A Pastoral Letter on the Financial Meltdown

My Dear Sisters and Brothers of the Diocese of New York,

We live in perilous times.

For many years we have been aware of the danger to the environment. In recent years we have been acutely aware of the dangers of violence and war here at home as well as abroad. Day by day and week by week we have prayed for the men and women who serve in harms way, and for the leaders who direct their paths. Now we face a new threat, one that presents an even more immediate threat to the way we, live our lives as individuals, the well-being of our nation and even the health of the world's community of nations: the apparent collapse, at least in the short term, of the economic underpinnings that sustain us all.

No wonder that anxiety saturates society.

Times of danger can cause panic and panic which reveals the best and the worst in human character.

The worst amounts to a blind frenzy to survive. And here the operative word is "blind"; the state in which anything and everything can be sacrificed to the one objective of personal, corporate, or national survival. A pernicious corollary of this blind instinct is the indiscriminate placing of blame. Clearly the time will come when a deep and thoughtful analysis of what went wrong will need to be undertaken. However, in the very midst of the crisis, as we now find ourselves, we need to be extremely cautious about the wholesale pointing of fingers. This is exactly the impulse that, in other eras and places has led to the obscenity of pogroms.

However, such moments of crisis also have the power to elicit the very best that the human heart has to offer. It is that very best that Christians are called to offer, now and always. It is our deepest conviction that though there can be no dispute that the physical circumstances of our lives are important, yet the truth that we have been shown in Jesus is that the ultimate, the real, foundation on which our lives rest, is not on the health of our bank account but rather upon the abiding love of God. The gospel that we have heard, and have been called to proclaim, is not that the darkness is not dark, it is rather that the light of Christ will over-come it. The hope that is ours is rooted not in an unbroken chain of triumph and success but rather the cross of Christ that brings life out of death. Therefore, we need have no fear. Our identity is not defined by our bank accounts but by God's love. The ground on which we stand, the abiding love of God for us and for all creation, is solid ground. Though we may be surrounded by the tornadoes' winds we need have no fear. Though we may even be caught up in those winds, we need have no fear. The wind of the Spirit of God who sustains us is more than any of these.

Now more than ever, at this time, when our society is in such turmoil, it is our vocation as Christian to be, in ourselves, beacons of hope. We can be such beacons of hope not because we possess a secret answer to complex financial and economic questions, but rather because we know that the One through whom all things were made possesses us in the palm of His hand.

Faithfully yours,

+Mark
(XV Bishop of New York)

The Rescue Plan summarized

From today's New York Times, a good summary of the rescue plan (click image to enlarge):

RFSJ

Well, They Did It

Today the US House of Representatives passed the bailout bill and the President has signed it into law. Wall Street in the form of the stcok markets seemed to shrug it all off, but since this has never been about stocks, but about interest rates and credit, it doesn't really matter what the DJIA, et. al., did.

I wa watching a bit of C-SPAN this afternoon while at the gym and I was amazed at the claptrap some of the Honorables were spouting. "It won't work" said many. "We don't understand what the problem really is." How sad to utter either of those comments!

What has happened isn't complicated. Too many people acquired mortgages on terms they could not afford. The lenders were too lenient, too eager to make the deal, and so too many people got housing they could not afford for very long. When the mortgage rates began to adjust from the very low initial rates, people started to default and go bankrupt at rates far higher than anyone was prepared for. (Lenders always reserve something for unperforming loans.) At the same time, because of both deregulation and lack of regulation of the credit markets, the big banks began to repackage mortgages into sellable securities. It worked like this:

Say that Raphael, Uriel, Michael, and Gabriel each have taken out a mortgage so each can buy a fluffy cloud in Heavenly Hills. Each owes $100,000 to Medici Bank. Medici may keep or sell the mortgages (really, the right to collect the mortgage payments) at any time. Companies like Fannie and Freddie would buy the mortgages and take loan off the books of Medici so Medici could turn around and make some more loans. Remember that loans and credit are what make the modern economy run. But say that Medici combines the 4 loans into one thing called Mortgage A, and sells shares of Mortgage A to spread the risk around. People (institutions, in reality) could perhaps buy a $5000 share of Mortgage A. So far so good. But when the defaults rise higher than anticipated, then the pieces-parts of Mortgage A now become less valuable. Investors began to lose money on these securities, and because they are very complicated, it was hard to tell for a long time what would happen. There are trillions of dollars of these mortgage-backed securities floating around. The credit crunch is happening becasue the securities have dropped in value, and so institutions have to hold more cash to back them and cover the losses stemming from the underlying mortgage failures. If everyone is holding cash to cover their losses, there is less cash available to loan out. Modern everyday commerce depends on loans both long and short-term, and even California is having to ask the US Treasury to lend it money because California can't borrow when no one else will lend.

