Financial crisis caused by folly plus government intervention

By Bryan Fischer

~ He who puts up security for another will surely suffer,
but whoever refuses to strike hands in pledge is safe. (Proverbs 11:15)

~ A man lacking in judgment strikes hands in pledge
and puts up security for his neighbor. (Proverbs 17:18)

~ Do not be a man who strikes hands in pledge
or puts up security for debts;
if you lack the means to pay,
your very bed will be snatched from under you. (Proverbs 22:26-27

While Joe Biden is out on the campaign trail, telling Americans that paying higher taxes at gunpoint is their "patriotic" duty, both Sen. Obama and Sen. McCain are proposing more of the same solutions — greater government regulation — that got us in this jam in the first place.

Said Sen. McCain yesterday, "We need strong and effective regulation." But strong and supposedly effective regulation helped create this mess. The problem is not de-regulation but over-regulation, coupled with business types who have ignored the time-honored wisdom of the Judeo-Christian tradition.

A significant contributor to our financial crisis is the increased government regulations forced on business by Congress after the Enron debacle in 2002, which required companies to change the way they report the value of their assets and liabilities instead of using traditional standards and methods.

These new regulations forced companies to issue financial reports that can make things look worse than they actually are, which then triggers a crisis of confidence in investors, who then pull their money from these companies, which in turn starts a stampede and results in a stupendously steep — and often unwarranted — drop in the value of important stocks.

We are now in a financial crisis that is the "worst ... we have faced since the Great Depression," according to a prominent economist at New York University.

As the Wall Street Journal says today, "Each episode seems to bring government intervention that is more extensive and more expensive than the previous one, and carries greater risk of unintended consequences."

Instead, as Sen. Jim DeMint of South Carolina points out, the way forward is actually to diminish government intrusion into business and to lower taxes to encourage fresh investment. Said DeMint, "Our leaders need to ... push for policies that reduce the failed role of government and reduce taxes on American investment to attract capital to our markets."

News comes today that Morgan Stanley and even Goldman Sachs may be in serious trouble, meaning that by the end of the week there may be no surviving stand-alone investment bank in America. Merrill Lynch only survived by being rescued by Bank of America.

Further, the federal government is flailing about, using your tax dollars and mine to throw a lifeline to AIG for its misguided financial decisions but letting Lehman Brothers drown in the same sea of self-created red ink and refusing help to General Motors which has been begging for a taxpayer handout.

The best the president's spokesman could say is, regarding the administration's selective rescues of private companies, "I can understand why a lot of American would be confused."

Worse, government bailouts simply encourage similar foolishness in the future. Said one observer, "If people know the government will step in and bail them out, then they won't have to use good judgment."

Any misplaced hopes that the bailout of AIG would stem the bleeding were dashed yesterday as the stocks continued to plunge.

The AIG bailout should be particularly infuriating to American families. Essentially, AIG is getting an $85 billion reward, consisting of your hard-earned money, for making dangerous and risky financial decisions for a decade. The insurance industry has now been effectively nationalized, a practice we rightly deplore when European and Communist countries do the same thing.

AIG got itself in trouble by focusing on insuring credit rather than the traditional sectors of life, casualty and property. Why should you and I be on the hook for their financial incompetence?

The companies in the greatest trouble are what are called Non Deposit Financial Institutions (NDFIs) who don't, like conventional banks, have significant capital deposits on hand. They borrow and lend money using securities, which are often pledged by their clients as collateral.

Consequently, as one expert observed, "They have much less capital than banks to support losses and far riskier assets."

But this is nothing more than committing the financial sin condemned repeatedly in the book of Proverbs of "going surety" in loan transactions. Going surety means that you commit yourself to satisfy a loan if the person you've loaned money to defaults. If they are financially irresponsible, you have put yourself on the hook.

In other words, if these titans of finance had been willing to regulate themselves by the wisdom of God, there would be no calls for the intrusion of government into their affairs.

Now the federal government has in essence forced us — ordinary American taxpayers — to do what we are instructed never to do by the exercise of our own free will: use our own personal resources to guarantee somebody else's financial obligations.

As Rep. Mike Pence said, "You cannot nationalize every failing business in America." Of the bailout, Pence said, "This money belongs to the American people, but the cash window is open."

All told, about $380 billion of the tax dollars extracted under threat of imprisonment from ordinary Americans has now been pledged by our politicians to prop up companies that should be allowed to reap the consequences of their own irresponsibility.

The entire crisis has been precipitated by companies who made foolish mortgage loans to people they knew were likely to default.

In many cases, they were pressured into issuing these risky loans by the federal government.

When the government discovered that banks were awarding mortgage loans to 78% of black borrowers but 86% of white borrowers, they accused banks of racial discrimination and insisted they offer loans to people who were being denied not on the basis of their race but on the basis of their ability to pay. Thus regulators in Washington forced private companies to make financial decisions which were guaranteed in time to blow up in their faces.

In the process, the government conveniently overlooked the fact that Asians were being granted loans 94% of the time, but no one complained that whites were the helpless victims of racial prejudice.

© Bryan Fischer