What's Going On in the World's Financial Systems?

Over the last few months we have watched the failure of some of the world’s largest financial institutions, and the rescue of some of them by their governments. As a crisis of confidence spreads worldwide, governments are being forced to inject billions of dollars into the support of the remainder. What’s going on? Perhaps it’s easiest to look at New Zealand first.New Zealand, (I’m not proud to say), has lead the world in this financial failure. However I hasten to add, it didn’t cause the world crises. It’s too small to have had any effect.

Here in N.Z., some finance companies that loaned on vehicle purchases, fell over due to irresponsible lending and the resulting high bad debts. Then followed more companies who had loaned on property subdivisions and apartments. These later finance companies still had assets (on paper at any rate), which exceeded their liabilities. However they couldn’t honour their commitment to repay their debenture holders on due dates because the companies they had loaned to couldn’t repay them, due to the downturn in the property market. In a similar way to banks, finance companies tend to lend long term and borrow short-term – an acknowledged recipe for disaster.

It then transpired that many of our finance companies were associated with and borrow from each other, and they also borrow from banks in America. With the sub-prime mortgage crises beginning in the American banking industry, borrowing from there to repay their N.Z. debenture holders was no longer an option. And their associated N.Z. finance companies couldn’t help either, as they were also unable to repay the people who had invested with them for the same reasons. And so many N.Z. finance companies defaulted. As each defaulted they brought down other finance companies which had lent to them and couldn’t be repaid. This lead to a general lack of confidence by the public in all finance companies, as they didn’t know which companies were lending to whom. And so, in fear, the public virtually stopped lending fresh money to finance companies. The newspapers describe it as a “contagion of fear”. (Their description didn’t help either.) The more that defaulted, the more fear.

By mid August 30 companies in this country had collapsed or suspended repayments, being half our finance companies. The other half has largely stopped lending because the public are not investing with them either.

At the same time our banks, which normally look to American banks for extra credit because New Zealanders historically borrow more than they save, are experiencing the same problem in borrowing from American banks as our finance companies have. As a result, New Zealanders are finding it extremely difficult to borrow anywhere for housing or legitimate business needs. New commercial borrowing is crucial if we are going to increase New Zealand’s productivity. Without this source of finance we will go backwards. Probably only the government, by lending to the banks, can right this crises of confidence.

Now, if we turn to the scene in America we see exactly the same scenario, except that there it is the banks themselves that are in trouble. There, some loaned to householders to buy homes, knowing that the borrowers could neither afford to meet the payments nor provide sufficient security, because the house valuations were less than the loans. Basically they were lending up to 20% more than the value of the houses as an inducement to borrow.

In America, as an encouragement by government to borrow, mortgage interest is a tax-deductible expense. Furthermore, it is relatively easy for a mortgage holder to walk away from his property and mortgage obligation. If the bank suffers loss after selling the house in a mortgagee sale it cannot seek restitution for the unpaid balance from the mortgagor.

The banks gave out sub-prime mortgages on the assumption that the economy was about to take off. Therefore pay packets would increase and so would the value of houses. They were wrong. Meanwhile, in order to finance their lending, these banks sold their loans to other banks (just as N.Z. banks sell theirs to overseas banks). They, in turn, sold them around other banks who moved them on, and so on, until these sub-prime mortgages were being financed by major banks all around the world without their realising it.

We now have the same situation worldwide as New Zealand’s finance companies have faced. There is a spreading “contagion of fear” by bank investors worldwide as, one by one, major banks have discover that they have unknowingly invested on American sub-prime mortgages and are now facing bankruptcy themselves. Price hikes in the cost of food and petrol have assisted in this by causing recession and a fall in house prices worldwide. No one knows which banks will be next, and so we are seeing runs on banks by depositors to withdraw savings as a result of rumours. Again, as banks are fearful of each other’s financial integrity, they won’t lend to help each other in order to assist. They have also heavily reduced their lending to their customers, just as the finance companies in New Zealand have. Only governments can afford to take on the risk and lend to their banks in order to restore normality and confidence in the financial integrity of the banking system. Indeed they simply have to in order to stop a meltdown in their economies.

Iceland’s prime minister on 8th October announced that his country is facing bankruptcy. Thankfully Russia has baled them out. New Zealand is second in the world to Iceland in its level of its overseas debt, as measured against the percentage of its gross domestic product (its annual production). i.e. we are very exposed to the state of the world’s financial institutions. We depend upon the financial support (rescue) that they are receiving from their governments. If these banks want repayment by our banks of loans when they fall due, or if they curtail further lending to our banks or impose lending restrictions, we must comply with their demands.

