I believe that the true cause of the “Great Recession” goes much deeper than “credit default swaps.” Credit Default Swaps (CDS) are basically an insurance policy that an institution may buy to protect itself against a borrower who defaults. Things took a strange twist when the market created default swaps that could be sold to someone who had not even lent money. These “naked default swaps” actually came to make up the majority of the CDS market. When the housing bubble burst, the institutions that issued the CDSs owed more money than they had, creating a crisis for lenders. Thus, the “Great Recession.”
Why were CDSs so attractive to investors? Shrewd investors understood what was really going on in the housing market. They knew that people were eventually going to default on their loans. Too many people had loans that they could not afford. Investors understood this fact, and bet on it to the tune of trillions of dollars.
The environment that allowed this to happen was created by the Community Reinvestment Act, which was passed originally passed in 1977 as a method to reduced discriminatory practices in lending. The intent was good, but taken too far. Federal Reserve Chairman Ben Bernanke has commented that “social, economic, and regulatory factors contributed to the perception that banking institutions were failing to adequately serve the credit needs of some residents of their communities.”
This perception was taken a step further when advocacy groups began to criticize banks’ lending practices, as a result of the Financial Institution Reform and Recovery Act of 1989. This act increased the visibility of banks’ lending practices, and was used by advocacy groups to put pressure on lenders to reduce their lending criteria.
Here lies the real cause of the “Great Recession.”
It is difficult to characterize all advocacy groups’ philosophies, but groups forcing lenders to lend with unsound criteria typically argue that all people deserve equal opportunities, regardless of a person’s lifestyle. Underlying that idea is the assumption that all people are basically good. The thought is that people who act irresponsibly will change their behavior, if only given the right opportunities.
Those with a biblical worldview have a completely different understanding. A biblical worldview considers Romans 3:23: “For all have sinned and fall short of the glory of God.” Outside of a life transformed by Christ, we cannot expect good things. People can try, but if the source of the well is dirty water, the well will contain dirty water.
There are consequences for our sin. “I have sworn with uplifted hand that they must bear the consequences of their sin, declares the Sovereign LORD” (Ezekiel 44:12). God will not be mocked; if people do the wrong things, they will suffer the consequences.
If we depart from God’s ways at the very basic level, we step onto a slippery slope that is very difficult to get away from. It was not greed that caused the “Great Recession,” but a misunderstanding of human nature. Greed was a part of a progression of events and actions based upon a faulty worldview. As we enter this election season, let us all pray that God would grant his wisdom to this country to make decisions based on truth and not lies.
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[1] Chairman Ben S. Bernanke, speech at the
Community Affairs Research Conference, Washington, D.C., March 30, 2007.
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