A group of Christian people, standing together, praying and watching out for each other may be able to resist some evil.
When the day of Pentecost came, they were all together in one place (Acts 2:1).One hundred and twenty disciples were standing in one place. This made it quite difficult for the Jewish leaders to attack them. They were safe while they stayed together. The Upper Room was the safe place from which the church launched its rapid growth.
Every Christians should have a group of friends who will gather together to stand against evil. Paul was kept safe in Damascus and then Jerusalem (Acts 9) because he had other believers who watched out for him. Jeremiah had friends who took a stand and kept him safe (Jer 37,38).
Geography is important for spiritual warfare. Christians living in isolation will be outvoted spiritually in their locality. In contrast, a dozen Christians living the same neighbourhood will be able to unite in prayer to drive out the enemy and make their locality a spiritual stronghold for the Lord.
Most people living in suburbia hardly know their neighbours. During a time of social collapse, good relationships with neighbours will be essential. Christians can prepare for challenging times by developing strong relationships with their neighbours. This will be easier, if there are a number of Christians in the neighbourhood.
If it is possible, as far as it depends on you, live at peace with everyone (Romans 12:18).When organising the security of their neighbourhood, Christians will need to draw in other people that they trust, so that they can contribute their skills and resources to the common cause.
Tuesday, March 31, 2009
Monday, March 30, 2009
When a time of crisis is drawing near, God will tell some Christians to sell their property. After Pentecost, Christians living in Jerusalem sold their land.
Joseph, a Levite from Cyprus, whom the apostles called Barnabas (which means Son of Encouragement), sold a field he owned and brought the money and put it at the apostles' feet (Acts 4:36-37).These people had heard Jesus prophecy (Matt 24:1-35) that Jerusalem would be destroyed. They knew that the day was coming when there property would be worthless, so they sold out while the market was still good. They used their money to provide food for people who had lost their income during a tumultuous time.
During unsettled times, some Christians will be lead to sell their property while it still has value. Some will use the money to provide assistance to those who are destitute. Others might some use the proceeds to buy a home that is closer to other believers. The objective is not to protect our property, but to use our property strategically to protect God’s people.
Sunday, March 29, 2009
Christians are called to be salt and light in the world.
You are the light of the world. A city on a hill cannot be hidden. Neither do people light a lamp and put it under a bowl. Instead they put it on its stand, and it gives light to everyone in the house (Matt 5:14-15)Withdrawing to a place of safety must be a last resort, because we would be putting a lamp under a bowl when it should be shining into the darkness.
We face the challenge of living in the world, while being protected from it. This was easy while we were the dominant culture in Western society. We could expand our influence by spreading across society. Unfortunately, that world has changed and we have now become a small minority in a hostile world. We are now spread too thin to impact our culture and are too isolated to keep each other safe. Isolation in suburbia is dangerous when society collapses.
Once Christians could live anywhere and be safe. We now need to think much more strategically about where are live. The best way to keep safe, without losing visibility is for a group of Christians to live together in the same neighbourhood. If four or five families lived in close proximity to each other, their lives would be open to the people living around them, while being protected by the bonds between them.
About twenty houses in and around A Street have Christians living in them (shaded grey). Some moved into the area, but a few lived there before they became Christians.
Living close to people we trust will strengthen our security. The people living in homes near the entrance from D Street could take responsibility for warning the rest of the community of coming trouble. The Christians could join together to stand against those who want to harm them. When they go out of their community, they could travel together to ensure their safety. If thinks got really bad, they could throw up barrier at the entrance to A Street to keep intruders out. Those living outside could move inside for a time.
During a time of crisis, giving and sharing will be much easier for people who live near to each other. Living in the right place will be vital, while isolation in suburbia could mean separation from those who can care and share with us. People who have never heard the gospel might choose to live among the Christians in this community, because it is a safe and secure place to live.
The complete series on Coping with Social Collapse is here.
Saturday, March 28, 2009
Getting good guidance will be really important in a time of crisis. When Paul was on a Roman ship in the middle of a terrible storm, God showed him a dream what would happen. He encouraged the soldiers and sailors.
Last night an angel of the God whose I am and whom I serve stood beside me and said, 'Do not be afraid, Paul. You must stand trial before Caesar; and God has graciously given you the lives of all who sail with you.' So keep up your courage, men, for I have faith in God that it will happen just as he told me (Acts 27:23-25).The solders and sailors listened to Paul, because he knew what was going on and what to do. They followed his instructions and protected Paul’s life. If Christians have insights into what is going on, they may be able to influence hostile leaders. This might be important for their protection.
During a crisis, Christians should seek guidance from God. Doing God’s will is the best protection in every season. Being at the centre of his will is the safest place. Joseph was able to protect his family, because he knew what to do. God spoke to him in a dream to provide the guidance that he needed.
When they had gone, an angel of the Lord appeared to Joseph in a dream. "Get up," he said, "take the child and his mother and escape to Egypt. Stay there until I tell you, for Herod is going to search for the child to kill him" (Matt 2:13)Wisdom
Wisdom will find the safest options. Moses was born in a hostile nation. His mother hid him in a place where Pharaohs daughter would find him.
