Leave economics to the economists
Wednesday, May 28, 2008
There is a reason why theologians should stick to theology and leave economics to the economists. In her "On Faith" commentary today, outgoing Chicago Theological Seminary President Susan Brooks Thistlethwaite demonstrates why she should stick to subjects she actual understands.In her rant this week, Thistlethwaite manages to mangle disconnected facts to suggest that there is a connection between lower interest rates, the war with Iraq and the mortgage lending crisis leading to the sin of greed. Thistlethwaite states:
Low interest rates are one big factor in the temptation to greed found among mortgage lenders. Alan Greenspan, when he was Federal Reserve Chairman, was not being evil in continuing to lower interest rates; he wanted to keep the economy growing even though the country was pursuing a war and paying for that war on credit. Perhaps his political bosses told him, “Keep the economy humming.” Who knows? All we know is that, for example, in 2001, we saw news stories that stated, “In an effort to battle U.S. market conditions this year, Greenspan has been forced to roll up his sleeves and unleash five 0.5 percentage cuts in the Federal funds rate. This drop from 6.5% to 4% is unheard of and the current rate is at its lowest level in seven years!” In the beginning, these rate cuts were necessary to help the market in the post 9/11 recovery. The thing that opened the door for the predatory lenders was keeping the rate so low for such a long time and lack of oversight.
‘Hurray!’ said the banks. 'Let’s make money off of these low interest rates and package lots of attractive mortgages.' But the banks added to the conditions that made for the sin of greed, because they didn’t just sell people on the idea of low fixed interest rates, they tempted home buyers with the idea they could get even lower interest rates by choosing variable rate mortgages and even interest-only mortgages.
Meanwhile, there were these two wars still going on and the wars were being paid for on credit. This disastrous run-up in debt, in turn, lowered the value of the U.S. dollar abroad. The falling dollar meant that the U.S. had to pay for its oil abroad with ever more devalued currency. At the beginning of the Iraq war, oil was selling for $25.00 a barrel, but remember those were dollars worth far more than the dollar is worth today.
The value of currency is most closely related to the interest that can be generated from holding that currency. When the U.S. lowered interest rates after 9/11, most other central banks around the world did not lower their rates. The euro, which has maintained higher interest rates, has been more attractive to other central banks. Our trade deficit (imports exceeding exports) also contributes greatly to the slide of the value of the dollar. Oil prices have increased (as the price of all imported goods have increased) as the value of the dollar decreased. The silver lining is that with the lower dollar, our exports should increase.
Besides being completely wrong about the causes of the decline of the dollar, Thistlethwaite is also wrong to associate the value of the dollar with the debt from the war. To understand this, you need to understand what the cost of the war is in relationship to GDP. The total current defense spending today represents about 4% of GDP. In 1980, defense spending as a percentage of GDP was 4.9 percent under President Carter and in 1968 was 9.5 percent under President Johnson. There is no historical relationship at all between defense spending and the value of the dollar and Thistlethwaite's claim that there is... well frankly... it's a lie.
The bigger picture here is just how unintelligently she tries to connect low interest rates to the temptation to sin through greed. The sin of greed has always been there regardless of interest rates. Right now we point to mortgage brokers putting together loan packages for borrowers they knew couldn't afford the loans. Twenty years ago, the Savings and Loan crisis was fueled in part by speculative loans made because interest rates were high. This is not exactly rocket science but it's clearly beyond Thistlethwaite's intelligence.
Besides being completely wrong about the causes of the decline of the dollar, Thistlethwaite is also wrong to associate the value of the dollar with the debt from the war. To understand this, you need to understand what the cost of the war is in relationship to GDP. The total current defense spending today represents about 4% of GDP. In 1980, defense spending as a percentage of GDP was 4.9 percent under President Carter and in 1968 was 9.5 percent under President Johnson. There is no historical relationship at all between defense spending and the value of the dollar and Thistlethwaite's claim that there is... well frankly... it's a lie.