In fulfilment of Proverbs 22 verse 7, “the borrower is servant (slave) to the lender”.

So far, unlike the rest of the western nations, New Zealand’s government has done little to support its banks apart from guaranteeing deposits, in a move to restore confidence and move money out from “under the mattress”. One wonders whether it isn’t injecting funds into its banks because they are largely Australian, or because it can’t afford to. However it’s all very well to have governments guaranteeing people’s deposits and injecting billions of dollars into their banks, but inevitably that’s all going to have to be paid for by increased government borrowing and higher taxes. We are indeed seeing interesting times.

A Christian Perspective

The above picture of current world events is necessarily simplistic and generalised and doesn’t mention the several other causes that have together contributed to this crisis. I hope it has given Christian intercessors however some understanding of what is happening and how to pray. The crises could potentially lead to a complete meltdown in the world’s financial systems if governments don’t move to bolster their banks in order to prevent a continuation of this contagion of fear by their people in their banking systems.

What responsibility do Christians have?

Well, in Genesis God gave us the responsibility to tend His garden. This world and the welfare of its people is our responsibility.

But secondly, as you will have gathered by now, this whole situation has its root cause in “debt”. It marks the culmination of a long process of accumulating debt by some political leaders and borrowers, and of aggressive lending by lending institutions in what is now a single global financial village. In reality, lenders have lent and borrowers have borrowed until the latter can no longer afford to service their debts. An eventual crash was inevitable. New Zealanders are among the world’s highest borrowers and the world’s poorest savers.

Furthermore, so complacent have we Christians become to the hidden cost of the interest component in every purchase of goods and services we make and tax we pay, that we have been beguiled to join “the world” in this culture of debt in order to gain self-centred instant self-gratification, despite Christ’s last prayer with His disciples in John 17 vs.14 – 16. In terms of our financial lifestyles we have literally become, in Jesus’ term: “of the world”. No longer do our lifestyles portray any difference despite Christ’s injunction in ch.15 v 19 that we be noticeably different from non-Christians, lights in the darkness.

But what alternative do we have?

Well, for a start we all know that the Bible teaches “Sowing and Reaping”, but few of us actually apply it to our natural lives – that is, outside of our church giving. But Christ spoke of “Sowing and Reaping” as a natural principle. He said we would “reap what we sow”. Too true!

Then there is “Stewardship”. We agree that this should be our inspiration and life plan. However most of us begin our Christian lifestyle when a child and teenager by following peer pressure and living self-indulgently for the moment. We accumulate debt by buying “must have” toys. Then we marry and buy a house and compound our debt by accepting a 25-year (or more) mortgage. Most of today’s teenagers will still be repaying debts when they retire. (That is, if they own anything besides a car.)

Where does Christian stewardship come into that?

In Bible times, families assisted newly-weds by lending to them interest-free to buy or build a house or start up a business, or by building them the house. They in turn helped younger newly-weds in their turn. This culture is still worldwide. We see it today in the families of some immigrants to New Zealand. We know it’s most successful, but we can’t apply it in our culture because family relationships here have been lost. Instead, our worldly culture respects “independence” – the “I’ll do it my way” value system. We are no different from “the world”.

The Israelites proudly believed they were each a part of a unique community of God’s chosen people. How I wish that Christians today had that same understanding as the Israelites did.

Jesus gave us a new commandment at that Last Supper, not found in the O.T:

“Love one another. As I have loved you, so you must love one another. By this will all men know that you are my disciples, if you love one another.” (Jn.13 v 34)

Even greater than sense of community enjoyed by Israel, our New Covenant was to be linked by a deep love between the brethren. That requires a completely lifestyle of values to that of “the world”. Yet sadly, Christians still are bound up in the world’s system of materialism and self-centred greed and debt.

Paul warned in 2 Cor. 6 v 14-18: “Do not be yoked together with unbelievers.” – How plain is that?

He even ends with the quotation: “Therefore come out from them and be separate, says the Lord.” Remember, his is firstly a financial teaching, then a spiritual. – First in the natural – then in the spiritual.