As I understand it, merely bursting the housing bubble (which is what is happening now) wouldn't necessarily be enough to cause the credit crunch, because the "normal" regulations and safeguards would have been in place to ensure banks had the reserves needed to cover their losses. But when you add in the unregulated securitization of the mortgages themselves, all bets were off. And that's what has happend. It's like a clogged water pipe - the water can't run and shuts everythineg down because it's clogged with bad mortgages and their securities. Loanable money is the water and it isn't flowing anywhere, because everyone is sitting on it to cover their bad loans.

So how to solve it? Remove the blockages in the pipes that carry the loand throughout the economy. In other words, buy the bad mortgages at reduced prices, which clears out the pipes by taking the bad loans off the books of the banks and institutions. Now the water can flow again becauase lenders and borrowers don't have all that bad debt blocking the pipes.

And that's what the bailout plan does. It authorizes the Government to use public debt to buy the debts that are clogging the economic system so that credit and loaning can resume. There are safeguards to make sure that we the taxpapers can recover the sales prices when the firms we buy the debt from recover. But the essense of the plan is to unblock the pipes by getting the bad debt out of the way.

I don't know if the above helps. It's almost more for me than for anyone else, but I hope it helps explain what, more-or-less, is going on and why the bailout was done the way it was done.

The New York Times is doing an excellent job of explaining things, far better than I can. Check it out if you'd care to.

RFSJ

A "St. Michael's Day Bloodbath"?

The House of Representatives defeated the bailout plan today by a close vote. The markets plunged nearly 8 per cent on the news. I am stunned and I am angry. Maybe it wasn't the best plan, but there was hardly an alternative. When the church is on fire one hardly needs to be arguing about whether it's God's will for it to burn or not. You put out the fire.

Pray for the nation and for the world.

RFSJ

A Sobering Assessment

Suddenly, it seems, we're getting hit from all directions.

Energy and food prices are soaring. The housing market continues to collapse. Government revenue is falling, and taxes are rising. Airlines are jacking up fares and fees while reducing service. Banks are pulling credit lines. Auto companies are cutting production once again. Even investment bankers are losing their jobs.

The tendency is to see these as separate developments, each with its own causes and dynamic. Fundamentally, however, they are all part of the same story -- the story of the global economy purging itself of large and unsustainable imbalances that for a time allowed many Americans to think they were richer than they really were.

There's lot's more - read it all here. I think the idea that for too long we Americans have been lioving beyond our means is fundamentally correct. Correcting that is and will continue to be painful.

RFSJ

The Worst is Yet to Come?

From the front page of today's New York Times:

Read it all here. This could affect me personally, so it's disturbing, not only because I do think the government should be involved when a major market like housing fails, to ensure social stability and cohesion. Owning one's own home has been a bedrock policy of successive administrations since WWII, and rightly so. Now the Administration says it isn't interested in helping out consumers who are underwater. They made bad choices, now they have to live with it, supposedly goes the thinking. But when so many people are or are going to be affected, I wonder if principle must give way to practicality. I doubt we can afford the social cost of potentially millions of people affected in this way. Believe it or not, I do tend to be a free-marketer; the housing market has failed from extra-market forces and because the market players - consumers, mostly - did not have full information to participate rationally in the market, which is a basic requirement for effective markets.

I also wonder if I may have to do something if my own house in Indianapolis has to go on the market.

RFSJ

When you take Stimulus. (TM)...

RFSJ

I'm Just Sayin'

As more than 250 mayors gathered in Washington for the winter meeting of the United States Conference of Mayors, many agreed that the collapse of the subprime market had left a growing problem of vacant houses, depressed property values, tighter credit, and a need to cut services to close municipal budget gaps.

