The headlines are pretty depressing these days, and it’s tough to make sense of all of the apparent economic disasters around us. I have spent a lot of time researching our economic issues, and these are the three best articles I could find to explain what we’re going through.
Please read this article, this article here and this article here.
To sum up: The source of the crisis is debt and a desire for “easy money,” which led to the subprime crisis, which led to the crisis we are in today. With the latest problems, we are most likely entering tough times, even tougher than the last few years. Many economists and observers don’t know what’s really going on and what to expect, because this exact type of crisis has not happened before.
But at the end of the day, a prophet has spoken on the things that are important during these difficult times.
For Latter-day Saints, there are several precedents for the worrisome economic times we are going through now.
Many people forget how devastating the 1837 banking crisis was, both to the economy and to the Church. The situation was remarkably similar to that of today: people wanted easy money, and they expected banks to provide it to them. The Church set up the Kirtland Safety Society Anti-Banking Co, which was basically a private joint-stock company. People bought into the bank, the bank lent money — easy money!
Of course, the bank failed along with thousands of other in the Panic of 1837. To put things into perspective, the Panic of 1837 was much worse than today because there was no FDIC insuring deposits. A run on a bank in those days meant the bank went bankrupt and most people lost their money for good.
The panic resulted in a spiritual panic — a large number of the Church’s leaders ended up turning on Joseph Smith and apostatizing. Oliver Cowdery, Martin Harris, David Whitmer and others ended up leaving the Church. They called a meeting in the Kirtland temple in February 1837, and many members asked that Joseph Smith be declared a fallen prophet. Brigham Young’s response is instructive:
“Joseph was a prophet, and I knew it, and that they might rail and slander him as much as they pleased; they could not destroy the appointment of the Prophet of God, they could only destroy their own authority, cut the thread that bound them to the Prophet and to God, and sink themselves to hell.”
The Depression of the 1930s was another distressing time for the Church and its members. Unemployment in 1932 reached 36 percent in Utah, and per capita income fell by 48.6 percent. Tithes fell from $4 million in 1927 to $2.4 million in 1933. (Source: “The Church History in the Fullness of Times,” p. 509).
Compare this to today, when unemployment is about 6 percent and per capita income continues to grow (although home values and overall household worth has fallen in the last few years).
In any case, the Church had another kind of crisis during the 1930s: the institution of a Church welfare system that helped people stop relying on the Federal government for aid. About one-sixth of all Church members were being supported by public aid, and the concern was that they were not being required to work for what they received. The First Presidency pleaded with local leaders to “build again within the ranks of Latter-day Saints a feeling of financial independence.” At the 1936 general conference, the First Presidency said its “primary purpose was to set up…a system under which the curse of idleness would be done away with, the evils of a dole abolished, and independence, industry, thrift and self respect be once more established.”
The Church exhorted members to stay out of debt, to build up food storage and to avoid covetousness and greed.
Well, anybody who has been listening to General Conference the last few years knows that the message hasn’t changed much. I did a search on Lds.org and found 194 talks in the last two decades discussing the importance of staying out of debt. That seems to be the central piece of temporal advice the Brethren have given us lately.
But let’s go back to President Monson’s talk, because there are other important points. President Monson tells members to “set their homes in order.” He has several important points:
–Try to avoid contention and anger.
–Teacher children to pray and pray as a family.
–Make your home a place of fasting.
–Read the scriptures and other good books.
“This, then, is your building project, brothers and sisters, to organize yourselves, prepare every needful thing, and to establish a house of prayer, a house of fasting, a house of faith, a house of learning, a house of glory, a house of order, a house of God.”
Pretty basic stuff, right? Well, prophets keep on telling us to do basic stuff for two reasons, I believe: 1)many of us don’t do the basic things, despite being repeatedly warned and 2)it is a reminder that when times get tough you need to concentrate on what is important.
So, as the value of my 401k and the value of my house continue to plummet, I take a tremendous amount of solace in the words of a modern-day prophet. It seems to me that if I concentrate on the important things, ie my family, the scriptures, prayer and fasting, everything will turn out OK in the end.
Great advice Geoff. Often, the panic after the problem makes the problem worse. If everyone took the advice that no matter what, we should “concentrate in what is important” and that “everything will turn out OK in the end”, then financial downturns would likely be significantly ameliorated.
Nice linking of the past and present, with advice that we should be following in good times as well as bad. Thanks.
Very nice piece, Geoff. I few years back I read a history of banking in Michigan that I found in the stake center’s family history library, a very useful perspective for looking at a community’s development. It added a lot to my understanding of the Kirtland banking failure to read about the same events in the neighboring Michigan territory. As Geoff wrote, the Panic of 1837 was a big deal. The monetary system was little more than promissory notes from individuals and institutions. Without a reliable medium of exchange, economic development was hindered, and notes from far away banks in New York and Boston traded with a steep discount, because who could tell what their current worth was? So the territory authorized local banks, but how to keep a useful system of exchange notes from devolving into an unstable morass of debts?
In Nevada, the members of my stake and a neighboring stake had a credit union. Many former and some current church officers were officers of the credit union. A banker was brought in run the operation, and he became my stake president. I wonder what kind of Kirtland Safety Society problems we could have had? The communities of Utah probably face similar issues where community leaders are people you are involved with at church and in business.
