Tuesday, February 26, 2008

Debt, Credit, and Overcoming Poverty, Pt. 2

One of the best things about reading Banker to the Poor was that Dr. Yunus articulated my views on economics and fiscal politics better than I ever could. It was amazing to read his opinions and realize that he had expressed in writing what I have been trying to put into a coherent sentence for years. For example:

"There is little doubt that the free market, as now organized, does not provide solutions to all social ills. It provides neither economic opportunities nor access to health and education for the poor or the elderly. Even so, I believe that government, as we now know it, should pull out of most things except for law enforcement, the justice system, national defense, and foreign policy, and let the provate sector, a "Gremeenized private sector," a social consciousness-driven private sector, take over its other functions."
"I am not a capitalist in the simplistic left/right sense. But I do believe in the power of the global free-market economy and in using capitalist tools. I believe in the power of the free market and I believe in the power of capital in the marketplace. I also believe that providing unemployment benefits is not the best way to address poverty. The able-bodied poor don't want or need charity. The dole only increases their misery, robs them of incentive and, more important, of self-respect.
Poverty is not created by the poor. It is created by the structures of society and the policies pursued by society...given the support of financial capital, however small, the poor are fully capable of improving their lives."

I have never been a fan of welfare or government involvement in people's lives and finances. I am definitely a fiscal conservative, arguing for less taxation and correspondingly, less government spending. However, I am not some hard-hearted Republican who tells everyone to just pull themselves up by their bootstraps. I do believe that as Christians we have a responsibility to combat poverty and economic injustice. But how do you do that in a society where we have perpetuated unjust social structures, where we have created a world where CEOs who fail in their jobs get paid more in their severance packages than most people make in their entire lifetime? And how do we fight against injustice while still affirming a belief in personal responsibility and empowerment over entitlement?

Every day I am online, reading up on economics, the subprime mess, credit crunch, write-downs, and all of the other shtuff that has been hitting the web since last summer. More and more I am amazed at how our economy has gotten itself twisted up in so many layers of greed and debt. Investments that were considered "safe" have become volatile to the point of illiquidity. Banks are writing down and writing off losses bigger than the GDPs of entire countries. While analysts may say, "Capital preservation, debt reduction and financial intelligence remain the hallmarks of any successful financial agenda" it is obvious that our economy and the bull market we have been riding has been built on anything but common sense. Instead we have leveraged debt in pursuit of profit and told ourselves that we really could afford those mortgage payments.

Dr. Yunus speaks at length about greed in the capitalist system. But he also makes a piercing comment:

"Somehow we have persuaded ourselves that the capitalist economy must be feuled only by greed. This has become a self-fulfilling prophecy. Only the profit maximizers get to play in the marketplace and try their luck. People who are not motivated by profit making stay away from it, condemn it, and search for alternatives."

How true this is. Greed has been the primary motivation for our market economy. The profit seekers convinced money managers in the investment banks that leveraging was a good way to increase returns, not considering what would happen if the debt instruments at the bottom of their house of cards collapsed. All of these so-called "structured investment vehicles" are just examples of clever people focused only on a new way to create money out of thin air.

But it wasn't just the profit-seekers that caused this issue. Our pursuit of the "American Dream" led to insane spending. Individual borrowers stretched their budgets to the max with interest-only loans and adjustable rate mortgages, relying on the ever-increasing housing price bubble to support their desire for home ownership. Refinanace, refinanace, refinance. Refinance investments, refinance your mortgage. The same bad decisions made in the top investment banks were made in houses across the country. And it brought both groups down.

Now we have rising foreclosure rates and out of control consumer debt. The economic slowdown has led to rising unemployment rates which only puts further pressure. A quote in the New York Times sums up the downward spiral:
"You can almost draw it out in a diagram. With home prices going down, consumers cut back on spending. If consumers cut back on spending, the economy weakens further. If the economy weakens further, fewer people are able to afford mortgages so home foreclosures increase."
It's a neverending cycle, and what is most sad is that the lowest income people will suffer the most as the cycle continues.

Despite the pain, I think this market correction is a good thing. It isn't fun, but perhaps it is a necessary wake up call. If we really want a strong economy, it has to be built on actual growth, not engineered returns with a foundation of sandy debt. I don't enjoy having to explain to customers why their investments have dropped thousands, sometimes hundreds of thousands of dollars in the past several weeks. And it breaks my heart to read about low-income homebuyers who have seen their lives destroyed by the subprime crisis. We have to remember that behind the word subprime is a real person with a real credit score and a real foreclosure sign in front of their home. But we also have to realize that an economy built on debt is self-destructive.

The story of Grameen bank gives us a different perspective on the use of credit in the marketplace. Instead of using debt to finance out of control spending in non-essentials, credit is used to create a strong, stable business. Borrowers are part of a support group, helping keep each other accountable to their goals and providing counsel and assistance in hard times. Status is not the focus, stability is. Their borrowing is not fueled by greed or a desire to have the most toys, but a desire to provide health for their families.

So there you have it folks-a superpower economy being destroyed by its own greed and foolishness, versus a struggling country that used capitalist principles and common sense combined with hardworking care for people to create growth and stability. It's like a tragic novel where the rich man ends up destroying himself and the poor family finds peace in their strength of character. There's so much more to say about all of this. This market is an example of what people around the world condemn in capitalism. And yet the more I reflect on this contrast-the challenge of overcoming poverty put up against our American greed-the more I agree with Dr. Yunus' challenge:
"We can condemn the private sector for all its mistakes, but we cannot justify why we ourselves are not trying to change things, not trying to make things better by participating in the economy. The private sector, unlike the government, is open to everyone, even those not interested in making a profit.
The challenge I set before anyone who condemns private-sector business is this: If you are a socially conscious person, why don't you run your business in a way that will help achieve social objectives?"

Here in America we have amazing resources of capital and intellect. Perhaps instead of using these resources to continue our cycles of debt and greed we could learn a few lessons from Dr. Yunus and our recent economic failures. Could we put aside our pride?

I'm not naive enough to think that all of the CEOs in the American economy are going to suddenly step up and acknowledge that profit making must be governed by social consciousness. But a seemingly impossible dream can be an inspiration for change, a challenge to make even the smallest adjustments that could have lasting effects on how we think about business. And so I leave you with a final quote from Dr. Yunus, a statement that, if we allowed it to truly affect our actions, could change the world:
"Social consciousness can be as burning, or even more burning, a desire as greed in the individual human being. Why not make room for those people to play in the marketplace, to solve social problems, and to lead human beings to a higher plane of peace, equality, and creativity?"

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