So the woman took the baby and nursed him. When the child grew older, she took him to Pharaoh's daughter and he became her son. She named him Moses (Ex 2:9-10).Moses was protected in the royal palace, because his mother was wise.
Friday, March 27, 2009
God Protects in Many Ways
Our immediate response to thoughts of social crisis is that God will protect us. This is true. The scriptures are full of promises that God will protect his children.
God is our refuge and strength,an ever-present help in trouble (Ps 46:1).Every Christian should meditate on these promises.
I will say of the LORD, "He is my refuge and my fortress,my God, in whom I trust." (Ps 91:2)
We should also be careful, because saying that “God is our defence” is a bit like saying “God will provide”. We need to put some content around these statements, or they just become wishful thinking. God sometimes works miracles, but he mostly provides and protects us through other people. To obtain his full protection, we must understand how he protects his people. The scriptures show a number of ways that this will work in practice.
Prayer is essential for protection from evil. When Peter was thrown into prison, the church prayed all night.
So Peter was kept in prison, but the church was earnestly praying to God for him (Acts 12:5).When Paul and Barnabas were in prison, they spent the night praying.
About midnight Paul and Silas were praying and singing hymns to God, and the other prisoners were listening to them (Acts 16:25).In times of chaos and crisis prayer is our best weapon.
God will sometimes work a miracle to protect his people. He parted the Red Sea to protect the children of Israel (Ex 14). This option will be relatively rare. We cannot just assume that God will send a miracle, but should understand the full range of ways that God works.
Angels sometimes provide protection for God’s people. Elisha opened the eyes of his servant to see the multitude of angels that were protecting them.
Then the LORD opened the servant's eyes, and he looked and saw the hills full of horses and chariots of fire all around Elisha (2 Kings 6:17).Peter was released from prison by an angel (Acts 12:6-10).
God can manipulate natural events to protect his people. He sent a plague to destroy Sennacherib’s army.
That night the angel of the LORD went out and put to death a hundred and eighty-five thousand men in the Assyrian camp. When the people got up the next morning—there were all the dead bodies! 36 So Sennacherib king of Assyria broke camp and withdrew. He returned to Nineveh and stayed there (2 Kings 19:35-36).When Paul and Silas were in prison in Philippi, an earthquake shook open the doors of the prison. They did not take the opportunity to escape, but God used the earthquake to get them set free (Acts 16:25-28).
Thursday, March 26, 2009
If the economic crisis gets really bad, the fabric of some societies will be torn apart. If work gets scarce unemployed people might start rioting and looting. If the government runs out of money, it might stop paying the police. In the worst case scenario, gangs of youths might roam streets of the city terrorising the population. The city would be a dangerous place, but the country would be no better. If food is scarce, hungry hoards might trample the countryside searching for something to eat. Personal security would be a big issue.
I am not that pessimistic. Very few western countries will experience social chaos and mob rule as a result of this economic crisis. The powers that be will simply not let it happen. Troops have already been deployed in many countries ready to prevent riots and looting. When faced with a choice between disruption of their comfort and dictatorial government, the people of the West have voted consistently for their comfort. We are more likely to see autocratic governments than mob rule in the West. Repressive governments will not be a threat to Christians, as they will mostly ignore us, unless we become an irritant.
In some parts of the world however, where governments are less secure, economic crisis might collapse into social and economic chaos. Christians living in these nations would be wise to prepare. To assist their preparation, I will examine the scriptural teaching about protection in times of social chaos in the next few posts.
Another reason this teaching is important is that the whole world is moving towards the next epochal event in history called the “time of desolation”. This short season leads to a great outpouring of the Holy Spirit and a powerful advance for the Kingdom of God, but it will be a time of terrible dislocation. All Christians should be thinking about how they can prepare for this season.
The complete series on Coping with Social Collapse is here.
Labels: Social Collapse
Wednesday, March 25, 2009
The impact of any economic crisis will vary from region to region and country to country. The preparation that is appropriate for the current crisis will vary according to where people living.
The problem for those trying to prepare is that none of us no how bad things will get in our city or region. The wisest option is to be conservative and prepare for the worst. If the worst does not happen, we will not have lost anything. We will be able to assist those who have not prepared. Jesus parable of the ten virgins should guide our preparation.
At that time the kingdom of heaven will be like ten virgins who took their lamps…. Five of them were foolish and five were wise. The foolish ones took their lamps but did not take any oil with them. The wise, however, took oil in jars along with their lamps (Matt 25:1-4).This full series on preparation for crisis is here .
Labels: Economic Crisis
Tuesday, March 24, 2009
The objective of sharing is to spread the good news and not to keep God's people comfortable. Christians should also use their resources to help people who are not Christians. When the Arameans were besieging Samaria, four lepers were shut outside the city. When they found the army had panicked and fled, the hungry lepers were the only ones who noticed.
