In many instances, home buyers overstated their income to lenders. Not to worry, they expected to unload the property before the payments on their "interest only" loan ratcheted up. They were aided by greedy lenders who weren't worried about whether their borrowers were creditworthy. The lenders didn't expect to assume the risk of the bad loan. They planned to flip the loan to companies like Fannie Mae or Freddie Mac who would bear the risk of default. In the meantime, the lenders would be paid a fee for "originating" the loan and receive a portion of the interest for "servicing" it. (Servicing the mortgage meant collecting the payments and remitting the net proceeds to the purchaser of the mortgage, a.k.a. the "flipee.") Freddie and Fannie guaranteed the loans (thereby assuming the risk of any bad loans), kept some of the interest for themselves, bundled the loans together and sold them as "securities" to investors who were to receive the balance of the interest.
The Roof Caves In
The rest is history. The economy slowed, jobs were lost, and inflation went up. The price of gasoline and food went through the roof. People couldn't pay their bills. They began defaulting on their home mortgages. Foreclosures went up and home prices went down. Homeowners owed more than their houses were worth. Lenders ran into financial trouble and the value of their stock plummeted. They called on Fannie and Freddie to make good on the loans. But Fannie and Freddie had bitten off more than they could chew. They couldn't deliver. Congress came to their rescue with the inevitable "bail out" and now the taxpayer is stuck paying the tab.
Greed is good?
Lessons Learned
Capitalism is a powerful economic system and free and open markets can produce great prosperity. But unless market decisions are informed by Judeo-Christian values, rapacious greed and chaos are likely to prevail in such a system. Here are some simple principles of Biblical stewardship that we will do well to keep in mind when making decisions in the marketplace:
We're all in this together. Our decisions have ripple effects. They don't just affect us. We have obligations to our fellow man. The Apostle Paul reminds us, "Let each of you look out not only to his own interests, but also to the interests of others." (Philippians 2:4 ESV) Caveat emptor, notwithstanding, the Bible doesn't give us license to deceive or defraud our fellow man.
Work creates wealth. Speculation leads to poverty. There is a work/wealth connection which is at work in the natural order and which should not be ignored. When it comes to wealth creation, there is no substitute for hard work and diligence. Speculating in the markets is no different from rolling the dice or spinning the roulette wheel. Proverbs 21:5 (TLB) reminds us, "Steady plodding brings prosperity; hasty speculation brings poverty."
Ill-gotten gains don't last. We should resist the temptation to act dishonestly. The fruit of deceit leaves a bitter aftertaste. Proverbs 21:6 (NIV) cautions us, "A fortune made by a lying tongue is a fleeting vapor and a deadly snare."
Don't presume upon the morrow. Be careful not to assume that today's conditions will necessarily prevail in the future. Life is not static. We have good times and bad. Markets aren't static either. They go up and down. Presumptions are dangerous. The Bible exhorts us, "Now listen, you who say, 'Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.' Why you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes. Instead, you ought to say, 'If it is the Lord's will we will live and do this or that.'" (James 4:13-15 NIV)
Greed is not good. In fact, it's dangerous. In the Parable of the Rich Fool, Jesus warned against becoming greedy. He told the story of a rich man who hoarded his possessions thinking that he could take it easy and eat, drink, and be merry. Having taken his ease, God demanded his life. Jesus said, "This is how it will be with anyone who stores up things for himself but is not rich toward God." (Luke 12:21 NIV) Small wonder then that Jesus warned the people, "Watch out! Be on your guard against all kinds of greed; a man's life does not consist in the abundance of his possessions." (Luke 12:15 NIV)
Greed is most assuredly not good. It is a destructive force in our lives, individually and collectively. Gordon Gekko was wrong. Those who desire to achieve real prosperity will do well to heed basic principles of Biblical stewardship. These timeless principles made our capitalist economy the envy of the world. They will continue to serve us well as we move forward into the future.