, greed, hubris or lies—and in every step of the way it was fueled by debt.
Any civilization, institution or family built on that foundation is bound to collapse.
How to Prevent an Economic Crisis
There is only one way that protects from collapse, and that way can be summed up by the way of give. Twentieth-century educator Herbert W. Armstrong wrote about this way in his book Mystery of the Ages: “It is the way of giving, serving, helping, sharing, not the ‘get’ way. It is the way devoid of coveting, lust and greed, vanity and selfishness, competition, strife, violence and destruction, envy and jealousy, resentment and bitterness.”
The way of give is not focused on getting as much as possible as quickly as possible. It’s not about transferring massive amounts of wealth from past and future generations to the current generation. It’s not about making deals using supposed sophistication to hide ignorance and confusion.
It’s about pursuing the best interests of everyone involved on both sides of the deal. This way is outlined in the Bible in 10 broad laws—the Ten Commandments. That law is a code of conduct that leads to perfect peace, cooperation, happiness and accomplishment between two or more people.
Keeping the law means having fair, honest dealings with each other. It is motivated by a win-win situation. It is expressing love toward a neighbor, as Paul wrote the Romans, “Love works no ill to his neighbor: therefore love is the fulfilling of the law” (Romans 13:10).
Whether the economy is growing at 4 percent, 2 percent or not at all—God’s laws still hold true.
Mr. Armstrong often repeated the words of Roger Babson, a well-known statistician in the 1920s. In January of 1920, he had warned a collection of leading bankers and businessmen of Chicago of an imminent economic crash. It was right in the midst of the post-World War i boom, so many of the leaders present smirked. Before the year was up, a flash depression hit, and Mr. Armstrong lost his advertising business.
Babson met those leaders again and told them how he knew what was coming while the executives didn’t. “I looked at the way people as a whole were dealing with one another,” he said. “I looked to the source which determines future conditions. I have found that the source may be defined in terms of ‘righteousness.’ When 51 percent or more of the whole people are reasonably ‘righteous’ in their dealings with one another, we are heading into increasing prosperity. When 51 percent of the people become ‘unrighteous’ in their business dealings with their fellows then we are headed for bad times economically.”
It’s remarkable that this man, skilled in mining the data for knowledge, took his nose out of numbers and looked around him at how people behaved to find the best guidance. He didn’t leave it to just numbers and models.
Now that the Great Recession has come and gone, economists are incorporating behavioral economics and learning more about how people can and do act irrationally. But even with those improvements in the models, how many people are looking into how righteously people behave? And how many even know to look to God’s law to define righteousness?
The boom, bubble, bust, bailout cycle is familiar. Those who ignore the warning signs from a debt-laden economy will assume the cycle will repeat. But Bible prophecy shows that a crash is coming that no bailout can fix.
The Bible also shows that after this crash, a completely different government is coming that will enforce the only way that leads to true abundance, prosperity and happiness. No longer will people fuel their goals through debt, stealing wealth from future generations. No longer will people be incentivized toward short-term gain over long-term stability.
It will be a wonderful world—but it will take a big crash for people to be ready for it.
For more information about a world built on the way of give, order Mr. Armstrong’s free booklet The Wonderful World Tomorrow—What It Will Be Like.