They ate and drank, and carried away silver, gold and clothes, and went off and hid them… Then they said to each other, "We're not doing right. This is a day of good news and we are keeping it to ourselves” (2 Kings 7:8,9).Christians must not fall into this trap. We should aim to feed all the poor living in our communities, not just the Christians.
Everything that happens should be an opportunity for evangelism.
Now those who had been scattered by the persecution in connection with Stephen travelled as far as Phoenicia, Cyprus and Antioch, telling the message only to Jews. Some of them… went to Antioch and began to speak to Greeks also, telling them the good news about the Lord Jesus. The Lord's hand was with them, and a great number of people believed and turned to the Lord (Acts 11:19-21).Economic crisis will create opportunities for proclaiming the good news.
Monday, March 23, 2009
Christians can escape the barter trap through giving and sharing. The hairdresser might bless the gardener by giving him a free haircut. The gardener can bless the butcher by giving him his surplus potatoes. The butcher can bless the motor mechanic by giving him some lamb chops. The motor mechanic can bless the farmer by repairing his tractor. The farmer can bless the miller by giving him some surplus wheat. The miller blesses the baker by giving him some flour. The baker can then bless the hairdresser by giving him some of his bread. Giving and sharing provides everyone with what they need without any money changing hands.
Giving and sharing will only work if there is a high level of trust between the various Christians. The will be committed to giving and be constantly looking out for people in need. If the Christian farmer does not know the Christian miller, the circle of giving could break down. If the baker knows the hairdresser, but do not care enough to find out what he needs, the links will break. Often the circle of giving will be much larger and more complicated than I have shown.
The world would have to trade on a reciprocal basis: you scratch my back and I will polish your shoes. Blessing flows round and round, which is more effective than reciprocal swapping.
Sunday, March 22, 2009
In a money-based economy, the gardener pays the hairdresser for a haircut. The butcher sells lamp chops to the motor mechanic and buys potatoes from the gardener. The farmer pays the mechanic to fix his tractor and sells the flour to the miller. The baker buys flour from the miller and sells bread to the hairdresser. In this system, the goods and services flow one way and the money flows back the other way.
Saturday, March 21, 2009
Deacons will develop strong networks between those with plenty and those in need. This is a division of labour. People with business skills may be good at producing surplus wealth, but lack the compassion and patience needed assist poor people struggling to get back on the right road. Deacons will be specialists in helping poor people how to manage their lives better. The body of Christ will be stronger if deacons can focus on doing their calling, with others providing resources for them to distribute. Barnabas handed his surplus wealth over to the deacons to hand out, so that he could get on with his ministry as an apostle (Acts 4:26-37: 6:1-6).
During a crisis, deacons with lots of contacts will take the responsibility for building networks between town and country. They will facilitate the flow of food from the country into the city. They will also ensure that the Christians growing food in the country get the resources they need to support their ministry.
Another role of the deacon is to identify people with skills put them in touch with those who need word done. If an auto mechanic is unemployed, the deacons will link him with people that need their cars repaired. They will also make sure that the giving flows back the other way, so the mechanic’s family does not starve.
If apostles have been sent out to establish new churches, they will have links with Christians in other regions. Paul was able to link the Macedonian Christians who lived in plenty with their brothers and sisters facing famine in Jerusalem. These links and relationships will be really important for ensuring that food flows from the country to the city and arranging for the Christian farmer to get his tractor repaired by the mechanic who lives in the city.
Releasing apostles into their ministry might be the best way to prepare for economic crisis. Developing the ministry of the deacon is probably the best way to prepare for social decline.
Friday, March 20, 2009
Returning to subsistence makes an economic crisis worse. Whatever the situation, we should try to keep the division of labour going as much as possible. Sharing skills is a good way to capture the benefits of specialisation. Each Christian should think about their skills and identify ways to bless other people in their community. These skills might not the same as they exercise in their calling or their paid employment. The prophet might have skills in repair electrical equipment. The accountant might have repaired old cars as a hobby. In some situations these skills might be more valuable do their community than what they usually do.
Christian leaders should look out for people with skills that their community might need. Networks that link needs with skills will be really important for the well being of a community. If we cannot buy new automobiles, we might need to keep older ones going for longer. The person getting their car repaired might not have money to pay the person repairing there cars, but they might be able to deliver vegetables to those who are suffering. Each person should be encouraged to use their skills to bless the rest of their community.
Some skills that are now redundant might become more valuable. These days very people bake their own bread, because it is not economic to put energy into making something that can be bought so cheap at a store. If the economic system really collapsed, bread might be hard to buy. Bread-making skills would be really valuable. People with skills in repairing electrical appliances .and vehicles might suddenly find they have plenty of friends.
A person who loses their job might be tempted to plunge into self-sufficiency by growing their own food. That might be sensible, if they are skilled at gardening and know people who would enjoy the surplus vegetables, but for most people gardening may be totally inappropriate. Each person should find ways to benefit their community doing tasks that utilise their skills. Not everyone is a gardener and man cannot live on vegetables alone.
