Financial Crisis, Cobb on the Wall Street – October 2008

Question: Can process theology contribute to our reflection about the crisis in the financial sector?

Publication Month: October 2008

Dr. Cobb’s Response

The Wall Street financial crisis seems to be a “teachable moment.” Generally when one talks about economics, and especially about finance, eyes glaze over. But currently there is some desire to understand what is happening.

One can discuss this at different levels. In Congress and in the press, the discussion is about how to get the normal financial functioning of the U.S. back on track. Since the most dramatic expression of its derailment is on Wall Street, attention is focused on how to get Wall Street firms to begin operating normally again. Given that level of discussion, there is little doubt that a solution favorable to Wall Street will be found and implemented.

Around the edges there has been another discussion of whether the money might be spent in ways that would benefit more people. For example, we could focus on helping those who are unable to pay their mortgages. This would keep people in their homes and keep money flowing to the immediate lenders, even if not at the high interest rate they anticipated. It would hasten the recovery of the housing market. It would not cost nearly as much money, but there would be no expectation of recovering the money in the future, except indirectly through the expansion of employment and a better property tax base.

It is not clear which of these approaches would actually free up credit more rapidly. But it is clear that Wall Street, rather than at-risk home-owners, controls the media. Fear of financial collapse generated by those controlled by Wall Street, including most of the government, will decide the issue. Christian theology in general favors a government that is not controlled by the financial sector and is able to act for the benefit of the weaker members of society. Certainly process theologians share this bias. So we are not happy about the fresh display of Wall Street’s power. But we are not surprised. Wall Street owns the so-called “Federal Reserve Bank.” The Secretary of the Treasury is now, as almost always, a Wall Street banker. Wall Street is the largest funder of those running for office in both parties, having given this time a bit more to Obama than to McCain. We should not be surprised that our government would be prepared to go to great lengths to salvage Wall Street from the consequences of its excesses.

Most economists, but far from all, tell us we had no choice. Looking simply at the financial sector, they may be correct that saving Wall Street will reduce panic more than any other measure. A theologian is not in good position to judge.

Process theologians can, however, play another role. Whereas the vast majority of economists are socialized to consider how best to keep the current system functioning, theologians are free to ask about the system as a whole and its alternatives. They may even wonder about the possibility of something more like “biblical economics.” Process theologians claim to be freed from the distorting glasses with which the Bible and subsequent history have been read in the mainstream of Western theology. From our perspective we can ask about the assumptions of the present system and evaluate these in light of the Bible. Consider the following assumptions that now shape our world.

1. The basic goal of the social and political order is to serve the economic order.
2. The goal of the economic order is to promote overall increase in production and consumption.
3. Such increase is best achieved by privatizing all activities that can be pursued for profit as well as all the resources used by business.
4. The market should be as large as possible and as free from regulation as possible.
5. Credit based on interest payments to financial institutions should also be free from interference by the government.
6. These institutions rather than government should create money to expand the money supply and should reap the profits from this activity.
7. Justice, community, personal happiness, and the condition of the natural world are irrelevant.

A world organized in this way will have predictable consequences. For some time it will succeed in its goal of increased production. In the process existing communities will be broken up and new ones will be transient. The global ecology will deteriorate rapidly and dramatically.

The achievement of these goals will greatly increase the gap between the rich and the poor within nations and between nations. The lot of the poor will become more miserable as governments are discouraged from having concern for them. Those who gain great wealth also gain great power, and this power will be used to push forward the policies that have made them rich.

As wealth is concentrated and made mobile, the importance of the financial sector will increase. Actual production becomes secondary as a means of gaining wealth in comparison with financial manipulation. As financial institutions are freed from governmental regulations, they will even more center economic power in themselves. Governments will assist them in further concentration of wealth.

The contrast with biblical and traditional Christian thinking could hardly be more glaring.

1. Economic activity should serve human beings and their social and political institutions.
2. This means that the economy should be so organized as to strengthen human community and develop a sustainable relationship to the environment.
3. Which activities should be private and which public is to be decided pragmatically.
4. In general the market should be as local as possible so that it can serve the local community. How much regulation by the community is needed is to be decided pragmatically.
5. Justice, community, personal happiness, and the condition of the natural world are the primary considerations.