Read it all. There's real pain happening in many areas of the country. And it's unclear whether the new package agreed to today will help or not.

Friday morning update: more uncertainty about the stimulus package. I want to do a stimulus, but let's please do the right one!

RFSJ

Better ideas than mine

Here are even more - and to my mind make excellent sense - ideas for a stimulus, if indeed we are bound and determined to have one.

Of course, the problem with both fiscal policy - having to do with taxes and spending - and monetary policy - interest rate and reserve controls - is that both work slowly. Neither are particularly effective short-term remedies. Both are very important in their own ways, of course. As someone noted online today, never has there been a three-quarter-per-cent rate cut by the Fed at one time. Never. And keeping up the safety net for those who need it, like the article above is suggesting, is important also, since it takes time for jobs to be recreated or reconfigured. At the same time, check out the following (click on the image to enlarge):

(New York Times, op-ed online, 1/23/08.)

Our fiscal policy rescues, it seems, have often come far after the official recession has ended. Does that mean I think we shouldn't have one? I think we do, if only for political reasons. It will raise the deficit, but I'm persuaded at the moment that this is OK. But as I have said, I want the relief to go to those who really need it. That means the middle class and the poor, to my mind.

RFSJ

A Real Idea for Economic Stimulus

If people knew that their tax rates were going up next year, they’d work to make sure that more of their income is taxed at this year’s lower rates. Investors would likewise have a giant incentive to cash out their capital gains now to avoid paying higher taxes later. In 1986, stock sales doubled as taxpayers rushed to avoid the capital gains tax rate increase scheduled for 1987. If people pour their stock gains into yachts and fast cars, that’s pure fiscal stimulus.

The idea? Repeal the Bush tax cuts a year early....read it all for the background.

I may well be accused of being a tax-and-spend liberal. I'd be willing to engage that debate if anyone wants to.

RFSJ

I'm coming out....

...as a bit of fiscal conservative with some populism thrown in:
RFSJ

I don't get it

Apparently, Rudy Guiliani said that what we need to stimulate the economy is a major tax cut. So we're already running a deficit - $164 billion in the last fiscal year. Now I'm not necessarily a stickler on zero deficits - when we borrow to invest in infrastructure like roads and bridges and stuff that will help grow the economy, that's OK. When we borrow to finance ongoing things like government operations, that's not a good thing. So a big problem with the economy right now is that people are overextended - they've already borrowed a lot and can't afford what they've already borrowed. So why does it make sense for the government to borrow more money to finance a tax cut? It's either pay now or pay later.

Seems to me what we need is structural changes in banking regulations to ensure that the subprime debacle can't happen again. There needs to be more of a balance between the unfetterred market economy and overregulation of the economy. I happen to think that at the moment we've leaned too far to the unregulated end. Time for more of a balance.



That won't help in the short run, of course. I supposed we're going to have a stimulus - seems like $150 billion or so, presumably in borrowed funds - will get sent as rebate checks, possibly by June 30. What I'd rather see is direct debt relief for those underwater in their mortgages. That could take the form of loan refinancing backed by the Fed of Fannie Mae or something, combined with several months of direct payment forgiveness while all that is being worked out. If we are going to spend $150 billion of the next generation's taxpayers money, let's help the people directly who need it most: those who, in many cases through no fault of their own, are now in trouble with their mortgages. Let's not foreclose on any more houses the rest of the year. I'll bet $150 billion could go a long way to helping with that.

RFSJ

An Interesting Take on Job Competition

Economist Stephen E. Landsburg wonders:

All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers. Does that mean they ought to? Does it create a moral mandate for the taxpayer-subsidized retraining programs proposed by Mr. McCain and Mr. Romney?

His thesis is that there may be no difference morally (and thus as a policy imperative) between going to buy one's meds on the Web rather than the local pharmacy because it's cheaper, and buying one's labor in a cheaper labor market. One wouldn't compensate the pharmacist for lost income; Prof. Landsburg asks why compensate a worker whose job has gone overseas?

I think it's an interesting argument. I myself am not sure there is a moral component to this; as a practical effect, I don't think government is morally obligated in this area. This is quite apart from any moral obligation that Christians have to help each other out. That may be quite a different thing entirely. But the whole argument is worth a read, nonetheless.

See what you think. Comments always welcome!