Thursday, March 19, 2009
When a financial or social crisis causes trade to collapse, networks and relationships will have an important role in ensuring that goods and services flow from those who are skilled at producing them to the people who have the greatest need. This presents an amazing opportunity for God’s people. We are experts at relationships. We should have strong networks with other Christians. We should be really experienced at giving and sharing. If Christians get prepared, they should be able to lead the way in the giving and sharing that will enable people to survive through difficult times. Every Christian should thinking about what they can be share with others.
During an economic crisis, there will be plenty of Christians living in the country who are skilled at producing food, so there will be no shortage of food. However, the collapse in trade may make it more difficult for people in the city to buy the food that they need. City Christians might need to share fuel and other resources with those growing food in the country. Sharing between Christians living in the country and Christians living in the cities should ensure that food is provided to those who need it. Christians with strong networks will have an important role organising the flow of surplus food from the country to the city.
City people will also need to share among themselves. If we cannot buy new appliances, we might need to get better at sharing what we have. People with plenty might give clothing to those with none. The owners of vehicles might provide transport for those who need to travel.
Over the last century, Christians have entered into the modern suburban lifestyle with the same enthusiasm as the rest of the world. This works fine when markets are operating effectively. People can live wherever they choose, because the market brings everything they need to them. If they want to meet with other believers, they jump in the car.
If Christians believe that the market will collapse in the future, they should think more strategically about where they live. Giving and sharing will be much easier for people who live in close proximity to each other. In troubled times, isolation in suburbia might mean separation from those who can care and share with us. If the economic crisis affects supplies of fuel, the cheap transport that sustains life in suburbia might disappear. Sharing transport will much easier for Christians who live closer to other Christians.
Wednesday, March 18, 2009
At the economic level the main impact of an economic crisis will be a reduction in the division of labour. Trade will become more difficult, which will reduce the level of specialisation. New Zealand may not be able to afford to import so many autos, computers and flat screen television. A decline in the volume of trade and in the degree of specialisation will make us all worse off, but it does not mean we have to return to self-sufficiency and subsistence.
Whatever happens, we should maintain as much division of labour as possible. When trade gets more difficult, we might need to shift to sharing to get the benefits of specialisation, but we should not return to subsistence unless that is the only alternative. Sharing can strengthen the division of labour when trade weakens it. A return to self-sufficiency should not be necessary, if people have learnt how to share.
During 2004-07 I saw the financial industry stacking up the powder kegs that would eventually blow up. I tried on occasion to warn people. But my warnings fell on deaf ears at Lehman and elsewhere, but not for the reasons you might think.These words were written by a correspondent with Bill Bonner at the Daily Reckoning. The wide boys new that they were playing with fire, but they did not put the petrol away, because the money was too good. They thought that they would be clever enough to get out before it all blew up in their faces. Well they weren't and now the taxpayers are bailing them out.
I recall numerous conversations with senior people at various global financial firms on topics ranging from Fed policy, to the US/UK housing markets, securitisation and its potential pitfalls, the CDS tangle, and so on. One thing that is clear to me is that key people at these firms were aware for the most part what risks they were taking. They knew that it was all going to blow up someday, if not so spectacularly as it now has done. But they all believed that somehow they would be quicker and cleverer than rival firms, that they would effectively hedge themselves and they would get out first, before things got really ugly. As you well know, that sort of collective "greater fool theory" mindset is characteristic of bubbles and, if widely held, almost ensures that liquidity will dry up suddenly as markets turn for the worse.
Believe me, they knew they were playing with fire to a much greater extent than is currently acknowledged.
Labels: Bill Bonner
Tuesday, March 17, 2009
At the personal level, an economic crisis affects people differently.
The situation will be varied. Some people will have a dramatic decline in income. Others will carry on living as normal. The relative size of these two groups will depend on the severity of the recession.
Pauls spoke about the situation where some are well off and other are suffering.
Our desire is not that others might be relieved while you are hard pressed, but that there might be equality. At the present time your plenty will supply what they need, so that in turn their plenty will supply what you need. Then there will be equality, as it is written: "He who gathered much did not have too much, and he who gathered little did not have too little (2 Cor 8:13-15).Paul suggested a solution for the situation where some have plenty while others are hard pressed. The solution is generous giving. A key to preparing for difficult economic times is to learn how to give and share. Christians can best prepare for difficult times by building relationships and building channels through which those who are better off can share with those who are hard pressed.
Deacons will have a role in facilitating this giving and sharing. Acts 6 describes how people with this calling were set aside to care for those in the Christian community who were poor. We should be working and praying to raise up this ministry.
For more about Deacons read Deacons.
Monday, March 16, 2009
The credit crunch has created a great deal of economic uncertainty. Christians are starting to think about life in difficult times. Some are preparing to cope with an economic crisis. This sense of urgency is good, but we must focus our efforts wisely.
When preparing for difficult times, most Christians think about returning to a subsistence lifestyle. Their first response is to start growing vegetables. Some Christians consider moving to the country, where a self-sufficient lifestyle will be easier. Growing vegetables might be a sensible away to support other people, but is probably foolish if the aim is to be self sufficient. The self-sufficient lifestyle is actually a substance lifestyle, and that is an awful way to live.