One example of Israel’s community of His chosen people is found in Deut. 23 v 19. They were free to charge interest to a non-member, but to a brother Israelite they were not to charge interest. In many churches today the teaching lifts Rom.13 v 7 “owe no man anything”, out of its correct Bible context and incorrectly teaches that it is a “financial” teaching that says that all borrowing is wrong. The Bible never says that anywhere. It accepts that debt is sometimes unavoidable. These churches forget that lending among the Israelites was widespread in Bible times. An example of this is the number of times they were commanded not to charge interest on loans, and other verses that commend those who lend to the poor. In Deut. 15 v 8 it actually commands lending to the poor!

In today’s context, would you agree with me that a young couple buying a house is “poor”?

As proved by many families today, a system of interest-free lending to each other is most successful. Indeed it is extremely practical to lend without interest if you also receive without interest. The blessings to all are obvious.

Lending interest-free to fellow members of God’s community (Deut.23 v 19) is a basic Bible principle. It was not only applied throughout the Old Testament and the New Testament, it was applied right up until the Middle Ages in Europe.

Two World Systems

The events of the last few weeks have again highlighted the fact that, just as there are two opposed spiritual kingdoms in the world (Satan’s and God’s), so there are two opposing financial systems. Jesus said in Luke 16 v 13:

“No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. We cannot serve both “God” and “Money”.

It seems that Jesus was talking of two radically opposed value systems. In short there is God’s system for His chosen people, and there is the world’s.

I commend to you Watchman Nee’s classic “Love Not the World” for an excellent Biblical interpretation of “the world”. In it he says:

“Today we are confronted by two worlds, two spheres of authority, having two totally different and opposed characters. It is a question of whether I belong to an order of which Christ is sovereign Lord, or to an opposed order having Satan as its effective head. It is no less a question of two violently opposing worlds, and our transition through salvation and baptism from one to the other.”

Satan’s system (the world) is built upon self-centred greed, a love of pleasure (and instant gratification to get it), and debt (control and power).

God’s system is built upon Sowing and Reaping through His “Storehouse”, and support and interest-free lending (Deut. 23 v 19) within His community (family). At its heart is the recognition that we are one community, His chosen people, which was created at the New Covenant between God and man at the cross.

As verse 19 says, we are at liberty to lend to “the world” at interest, but not to borrow from it. Jesus endorsed this (lending to banks) in the Parable of the Talents. We see this in Deut.28 v 12: “You will lend to many nations but will borrow from none”, and sadly today in the curse result for disobedience: “He shall lend to you and you shall not lend to him; he shall be the head and you shall be the tail”. (verse 44)

Our Experience

In 1987 God spoke a series of instructions through two intercessors in Whakatane which radically changed my view and that of the others team members who volunteered to carry out the follow-up research. What we found was a DIY system, designed by God, for financing homes interest-free, which saved each person hundreds of thousands of dollars in interest, and years of repayments. Yet it was completely scriptural. As well as that it highlighted a number of the Bible’s financial principles which have been largely overlooked by Christians today. It has become clear that God has a completely different financial system and financial lifestyle planned for His family, and it is safer than houses – and banks!

In 1989 the community of over 100 families, churches, family trusts, missionaries etc commenced a charitable trust named “Liberty Trust”. Each pledged $20 per week to lend interest-free to each other, to be repaid within 7 – 10 years. Starting only with “a Word” and no money, it has loaned 218 interest-free mortgages so far, and has had no repayment arrears. It has never borrowed, and has no debts. Its only assets are the mortgages out there helping people and churches, and several computers. Although the details have changed, giving it much greater flexibility, it is working exactly as the original principles given to the two intercessors. Surprisingly God has allowed New Zealand to re-introduce this to His people world-wide. Why?

In Summary

Today the financial lifestyle of many Christians is no different to non-Christians. The world’s financial system is presently in a state of meltdown due to debt and greed, and Christians who have forsaken the Bible’s financial principles are victims of it. If they have no positive alternative to offer to their non-Christian friends, how can their lifestyles be “lights”?

Most modern day Western Christians have very little concept of how to work as a community, but God is about to change that. Why? – I suspect we will soon find out. The world’s financial events of the last few days give us some indication of the values it is built on. Jesus prayed at His last supper that we remain “in the world’ while not being “of the world”. That is a choice. It presents an urgent challenge to The Church in the western nations.

Kelvin Deal

Chartered Accountant and Chairman of Liberty Trust

[Published in Day Star Magazine December 2008]