The Financial Crisis: Lessons On the Value of Thrift
- Wednesday, October 15, 2008
In the wake of an unprecedented $700 billion bailout plan passed by Congress, many are asking, “How did this happen?” While there is plenty of blame to go around—much of which rests with reckless politicians and avaricious profiteers—many of us still don’t fully comprehend exactly what has happened. All most of us know is that the stock markets are all over the place and there is real potential for a widening financial crisis.
At the heart of our present crisis is the simple issue of lending money to folks whose credit history and ability to repay said loans was dubious at best, i.e., subprime mortgages. This was compounded by the institutionalization of these defective lending practices through government-backed guarantees issued by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that played a critical role in the current crisis.
I don’t claim to be a financial expert or economist; however, economics are not so much the source of this debacle as is a fundamental shift in values, namely, away from the historic Christian virtue of thrift. A concept that is almost anathema today, thrift exalts the prudent use of money and goods. If you look carefully you will see that the same “values” present in the subprime mortgage crisis are institutionalized throughout America’s current economic structure.
Historically, Americans were supported by a large number of institutions that encouraged savings and judicious spending. Local retail banks, credit unions, building and loan associations, savings and loans, savers’ clubs, and the like represented a cooperative, nonprofit banking tradition designed to serve the small saver. These institutions represented a pro-thrift sector of the financial service industry, which offered small, short-term loans to creditworthy Americans. In addition to encouraging savings, these institutions were also governed by strict rules for lending that limited the amount of debt consumers could carry.
If you wanted to buy a home, you had to first accumulate savings, apply to a local lender, document your creditworthiness, subject yourself to the bank’s scrutiny, and usually make a down payment. The federal government set limits on interest charges and, as social historian Barbara Dafoe Whitehead points out, “some forms of thriftlessness were outlawed entirely. Lotteries were illegal in all states, [and] usury laws prohibited predatory interest rates…” (Barbara Dafoe Whitehead, “A Nation in Debt: How we killed thrift, enthroned loan sharks and undermined American prosperity,” The American Interest Online, September 28, 2008). Whitehead observes, these “authoritative institutions play a role in guiding individual choices and in setting cultural norms” (Ibid.).
By contrast, the pro-thrift institutions of the past have been increasingly supplanted by new “authoritative institutions…setting cultural norms” that encourage thriftlessness. Instead of institutions committed to the principles of thrift, the market is now flooded with predatory institutions and parasites who prey on the naïve, desperate, and irresponsible, such as “subprime credit card issuers, mortgage brokers, rent-to-own merchants, payday lenders, auto title lenders, tax refund lenders, private student-loan companies, franchise tax preparers, check cashing outlets and the state lottery” (Ibid.). God, who has compassion on the poor, calls this “oppression” and describes it as an “abomination” (see Ezek. 18:13).
The average American today is bombarded by a large number of institutions (and messages) that actually discourage savings and promote impulsive, often foolish, spending, contributing to the highest level of consumer debt in history. As to the scale of this problem, “there are more than a billion [credit] cards in the hands of U.S. consumers” (Ibid., emphasis mine). Between 1989 and 2001, “credit card debt almost tripled, from $238 billion to $692 billion” with much of that coming from young, unemployed college students, “56 percent” of whom “have four or more cards” (Ibid.). Opportunistic payday lenders provide “fast cash” to more than 15 million lower income wage-earners each month at the equivalent annual percentage rate of 300 to 400 percent.
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