Returning to subsistence is not the best way to prepare for tough times when most people live in cities. If Christians want to provide a lead, we will need to develop models for life that will work in a city. Before rushing into the country, we should think clearly about what happens in an economic crisis. Once we have a clearer idea of what we will be facing, we can prepare more sensibly.
Sunday, March 15, 2009
The division of labour makes life in cities possible. Without the benefits of specialisation and trade, life in a modern city would be impossible, even for those who live simply. Several companies in the city where I live produce top quality electronic equipment that is exported all over the world. However, this city does not have the capital equipment are the range of skills needed to manufacture the full range stuff that people need to survive in a modern city. The only way that we can maintain a city lifestyle is to specialise in manufacturing and exporting a very limited range of products and import the other goods and services that we need.
What is true for a city is also true for a large country. Even the United States does not have sufficient capital and skills to produce the full range of goods and services needed to sustain life in and American city. If America attempted to be self sufficient, living standards would suffer as the benefits of the division of labour and specialisation disappeared. Life in the city would be terrible.
Self-sufficiency is not a practical for a city or country, but it is even less practical for an individual. An individual who attempts to be self-sufficient loses all the benefits that have come through trade and the division of labour. A man fending for himself will be hard pressed to produce enough food and clothing for his own family, even if he was very industrious. He will not have time to produce all the things that we need to live in a city.
In difficult economic times, trade declines. A reduction in the division of labour and a decline in living standards inevitably follow. We will have to deal with this, if it happens, but we must understand that a total collapse of trade and return to total self sufficiency would be a total disaster for people living in a modern city.
A collapse of trade would severely damage the lifestyles of people living in the country. Most country people in the Western world are dependent on the division of labour and lack the skills and equipment needed to be self-sufficient.
People in some parts of the world may be forced into subsistence and self sufficiency, but that should never be our first response to crisis. Whatever our circumstances, we should always attempt to specialise and trade as much as is practicable. We should always maintain as much division of labour as possible. Being dependent on other people will strengthen our community and enlarge our lifestyles.
Tomorrow, I will start thinking about preparaton for crisis.
Saturday, March 14, 2009
The name that economists use for this specialisation and trade is the “division of labour”.
Division of labour or specialization is the specialization of cooperative labour in specific, circumscribed tasks and roles, intended to increase the productivity of labour (Wikipedia).By increasing the productivity of labour, supports trade and improves the standard of living in a society.
The division of labour is really important, because even a small decline in the division of labour will make most people will be worse off. The reality is that no Western country can make all the products that modern people are used to consuming. When specialisation and trade diminish, standards of living decline.
The division of labour and specialisation is a Christian way of functioning.
Just as each of us has one body with many members, and these members do not all have the same function, so in Christ we who are many form one body, and each member belongs to all the others. We have different gifts, according to the grace given us (Rom 12:4-6).The church functions best when the prophets prophesy, the apostles apostle, the pastors, pastor, the evangelists evangelise, the servers serve and the encouragers encourage. When each Christian tries to do a little bit of everything, the body of Christian is weakened.
There are different kinds of gifts, but the same Spirit. There are different kinds of service, but the same Lord. There are different kinds of working, but the same God works all of them in all men (1 Cor 12:4-6).
Labels: Division of Labour
Friday, March 13, 2009
In the next couple of days, I will be posting some suggestions about how to prepare for a crisis. To understand some of the issues I raise, readers will need to understand the role of the Division of Labour in economic activity. I will explain the meaning of this expression in my next two posts before going on to talk about preparation.
Specialisation and Subsistence and Self-sufficiency
In a traditional society, people often live by substance. They do not depend on any other people for survival, because they grow or produce everything that they consume. If they cannot grow or make it themselves, they do not have it. Living on subsistence allowed the people to be self-sufficient, but this was quite limiting, because they spent so much of their lives producing food and shelter, they did not have time to develop and make other products that they may want.
Trade changes everything, because it allows people to specialise. One person specialises in growing grain. Another specialised in catching fish. A third person specialises in baking bread. Each one does what he is most skilled in doing. By focusing on one task, each person could increase their skills and find ways to do a task more efficiently.
The person who specialises can produce more than they need to survive. They can trade their surplus production with others to get all the things they want. Trade improves the situation of almost everyone.
Over the last fifty there has been a vast increase in specialisation and trade. The Japanese have specialised in making flat screen TVs, New Zealand has specialised in producing milk powder and special effects for movies. Americans have specialised in making autos. The Chinese have specialised in manufacturing clothing. This trade and specialisation makes most people better off.
I do not have a clue about how to make a computer or a flat screen TV. I could not make a decent automobile, if I worked on if for a hundred years. If I made my own clothes, I would look like a caveman. However, by specialising in tasks that I am skilled at doing, I can afford to buy all these things and many more.
Labels: Division of Labour
Thursday, March 12, 2009
Many economists are worried about systematic risk. This is the risk that an entire system or market will collapse in chain reaction response to the collapse of one instituion.