The bigger picture here is just how unintelligently she tries to connect low interest rates to the temptation to sin through greed. The sin of greed has always been there regardless of interest rates. Right now we point to mortgage brokers putting together loan packages for borrowers they knew couldn't afford the loans. Twenty years ago, the Savings and Loan crisis was fueled in part by speculative loans made because interest rates were high. This is not exactly rocket science but it's clearly beyond Thistlethwaite's intelligence.
7 Comments:
After reading Thistlethwaite's contributions to "On Faith" over the last year, I've concluded that she 1) has absolutely no sense of her limitations; 2) has no qualms about spouting opinions that have no basis in fact whatsoever; and 3) has no hesitation to demonize anyone who disagrees with her, even on stuff she knows nothing about. All in all, she's a good representative of the UCC's leadership.
commented by 
Athanasius, 6:06 PM
Athanasius, 6:06 PM
FWIW, in less than a decade the amount of wealth in the world available for (read "seeking") investment has doubled. American real estate attracted a good deal of this, enough so that there was a real demand for investing in it. The criteria for loans vanished as mortgage brokers became wealthy.
Banks were willing as long as real estate value increased--Why not? In the event of a foreclosure they would end up with a property worth more than the mortgage.
The rating companies of these investments relied on obsolete data that indicated there was a failure rate on U.S. mortgages around 2%. But with the change in criteria the new plethora of mortgages were far, far less reliable. The rate in some categories is approaching 50% Most are around 20% which is 10x what was expected.
Values ceased to rise at almost exactly the same time as the defaults started rolling in pushing the real estate market ever lower.
In response, the new rich of the world who were so willing to invest in U.S. real estate market won't put a dime in now unless the risk is far, far less. So now there's a lot of houses to buy but no money.
The war in Iraq doesn't have a lot to do with it. Nor does the lowering of interest rates. There has been an incredible increase in wealth in the developing world, especially China and India. The demand for investment was too great for it to be done wisely. U.S. real estate just happened to be the target.
(Didn't know I knew this kinda stuff, didja? :-) )
Banks were willing as long as real estate value increased--Why not? In the event of a foreclosure they would end up with a property worth more than the mortgage.
The rating companies of these investments relied on obsolete data that indicated there was a failure rate on U.S. mortgages around 2%. But with the change in criteria the new plethora of mortgages were far, far less reliable. The rate in some categories is approaching 50% Most are around 20% which is 10x what was expected.
Values ceased to rise at almost exactly the same time as the defaults started rolling in pushing the real estate market ever lower.
In response, the new rich of the world who were so willing to invest in U.S. real estate market won't put a dime in now unless the risk is far, far less. So now there's a lot of houses to buy but no money.
The war in Iraq doesn't have a lot to do with it. Nor does the lowering of interest rates. There has been an incredible increase in wealth in the developing world, especially China and India. The demand for investment was too great for it to be done wisely. U.S. real estate just happened to be the target.
(Didn't know I knew this kinda stuff, didja? :-) )
OK Don... you are allowed to have an opinion about economics now. :)
LOL.
Truth-to-tell, I got it from a really good NPR broadcast of This American Life. James, since you travel, I highly recommend looking for free podcasts and an ipod. (And if you have as few scruples as I do, I recommend BitCommet to dl TV programs and movies to watch on your ipod as well.)
Truth-to-tell, I got it from a really good NPR broadcast of This American Life. James, since you travel, I highly recommend looking for free podcasts and an ipod. (And if you have as few scruples as I do, I recommend BitCommet to dl TV programs and movies to watch on your ipod as well.)
We should leave this up to Congress to fix. http://michellemalkin.com/2008/05/27/deadbeat-dem-defaulted-on-three-home-loans-while-lending-her-campaign-77500-hellllooo-congress/
They will fix it good. tehe.
They will fix it good. tehe.
Don: I do - I have an IPOD Nano which is loaded with TV shows and podcasts... mostly techy stuff though... I'll check out NPR's stuff.
Don: I do - I have an IPOD Nano which is loaded with TV shows and podcasts... mostly techy stuff though... I'll check out NPR's stuff.
