The Economic Earthquake of 2008 Part 1by Chuck Bentley, CEO, Crown Financial Ministries
crown.orgImplications, Vulnerabilities and Aftershocks, Part 1In 1991, our late co-founder Larry Burkett wrote The Coming Economic Earthquake, warning of the dangers of the ever-growing appetite for debt by our society and federal government alike. Although a best seller and helpful to many who heeded his advice, he received harsh criticism for his failure to peg the event to a date certain. Many dismissed his work as “too simplistic” and unsubstantiated by economic models. Others painted him as a “doom and gloomer,” especially in light of the robust economic growth of the 90s. Larry remained humble towards his critics, stating he was not attempting to be a prophet but was only making Christians aware of their need to apply God’s Word. He said that even if the events he outlined in his book did not occur, the reader would be better off for following the advice that God gave for our benefit.
Interestingly, Larry also warned in his best seller Business by the Book that 2008 could be a “horrendous year” for the economy as the baby boomers began to retire.1 At that time, he had no awareness of the toxic shock that would be brought about by the massive run-up of household debt through sub-prime mortgage loans.
The simple advice about borrowing that Larry referenced was based upon Proverbs 22:7, “Just as the rich rule the poor, so the borrower is servant to the lender.” God’s Word has certainly proved to be true. Our recent economic woes have shouted loudly that biblical principles apply to individuals, families, Wall Street firms, and even governments.
Following a reduction of lending standards for the qualification of a home mortgage, millions of borrowers took on debt obligations they simply could not afford. These mortgages were packaged and sold throughout a massive, global network. A bubble of non-sustainable housing prices was created. This set the stage for some of the unthinkable events we have witnessed. Foreclosures escalated in 2006, 2007, and 2008, triggering a real economic earthquake, a financial tsunami, and a breathtaking, wild roller coaster ride as global financial stability teetered on the edge of a meltdown.
Here are the milestones of the most significant financial crisis the United States has faced since the Great Depression:
* March 16
Bear Stearns, founded in 1923 and one of the world’s largest brokerage firms, collapsed.2
* July 11
FDIC takes over mortgage lender IndyMac. FDIC will seek buyer. It may become the most expensive bank collapse ever.3
* September 7
“The US government today announced the biggest financial bailout in the country’s history as it took troubled mortgage giants Freddie Mac and Fannie Mae into temporary public ownership to save them from collapse.”4
* September 14
Merrill Lynch CEO John Thain, seeing the writing on the wall, arranges the sale of his company, founded in 1914, to Bank of America.5
* September 15
Founded in 1850, and one of Wall Street’s most prestigious firms, Lehman Brothers, collapses and files for bankruptcy.6
* September 16
“In a move that would have been unthinkable before the credit crisis began, the Fed arranges to lend $85 billion to AIG, the world’s largest insurance firm, in exchange for a 79.9% equity stake."7
* September 17
The New York Times reports that Washington Mutual, the nation’s largest thrift, has put itself up for sale. The Dow plunges 449 points.8
* September 18
U.S. government begins action on the hugest bailout of all, committing hundreds of billions of taxpayer dollars to buy troubled mortgage assets from beleaguered financial institutions. As word of the evolving plan spreads, stocks rally. The Dow closes up 410 points.9
* September 19
Senate Banking Committee Chairman Chris Dodd says the United States may be “days away from a complete meltdown of our financial system, with all the implications here at home and around the globe.”10
* September 19
Mr. Paulson [U.S. Treasury Secretary] announced plans to introduce new laws to buy hundreds of billions of dollars of bad debt from banks, debts he said were “clogging up” the financial system. “To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem,” he added. Reports said Mr. Paulson was looking into setting up something akin to the Resolution Trust Corp (RTC), which was formed after savings and loans banks collapsed in the 1980s. The RTC took over most of the smaller banks in the US at a cost of $400 billion - about $1 trillion in today's money - and then tried to sell off their assets. The cost of such a bailout would probably be higher this time, with bad mortgage debt believed to be around $2 trillion.11
The Markets Rally
Bloomberg reported on September 19th: “The U.S. stock market posted the steepest two-day rally since the aftermath of the 1987 crash as government efforts to bolster banks helped the Standard & Poor’s 500 Index rebound from its biggest losses in seven years.
“Government plans to purge banks of bad assets and curb bets on share declines sparked a 24 percent rally in lenders and brokerages in the final two trading sessions and left stocks little changed for the week.
“ ‘It's been a roller coaster, and the investors would like to get off the ride if they could,’ said Bruce McCain, the Cleveland-based chief investment strategist at Key Private Bank, which oversees about $30 billion. ‘Lehman may be gone, Merrill may be gone, but the government has taken a basic step to solve the crisis by being a buyer of last resort. That offers the hope we really will put this part of the crisis behind us.’ ” 12
Postponing the Pain
BBC Business Editor Robert Peston said, “We can't afford to have a short-term fix and then in three or four years have an even bigger bubble explode.” He said that the taxpayer funded bailout “represents a massive humiliation for Wall Street and will severely dent the ability of the US to export its way of doing business to the rest of the world. But an even bigger risk could be a loss of confidence in the American government's balance sheet.