If you’re still not convinced to get your financial house in order, here is an excellent Glen Beck interview of a 10 term Congressman who has been predicting these things for years:
part 1: http://www.youtube.com/watch?v=ZvcgGp5mz_E
part 2: http://www.youtube.com/watch?v=O_RFIXcj4ik
Money is supposed to be a safe store of value for those who earn, invest and save. Our dollar on the other hand has been an instrument of debt even since Bretton Woods in 1971. Inflation is not what they told you in your economics class, it is actually a vehicle to enrich the super wealthy at the expense of the American tax payer.
Here is an interview that will blow your mind:
Our elected leaders actually think this way.
Your article got me thinking about 1837, Andrew Jackson’s last year in office. I know a lot of people can’t stand Andrew Jackson, but he really did risk his very life to fight against the private/foreign banking interests who were trying for the second time to setup a central bank in this country. Interestingly, Andrew Jackson’s tombstone says nothing about him being The President of The United States, but simply states “I killed the Bank” There can be little doubt he viewed this as his greatest personal achievement.
There’s been a lot of ignorant or misguided borrowing.
But it cuts both ways. The lenders have also been utterly irresponsible in who they lend to. And the free market simply fails to incentivize such lenders to lend responsibly.
It’s time to reverse deregulation.
Banks are no longer presented with the possibility of failure when they make irresponsible loans, but are instead rewarded with bailouts on the backs of the taxpayers, the poor and middle class being hit hardest by the resulting inflation. The FED is sending a message, “it’s ok, here’s cash, now go make some more bad investments.” Issues that could have been resolved by a few painful bankruptcies now are delayed and compounded for a later day of reckoning, but that day will come…sooner than later. Meanwhile, people can’t figure out why everything costs more.
“It’s time to reverse deregulation.”
Regulation is the problem. Our markets to not behave naturally at all anymore. All government interventions result in market distortions that are difficult, if not impossible to predict. Fannie May & Freddie Mac are a good example of what can happen when the government steps in to correct what it thinks is a wrong. Our problems could all be solved by a good dose of Austrian Economics a la Von Mises.
I wasn’t thinking of intervention on the bailout end. I was talking about regulations to force some degree of responsible lending.
It’s worse than just the assurance of a Federal bailout Mike. All debts to major lenders are insured. The insurance portfolio shares are traded on the stock market.
So even if there was no assurance of a Federal bailout, the lenders would have no incentive to lend responsibly. All risk has been insured away and thrown on the stock market.
Let me eave you with this thought from Henry Ford many years ago:
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
Individual responsibility, liberty, agency all got slapped silly in this “no pain for anyone” debacle. I wish I could find some solace in my Republican politics but it is a flimsy and insignificant counterweight to the enormous leftism in this country. The war in heaven is raging on and Satan is winning. Doesn’t it say “even the ‘elected’ may be deceived”?
Was Social Activism the root cause?
A New York Times article from Sept. 1999 states that Fannie Mae had been under increasing pressure from the Clinton administration to expand mortgage loans among low- and moderate-income people and that the corporation loosened its lending requirements to comply.
An ominous paragraph of the article reads, “In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.”
Liebowitz likewise predicted in a 1998 paper the risk of sacrificing sound financial policy for social activism.
“After the warm fuzzy glow of ‘flexible underwriting standards’ has worn off,” Liebowitz wrote, “we may discover that they are nothing more than standards that led to bad loans. … It will be ironic and unfortunate if minority applicants wind up paying a very heavy price for a misguided policy based on a badly mangled idea.”
And though some have speculated that lenders in the ’90s dove into sub-prime mortgages in an effort to gouge new markets, the president and chief operating officer of Freddie Mac in 1999, David Glenn, confessed his company was pushed by a federal agenda.
“The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership,” Glenn said in his remarks at the annual convention of the Mortgage Banker Association of America.
“The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories,” Glenn said. “Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low- and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets.”
In that same year, Freddie Mac warned of the logical pitfalls of pursuing loans on the basis of skin color and not credit history.
The short answer is absolutely! Even hypocrite Alan Greenspan was warning about the danger Fanny/Freddie would present to the economy well in advance of today’s debacle. Peter Schiff, a popular Fox commentator and former Republican Candidate for president, Ron Paul, have both been warning about this for years. They have both become very popular guests on the talking head shows over the last few weeks. It was sad watching the debates as Ron Paul predicted what was coming and Mitt Romney and The Ghoul both snickered at Ron Paul as he warned about the looming economic disaster about to take place. Ron Paul is the greatest patriot of our age. An entire movement has formed based on his candidacy to restore limited government as defined in the Constitution. Anyone wanting answer to the real problems this country faces should pick up his New York Times #1 best seller, “The Revolution: A Manifesto.” This man is the greatest statesman of our age. As the quote goes, “In a time of universal deceit, telling the truth becomes a revolutionary act.”
The recognition of the problem by Alan Greenspan brought to Congress in 2005. Fannie and Freddie were, in dire straits. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission’s chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie’s position on the relevant accounting issue was not even “on the page” of allowable interpretations.
The time was ripe.
Greenspan’s Warning made clear the gravity of
the situation, and legislation was pushed forward. Greenspan said. “We are placing the total financial system of the future at a substantial risk.”
A Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in the risky mortgages to low income borrowers
If that bill had become law, then the world today would be different. But the bill didn’t become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signalling their “commitment to the poor”. Republicans couldn’t even get the Senate to vote on the matter.
Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable.
We now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.
Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.
Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The bribes found their way back to the senators who killed the fix. So, it was, again the Democrsts who didn’t want to fix the problem they created in the 1990s.
But there was someone who should receive credit (which the MSM won’t let you know): Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.