Friday, September 7, 2012
Boom and Bust
One of the characteristic features of a free market economy is the "business cycle" – alternating periods of expansion and contraction. During the Nineteenth Century America went through this cycle on a regular basis, with a "panic" every twenty years or so (1819, 1837, 1857, 1873, 1893). The biggest one of all, of course, was occasioned by the stock market crash of 1929, followed by the Great Depression of the 1930's. The question is, are these "panics" normal, the inevitable way the market works, or can they somehow be avoided?
There are obviously a lot of factors that influence the economy: weather conditions, wars, political developments, foreign competition. But in the American experience, at least, there are certain recurring patterns that are especially interesting. There would typically be a period of prosperity with a rapid expansion of the economy, often driven by some new technology – the railroad, the automobile, the computer. Convinced that the prosperity would go on forever, people would engage in speculation – in land, commodities or stocks – hoping to make a quick profit. There was an expansion of credit, accompanied by loose lending policies. And then, unfortunately, there was crime, sometimes in the form of embezzlement at a bank. Then the whole thing would collapse. Stock prices fall, banks fail, credit dries up, investors are ruined, and someone goes to jail. The human tragedy of all this is that millions of hardworking people lose their jobs and suffer real privation and want as a result. It would then sometimes take years for the economy back on its feet.
In a modern industrialized economy a banking system and a stock market are probably necessary; otherwise it would be nearly impossible to raise the amount of capital necessary to expand business. Unfortunately, however, both banks and the stock market lend themselves to abuse. It is all too easy to "create" money by fiat through the use of credit, and to make a "profit" through speculation. But it is all fake. Paper profits are not real profits and dept is not wealth. Eventually reality catches up with the markets and the false prosperity disappears. Debt financing , in particular, exacerbates the boom / bust cycle by creating an artificial demand which drives up prices, and then choking the expansion off suddenly when credit dries up.
What is often overlooked in the discussions about the economy is the underlying psychology of the market. Economics is, after all, a form of human behavior, and human behavior is driven by psychology. Economics is all about the way individual human beings make financial decisions. And what is often overlooked in particular is the ugly fact of sin. We are fallen creatures by nature, and as a result our decisions are not always rational, nor do they always work for the common good. Greed, in particular, often manifests itself in excessive debt, speculation, and outright fraud.
The Bible does, in fact, have something to say about all of this. "But those who desire to be rich fall into temptation and a snare, and into many foolish and harmful which drown men in destruction and perdition. For the love of money is a root of all kinds of evil, for which some have strayed from the faith in their greediness, and pierced themselves through with many sorrows" (I Tim. 6:9,10; NKJV). Here we have the autopsy of a financial crisis. The problem starts with ambition ("those who desire to be rich"), which leads to risky and unethical ventures and greed ("many foolish and harmful lusts," lusts being self-centered desires of whatever sort), and ends in ruin ("destruction and perdition," or "ruin and destruction," as it might also be translated. The ruin and destruction might be either financial or spiritual).
Paul then goes on to make a general observation: "For the love of money is a root of all kinds of evil . . ." (v. 10). Greed is an aggressive primal urge which, if unrestrained, will wreak havoc everywhere. It will destroy others and will eventually bring ruin to ourselves.
Alexis de Tocqueville once observed that "a native of the United States clings to this world's goods as if he were certain never to die; and he is so hasty in grasping at all within his reach that one would suppose he was constantly afraid of not living long enough to enjoy them. He clutches everything, he holds nothing fast, but soon loosens his grasp to pursue fresh gratifications" (Democracy in America, I.II.XIII). In reality mammon is the idol we bow down and worship.
"For what will it profit a man if he gains the whole world, and loses his own soul?"