Michael Rozeff clarifies the issue.
Systemic risk is a function of the risks that an individual firm takes on. A firm that lends to a Bear Stearns is actually supposed to investigate the credit-worthiness of Bear. It is not supposed to put all of its eggs in one Bear basket. A firm that obtains a credit default guarantee from AIG is actually supposed to check up on AIG and find out if that guarantee means anything or whether it’s just an empty promise...In other words, if all banks mitigate risk correctly, systematic risk disappears.
Systemic risk is mitigated when individual firms mitigate their own risks. It is not mitigated when those risks are centralized in a few large firms with a government backup. That creates systemic risk. Decentralization and risk-avoidance mitigate systemic risk.
Wednesday, March 11, 2009
The banks and other financial institutions that bought CDOs also misunderstood the nature of risk. They assumed that insurance against default had eliminated the risk, so they purchased these financial instruments as if they were risk free. The reality was that they had swapped one form of risk for another. The risk of many homeowners defaulting had been replaced with the risk of a large monoline insurance company failing and defaulting on its obligation.
The risk of AIG defaulting could not be estimated on the basis of previous history, because this type of history does not repeat frequently enough. The default risk for AIG was probably very, very small, but the impact would be absolutely huge. The banks and institutions who trusted in AIG did not take this risk into account. Once the risk of mortgage default became widespread, the risk of AIG defaulting changed quite dramatically, but by then it was too late for anyone make change to mitigate the risk.
The government has now come to the rescue of AIG, but that does not eliminate the risk. The risk has just been transferred to all the taxpayers of the United States. This is not pooling of the risk, but pooling of the costs of default.
Note: the AIG bailout money flowed on to the banks with debt and securities insured by AIG. According to the Wall Street Journal, these include Goldman Sachs ($6 billion), Deutsche Bank ($6 billion), Merrill Lynch, Société Générale, Calyon, Barclays, Rabobank, Danske, HSBC, Royal Bank of Scotland, Banco Santander, Morgan Stanley, Wachovia, Bank of America, and Lloyds Banking Group.
Tuesday, March 10, 2009
The huge AIG insurance conglomerate has just received a second bailout from the US Government. The principles outlined in my previous posts explain why they got into trouble. AIG was insuring various kinds of debt instruments (CDOs) against the risk of default. Most of the CDOs were based on residential mortgages in the United States.
Insurance made sense while the risk of mortgage default was low likelihood and high impact. In normal times, the risk of a homeowner defaulting on their mortgage is quite low, even though the loss could be quite large, on the rare situations when they did default. Pooling the risk of mortgage default due to the vagaries of life was sensible.
Everything changes in a housing boom. When credit is flowing freely and every man and his dog is flipping houses, the nature of the risk changes. The boom eventually collapses and house prices fall. The risk of default ceases to be low likelihood, as default becomes widespread. The insurance companies set their fees as, if the risk was low, but now the risk is widespread and high impact, they are unable to compensate all those who face losses.
Monday, March 09, 2009
Insurance pools risk, but it does not eliminate it. When all the people in a city take fire insurance, the risk is transformed, but it is now concentrated in the insurance company. If dishonest people gain control of the insurance company, and embezzle the premiums and reserved held in trust, the company might default on its promise to rebuild houses that are burnt down. The risk of the insurance company defaulting is even lower likelihood than the risk of a fire, but the impact is even greater. The people of the city can spread this risk by dealing with several insurance companies, but the risk can never be totally eliminated.
Sunday, March 08, 2009
Understanding and managing risk has become a bit of science. Risk has two parts.
Liklihood tells us the probablity of an event happening. Impact tells us how much harm the event will do. The two factors are combined for an assessment of risk. An event that is highly likely is not a problem, if it has no impact. A very high impact may not be a worry, if it only happens once in thousand years.
Insurance is a method of pooling risk to minimise the cost of rare events to any one person.
Insurance works well for situations where the risk has low likelihood, but high impact. For example, the likelihood of a person’s house burning down is quite low. However, the impact is enormous, if it does happen. House insurance is method for pooling the risk and the costs.
In a city with a thousand homes, only one homeowner might experience a catastrophic fire in their house in any year. If everyone who lives in the city pays into an insurance fund, each home owner will only have to pay one thousandth of the cost of rebuilding a home to give the insurance fund enough money to pay for the cost of replacing the one house that is burnt down. Homeowners have several good reasons for paying into an insurance fund.
Insurance deals effectively with risk like a house fire, because it is relatively rare. The insurance company is able to estimate the probability of fires occurring and calculate an appropriate level for premiums. Everyone benefits from sharing the costs of the fire, because they know that next time they could be the one facing a tragedy.
Insurance is very effective for risks with low likelihood and high impact, but it stops working if the risk changes from being low likelihood to extremely widespread. That is why insurance companies have exemptions for extreme events like war and acts of God. If the city is bombed during a war, nearly every house might be burned down. In that situation, sharing the cost does not help. Paying for a thousandth of the cost of rebuilding all the houses is no cheaper than the cost of rebuilding your own house. Pooling the risk of an event that will affect everyone the same makes no sense. Insurance cannot deal with a widespread risk, because there is no benefit in pooling the costs.
