What Would Jesus Do About America's Economy?

The big debate between Palin and Biden was on last night. If we believe the candidates our salvation is just around the corner. Our economic and banking woes will be over come January when the evil Bush administration is cast out.
"What would Jesus Do?" is an over used and vilified statement that is more mocked than taken seriously anymore. Yet one day Christ will reign from Zion. He will rule over the economies of the nations. What would King Jesus Do?
I believe the most important thing Jeus would do is deal with mankind's greed. We are basically greedy people. We covet what we do not have, and we hold tight to what we do have. It is so obvious that GREED motivates our Congressmen as revealed by what it takes to get votes on an important piece of legislation like the banking relief (bailout) bill. Congress failed to pass the 3 page legislation last week. But now tha the Senate version has added over 400 pages and $105 Billion in "Pork", it will probably pass. This "pork" is nothing more that bribes to get certain Representatives and Senators to support the Bill. It is GREED at its worst.
The reason we got in this mess in the first place is our greed.

As Martin Wolf wrote in the Financial Times:

I suggest we should take a broader view of events. The aggregate stock of US debt rose from a mere 163 per cent of gross domestic product in 1980 to 346 per cent in 2007. Just two sectors of the economy were responsible for this massive rise in leverage: households, whose indebtedness jumped from 50 per cent of GDP in 1980 to 71 per cent in 2000 and 100 per cent in 2007; and the financial sector, whose indebtedness jumped from just 21 per cent of GDP in 1980 to 83 per cent in 2000 and 116 per cent in 2007 (see charts). The balance sheets of the financial sector exploded, as did the sector’s notional profitability. But leverage, alas, works both ways.

Since US net international debt was 39 per cent of GDP at the end of 2007, virtually all of this debt is an asset of another domestic entity and would net out to zero. But when the gross debt stock is huge and economic conditions difficult, the chances that many entities are bankrupt is high. When people fear mass insolvency, lenders stop lending and the indebted stop spending. The result can be the “debt deflation”, described by the American economist, Irving Fisher, in 1933 and experienced by Japan in the 1990s.

The reason our debt rose astronomically was because we wanted more. Consumers wanted more toys, bigger homes, banks wanted to make more money. Now it is all crashing down around us and people want quick solutions. We are still GREEDY.

When King Jesus reigns He will observe the Law of God. God's Law says "Thou shalt not covet." There were provisions for behavior in the Law that mitigated against coveting. Harsh penalties, a Sabbath day of rest and cessation from business, a Year of Jubilee when all debts were forgiven and land returned to the original owners, limits on interest rates (usury). He will once again place God's Law in effect.

I realize we must do something about the short-term crisis in credit and banking. As usual Governemtn will get bigger and the middle class will get squeezed. The rich will get richer. This is the American Way. But without dealing with America's GREED Factor, this problem will not go away. In fact, I believe God is at work in such a way that He is calling America to repentance. He is going to stop at nothing to bring this Nation to our knees. He wants us to acknowledge our GREEDY hearts and confess that it all belongs to Him. We must enter a period of Godly Stewardship of our possessions and wealth. As Psalms 2 states, we must "Kiss the Son lest He be angry".

I like this little tidbit from John Cochrane. There is a link to his entire article. This problem will not go away no matter which candidate is elected President. There are fundamental problems that must be addressed, and it will take time.

The Treasury Plan

The treasury plan is a nuclear option. The only way it can work to solve the central problem, recapitalizing banks, is if the Treasury buys so many mortgages that we raise mortgage values to the point that banks are obviously solvent again. To work, this plan has to raise the market value of all mortgage-backed securities. We don’t just help bad banks. We bail out good banks (really their shareholders and debt holders), hedge funds, sovereign wealth funds, university and charitable endowments – everyone who made money on mortgage-backed instruments in good times and signed up for the risk in bad times. This is the mother of all bail-outs.

There is a storm out on the lake, and some of the boats are in trouble. Commodore Bernanke has been helping to bail water from some boats until they can patch themselves up, encouraging other sound boats to help, and transferring passengers on sinking boats to others. But it’s getting tough and the storm is still raging. Someone has a great idea: let’s blow up the dam and drain the lake! Ok, it might stop the boats from sinking, but there won’t be a lake left when we’re done. That’s the essence of the Treasury plan.

Short of that, it will not work. Suppose a bank is carrying its mortgages at 80 cents on the dollar, but the market value is 40 cents. If the Treasury buys at 40 cents or even 60 cents on the dollar, the bank is in worse trouble than before, since the bank has to recognize the market value. Unless the Treasury pushes prices all the way past 80 cents on the dollar up to 90 or even 100, we haven’t done any good at all. And $700 billion is a drop in the bucket compared what that would take.

There is a lot of talk about “illiquid markets,” “price discovery,” and the “hold to maturity price;” the hope that by making rather small purchases, the Treasury will be able to raise market prices a lot. This is a vain hope – at least it is completely untested in any historical experience. Never in all of financial history has anyone been able to make a small amount of purchases, establish a “liquid market” and substantially raise the overall market price.

Since the Treasury will not be able to raise overall market prices, it will end up buying from banks that are in trouble, at prices fantastically above market value. This is transparently the same as simply giving the banks free money. Make sure the taxpayers get a thank-you card.

There is other talk (reflected in the Senate bill) of abandoning mark-to-market accounting, i.e. to pretend assets are worth more than they really are. This will not fool lenders who are worried about the true value of the assets. If anything, they will be less likely to lend. Conversely, if prices are truly artificially low, then potential lenders to banks know this and would lend anyway. We might as well just ban all accounting if we don’t like then news accountants bring. No, we need more transparency, not less.

Many of the changes in new versions of the Bill make matters worse, at least for the central task of stabilizing financial markets. The Senate adds language to protect homeowners – “help families to keep their homes and to stabilize communities.” That’s natural; a political system cannot hope to bail out shareholders to the tune of $700 billion dollars without bailing out mortgage holders on the other end. But it makes the bank stabilization problem much worse. Mortgages are worth a lot less if people don’t have to pay them back. This will directly lower the market value of mortgages that we’re trying to raise.

Yes, we need to do something. But “doing something” that will not work, with potentially dire consequences, is not the right course, especially when sensible and well-understood options remain.

We must pray for America and our leaders. We must confess our greed and covetousness. We must dedicate ourselves to Godly Stewardship of our money and assets. Only then will there be healing in our economy.