I have omitted biblical statements about the financial sector. Whereas I believe that nations could order themselves according to the five biblical principles enunciated above, the teaching of the Bible about finance seems utopian. The Bible forbids interest on loans. Efforts to observe this prohibition have led more to ways to circumvent it than to a genuine alternative.

Nevertheless, the biblical vision is important to recall. Again and again in biblical times and since, relatively egalitarian distributions of resources, chiefly land, have been undercut as money lenders have taken advantage of critical needs of small land owners to lend money that they cannot repay. Widespread ownership has been superseded by concentrations of wealth in land. Classically, workers have often had to sell themselves as well in order to survive. Ethically concerned observers railed against this transformation of healthy community into class society. Since the interest on loans is what usually makes it impossible to repay, they focused their opposition on that. Jesus taught us to pray for the divine commonwealth (the “Kingdom of God”) in which all debts would be forgiven as in the year of Jubilee.

The contrast between this opposition to finance, on the one side, and giving primacy to the financial sector, on the other, is marked indeed. To propose the abolition of interest seems quite useless. But we may be inspired by the Bible to envision a quite different overall economic system from the present one in which debt plays the primary role.

One destabilizing feature of the debt economy is that debts overall cannot be repaid at interest except as the money supply is increased enough to make it possible. This increase of money supply is currently left to banks. The banks collectively receive the interest on the money they create by their loans. Their ability to make loans far in excess of deposits is what enables them create money and be paid interest on their creation. Over time this guarantees that wealth will be concentrated in their hands.

In principle they share the power to create money with governments. However, they are jealous of their prerogative, and they often exclude the government from exercising its ability. The British colonies in North America spent money into existence and enjoyed considerable prosperity as a result. The Bank of England persuaded Parliament to forbid this, plunging the colonies into depression. This had more to do with their revolutionary fervor than the tax on tea.

The Continental Congress financed its successful struggle for independence from Britain by creating money. A major strategy of the British, too late in its success to stave off defeat, was to flood the colonies with counterfeit money to such an extent that people lost confidence in “the continental.” This loss of value gave credence to the view that national currency should be backed by gold, and the U.S. government was, accordingly, restricted in its creation of money. Lincoln understood that no such backing was really needed, and he successfully financed the Civil War by spending money into existence with no metal backing.

Nevertheless, the bankers succeeded in persuading the public that a government should not do this. They persuaded Congress to create the “Federal” Reserve Bank, largely owned by Wall Street, to issue currency which gradually replaced treasury notes. Later they were happy to abandon the gold standard. We have returned to the sort of money used by the Continental Congress and Abraham Lincoln, but now we have to pay the banks for the privilege of spending it. An increasing portion of our national budget goes to servicing a debt that results from our government turning over all power to create money to the banks.

There is a radical alternative. We could require that lending institutions lend only the money that their depositors entrust with them. This would then leave all creation of money in the hands of the government. The government could then both spend and lend into existence the amount needed for the economy to function. The result could be an end to government borrowing and a great deal more freedom for the government to take care of infrastructure, education, health care, and social services. Banks would become service institutions to society rather than concentrations of wealth and power.

To take another step into a biblical economy, the government could institute a special program to lend moderate amounts to individuals who are in financial trouble. This program might include financial guidance and access to special funds as well as simply making money available. Its goal would be to prevent foreclosure or bankruptcy.

Obviously, radical changes of this sort in the financial sector are not now “on the table.” But let us suppose that we bail out Wall Street and restore some regulations. Suppose then, that as the situation improves, once again Wall Street persuades congress to free it from onerous limitations. Then suppose there is another boom and bust cycle. Perhaps Wall Street can again persuade the public to bail it out. We learned very little from the earlier Savings and Loan crisis, perhaps we will forget about this one too. But perhaps not. Public resistance this time has been surprisingly intense. If the availability of a very different financial system is widely known, it might gain substantial support. Miracles are possible.