Saturday, March 07, 2009
I believe that we need to rediscover what it means to have the Holy Spirit as our leader. Jesus promised that he would tell us what to do (authority, direction and inspiration). Wherever we go, he is already there, so we are his followers. The Holy Spirit has a "have-a-go” style of leadership. He learned this from Jesus.
Jesus articulated his vision and invited people to copy his lifestyle and “have a go” at what he was doing. The twelve and the seventy-two did “have a go” and it worked out pretty well. Jesus did not try to control those who were willing to “have a go". He let Judas do what was on his heart. He warned Peter that he would “stuff up”, but did not forbid him from “having a go”. And he helped Peter sort out the mess afterwards.
New Christians are to place themselves under elders. That means finding someone who is further on with the journey and "having a go" at copying them. It means "having a go" at the place where another has left off, not finding someone to be in control.
Eldership is about watching over those who are "having a go" (Acts 20:27-29).
Apostolic people “have a go” in a different geographic space. Evangelistic people “have a go” among those on the fringe. People with pastoral gifting watch over those who are “having a go”. They warn against leadership by false spirits and they help clean up the mess when things go wrong. They teach people to "have a go together".
The Holy Spirit seems to be more interested in his people “having a go” than keeping things nice and tidy. I presume he is happy to clean up the mess if things go wrong (with a bit of help from pastoral people).
Labels: Holy Spirit
Friday, March 06, 2009
Many economists claim that saving is harmful during a recession. This incorrect view comes to us from the 1930s depression, when thousands of banks collapsed and the savings of many people were wiped out. A common response was to draw cash out of the bank and store it under the mattress. This was harmful, because while the cash was under the mattress it was out of circulation. This was hoarding, not saving.
In the current crisis, people are saving, but they are not hoarding. Those who have reduced their consumption are putting the money they have saved in their bank. This is good for the economy, because savings in the bank can be lent to businesses to buy machinery and other capital equipment, which makes them more productive. With the current deleveraging of debt, there is an enormous shortage of capital all over the world. Increased saving is the best way to provide the capital that is now required.
Saving is only a problem, if people hoard cash, because then the savings are not available to fund investment in productive capital.
Hoarding is different from saving. When I hoard something valuable, I do not use it, but I prevent others from using it. This is destructive. When put my savings in a sound bank, I make what I am not using available to other who can use it efficiently. Many economists who propound the fallacy of composition do not understand the difference between saving and hoarding.
Labels: Fallacy of Composition
Thursday, March 05, 2009
The powerful governments of the world are talking about starting a “bad bank”. Their idea is that other banks would sell all their toxic assets to the bad bank, where they could be isolated. The other banks could then get on with being normal banks.
This is a very expensive solution as the government will become responsible for all the losses on the toxic assets.
We do not need another bad bank. There are already plenty of them. What we really need is a good bank. I hope that a private business will take the opportunity presented by the current uncertain situation to establish a good bank.
We need a bank that does not claim money entrusted to it belong to it; that does not record deposits as assets of the bank.
We need a bank that does not take money that belongs to one person and loan it to another without permission.
We need a bank that does not rely on mathematical models or commission agents to make decisions about lending, but trusts relationship with borrowers and knowledge of their character.
We need a bank that does not chase profits from shonky speculations or random risk taking.
I have described how a good bank would function in Bank Deposits and Loans.
If a good bank started, depositors would move their money to it. Other good banks would start when they saw how well the good bank was doing. Good banks would spring up everywhere, as depositors look for a safe haven. The world would see a dramatic shift of money from the existing banks to the good banks.
The true nature of our existing banks would be revealed. They would be left holding their toxic assets and depending on funding by government bailouts. Everyone would see that they really are bad banks, and avoid them like the plague.
Wednesday, March 04, 2009
We need a totally new understanding of submission and authority. Authority in the church is different from authority in the world. In the world systems authority comes with a position. Appointment as a sergeant gives a soldier authority to tell the members of his platoon what to do. When a person gets promoted to a supervisory permission, they get control over the people they supervise. The owner of a business gains authority over the people employed in the business. A policeman has authority to make people do what the law requires.
Pastors and elders often assume that they have a similar authority. They think that they have authority to tell members of their church what they should do. This is wrong. Christians are required to obey the Holy Spirit. Pastors and elders should not expect Christians to obey them.
Authority in the church does not come from an appointment to a position, but through relationships. It does not come with a role, but through being trusted. A person becomes an elder when Christians who know their character begin to trust their wisdom.
Christian submission is not like the submission of a grunt to a sergeant. It is not for guidance. The Holy Spirit is already providing them with guidance, so a Christian does not need an elder to give them instructions about what they should do. The believer committed to obeying the Holy Spirit when they accept Jesus as their Lord, so they cannot obey someone else as well.