“This could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities,” BBC’s business editor explained.13
The Real Earthquake Larry Warned About
The aftershocks of these historic events will soon follow. The world as we know it has changed. Europeans are mocking the American financial system and already, some Chinese are calling for a financial system that is “not dependent upon the United States.”14
“The eruption of the U.S. sub-prime crisis has exposed massive loopholes in the United States’ financial oversight and supervision,” writes the commentator, Shi Jianxun.
“The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States.”15
This level of uncertainty in the global marketplace gives rise to opportunities for new leadership. As economic philosophies and world order are being reevaluated, we should be watchful for the rise of any power that claims to hold the keys to peace and prosperity.
Echoing in our ears are those warnings from Larry that no one is exempt from the consequences of violating God’s principles. That point has been made painfully clear to the individuals and families who have lost their homes as well as the shocking loss of billions of dollars by the collapse of some of the oldest and most respected financial service firms in the world.
We must now pray that our governing leaders can see that the U.S. federal, state, and local governments are also subject to biblical financial principles. They must manage the massive collective public debt (that we now each own) with care and prudence to move us back towards economic stability just as each of us must also do with our personal finances.
Failure to heed the principles God has plainly established for our own good will destroy the good faith and credit of the United States government. Should that day come, the consequences will be dire. Our entire economy will collapse with sudden speed, bringing mind-numbing consequences to world order. To avoid the pain, we can print more money, bringing on devastating hyperinflation, or seek to be bailed out by foreign governments and become subjected to slavery to our lenders, many of whom are not our allies.
That is the economic earthquake that Larry warned about, and the events of this year, while extraordinary, may look mild in comparison if foreign sources decide to call our notes due. As you can see in the chart, we are now spiraling towards our highest levels of federal debt to GDP since WWII and now ranking among nations with much weaker economies.
As Joel Belz of World Magazine ominously wrote in January 2008, “Even now, the overdue Burkett prediction of an economic earthquake may or may not come true. But individuals, families, businesses, churches, and other organizations that put an emphasis during 2008 on reducing their debt rather than extending it will be wonderfully stronger for the effort. That bigger house, that snazzier car, that more exotic vacation—if it has to be put on a credit card or a second mortgage—then Larry Burkett's counsel is as timely as if you heard him say it again on the radio this morning.
“If the only thing that stimulates our national economy is the piling up of even more individual and corporate debt, then it’s not just Larry Burkett’s wisdom that we’re ignoring. It’s the age-old wisdom of the Bible itself. For such a society, in such a case, the experts won’t be emphasizing that the Burkett schedule was off by 10 or 12 years. They’ll be complaining instead that his term ‘earthquake’ was way too mild.”16
Going forward, we will provide a regular update with our views of this fragile and rapidly changing crisis. We want you to be informed of the vulnerabilities we face and support you to respond with faith, wisdom, and true hope in God’s loving care. It is time to be sober-minded and seek the wisdom of our God who can deliver us.
Sources1 Burkett, L. (1998) Business by the Book (Rev. ed.). Nelson Business Press.
2 Sorkin, A. and Thomas, L. (March 16, 2008) JPMorgan Acts to Buy Ailing Bear Stearns at Huge Discount. The New York Times.
3 Clifford, C. and Isidore, C. (July 11, 2008). Regulators seize troubled IndyMac. CNNMoney.com.
4 Seager, A. (September 7, 2008). US mortgage giants Freddie Mac and Fannie Mae taken into public ownership. Guardian.co.uk.
5 Mintz, P. (September 19, 2008). Seven Days That Shook Wall Street. Businessweek.com.
6 The New York Times (September 24, 2008). Lehman Brothers Holdings Inc.
7 Mintz, P. (September 19, 2008). Seven Days That Shook Wall Street. Businessweek.com.
8 Stempel, J. and Davies, M. (September 17, 2008). Washington Mutual is for sale: sources. Reuters.com.
9 Mintz, P. (September 19, 2008). Seven Days That Shook Wall Street. Businessweek.com.
10 Herszenhorn, D. (September 19, 2008) Congressional Leaders Stunned by Warnings. The New York Times.
11 BBC News (September 19, 2008) Shares surge on US bail-out plan.
12 Martin, E. (September 20, 2008) U.S. Stocks Rise After Government Action Eases Banking Concerns. Bloomberg.com.
13 BBC News (September 19, 2008) Shares surge on US bail-out plan.
14 Reuters.com (September 17, 2008) China paper urges new currency order after "financial tsunami".
15 Rotella, S. and Stobart, J. (September 20, 2008) Europeans on left and right ridicule U.S. money meltdown. Los Angeles Times.
16 Belz, J. (January 26, 2008). Shadow of Larry Burkett. Worldmag.com.