Christian submission is different from worldly submission, because its purpose is protection against error. Christians submit to an elder by giving the elder permission to speak in to their life. They grant their elders permission to challenge them, if they are making a bad decision or taking a wrong action. The elders will know the Christian well, so they will notice any mistakes.
Elders have authority ask the tough questions, that no one else will ask. The elder may ask, “Did you pray about that?”, or they will say, “That does not sound like the Holy Spirit to me”. Elders must know their disciples well enough to see their hidden mistakes, and they must love them enough to challenge them, even at the risk of losing their friendship.
Many Christians fall away when they make a bad decision or slip back into persistent sin. This often happens, because no one loves them enough to challenge them, at the time of their first mistake. Many Christians watch other believers and see their mistakes. Elders are different because they act on what they see. The best protection for a struggling Christian is a challenge from a wiser person who understands and cares about their struggles.
Elders do not have authority to give instructions to people who submit to them. Their only authority is to watch over the believers who relate to them and challenge their mistakes. Elders also have authority to encourage believers. They will look for openings for each believer to fulfil their ministry and encourage them to take them up any opportunities that arise.
Trust builds authority comes, but control destroys it. Elders gain their authority through their relationships, not through their title. Wisdom and kindness increases the authority of an elder. Domination and control will diminish it, because believers will walk away. Authority disappears when relationships fail.
Tuesday, March 03, 2009
The offensive team needs a very different set of skills to the defensive team. Sharing an exciting vision needs different talents to exposing flaws in bad ideas. This can cause misunderstandings between the two teams.
The people defending at the front line often find visionary thinkers to be impractical and out of touch with reality. They are tempted to turn their skills at exposing bad ideas onto those who are describing the glorious future of the Kingdom of God. These people deal with details, so they are not moved by vague strategies.
The problem is that getting to our ultimate goal is a gradual process. There are several different ways to get to where we want to be. At times we will advance in one direction only to meet a setback forcing us to probe a new direction. This is the nature of progress. The visionaries can map out broad strategies, but they cannot provide the detailed plan that the defenders usually deal with.
Nevertheless, we must know where we are going. A clear vision of our ultimate goal will help us decide between different strategies and tactics. If we do not know where are going, we will often take the wrong path. We may even go the wrong direction.
Visionary people also get frustrated with those resisting the worldly agenda. The current system seems to be so far removed from the Kingdom of God that trying them better seems like a waste of energy.
Visionary thinkers and political conservatives often do not understand each other. However we need both, for the Kingdom of God to come.
Monday, March 02, 2009
A division of labour is important when dealing with social change. Like an American football squad, we need both an offensive team and defensive team. Conservative think tanks provide important leadership for the defensive team, by exposing the flaws in liberal agenda. However, just as the defensive team is less likely to score a touchdown than the offensive team, proving bad ideas wrong will not get us to a better society.
Conservativism is a good tactic, but a poor solution.
Resisting undesirable change is a sensible tactic, but it should not be our only one. Conservative policies cannot produce a good society. The society that we are seeking has never existed, so it cannot be achieved by going back to what existed in the past. Resisting change makes sense, but it will not get us to where we want to be.
While we need conservative people to explain why liberal solutions will not work, we also need visionary thinkers to develop and promulgate a vision for a better world. Sound defence will win battles, but we will not win the war unless our offensive team can articulate a compelling and practical vision for the future. People will only join our cause, if the Kingdom of God sounds exciting and plausible. We cannot beat something with nothing.
Sunday, March 01, 2009
In the second week of September 2008, the international banking system staggered an almost collapsed after Lehman Brothers went into bankruptcy. Bankers and governments managed to keep the system from going under, but four four major problems still haunt the clever people of the world.
1. Sub-prime Crisis
The collapse of the housing bubble has caused enormous problems for banks. This is often referred to as the subprime crisis, but the problem goes far beyond subprime sectors. Defaults have increased among all borrowers and the shocks have spread to financial institutions throughout America and Europe due to the wide spread securitisation of mortgages.
2. Eastern Europe
European banks are heavily exposed in Eastern Europe. They have fund a housing bubble in these countries, but now with house prices falling and their currencies collapsing, many will be unable to repay their loans. Ambrose Evans-Pritchard at the UK Telegraph tends to be overdramatic, but he provides a good description of the problem.
Western banks that have lent $1.74 trillion to the ex-Soviet bloc -- split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries,3. Synthetic CDOs
A huge problem that has not yet surfaced is synthetic CDOs. These complex financial instruments have been clearly described by Alan Kohler at the Business Spectator. He suggests that that $0.5 trillion of these could be out standing. The sting in the tail is that if eight or nine major named financial institution collapse (five or six have already gone), the holders of these securities will lose their money. This might prove to be a worse problem than the subprime debacle.
4. Private Equity
Over the large decade private equity firms undertook a huge number of leveraged buyouts. The private equity model minimises equity and maximise debt. This has left banks with huge exposure to businesses that are declining in value as their profits collapse. These chickens have still no come home to roost, so the banks are uncertain what their liabilities will be. This is one reason why they are holding extra reserves.
Labels: Financial Crisis