Iron Can’t Sharpen Iron Without Honesty

John Owen had a somewhat unique view of the Mosaic covenant (at least compared to the “Reformed divines”). You can read about it here: https://contrast2.wordpress.com/2010/02/15/john-owens-commentary-on-the-old-and-new-covenants-outline/

He presents a very compelling argument for his view, particularly his view of republication. He would be a strong ally for those today who argue for republication, but he is hardly ever mentioned, and never discussed. This might seem strange, but it’s not that strange when you realize Owen rejected WCF’s formulation. So I can understand why those who want to argue republication is compatible with WCF ignore Owen.

However, occasionally people do mention Owen. Take, for example, Michael Brown’s series of posts “The Mosaic Covenant in Reformed Orthodoxy.” Here is Michael’s particular post on Owen’s view of the Mosaic Covenant. He seems to accurately summarize Owen’s view, but I asked him in the comments section why he included Owen in an overview of “Reformed Orthodoxy” when Owen rejected WCF. The debate current in Reformed circles over the doctrine of republication has to do with whether or not it is consistent with the WCF. So why would he present Owen as someone who defended the Reformed Orthodoxy of WCF in regards to the Mosaic covenant?

Not only did he not respond to my comment, but he deleted it altogether.

In his concluding post, Some Concluding Thoughts on the Mosaic Covenant in Reformed Orthodoxy, someone truly searching for answers asked a great question:

I hope you don’t mind me posing a question I’ve had for quite a long time: is it fair to say that Owen and Bolton (and the others that held similar positions, whom you listed above) held views that contradict WCF 7.5, which identifies the old covenant with the covenant of grace?

This is someone who has been looking for an answer for “quite a long time.” He’s just looking for some help in sorting out this difficult issue. Michael responded:

I don’t think that Owen and Bolton would consider their views as contradicting the WCF. Bolton, as I am sure you know, was a member of the Westminster Assembly. And Owen, while not a member of the WA (he was a little too young at the time) was the chief arcitect of the Savoy Declaration, which was a modified version of the WCF. The Savoy maintained the exact language of WCF 7.5. Owen simply believed that the Mosaic covenant was superimposed upon the covenant of grace (see Owen’s Works, Vol 22, pp70-113). Like Bolton, he saw the Mosaic as subservient to the covenant of grace, as well as a republication of teh covt of works through its commands, sanctions, and reward for obedience.

So, I think there is more than one way to understand the Mosaic covenant as “an administration of the covenant of grace.” That is very broad language upon which many writers holding different views could agree. It allows for different nuances about the Mosaic in its more strict sense.

Michael’s answer is wrong and is significantly misleading to anyone trying to reach an understanding of the Mosaic covenant..

1. Savoy 7.5 did not maintain the exact language of WCF 7.5, as can very easily be seen by just reading it http://www.proginosko.com/docs/wcf_sdfo_lbcf.html#LBCF7
2. Michael tries to imply Owen viewed the Mosaic covenant as an administration of the covenant of grace, just like the WCF. And yet that is EXACTLY what Owen argues against. In his commentary he explains the view of the “reformed divines” and then politely disagrees with them: “Having noted these things, we may consider that the Scripture does plainly and expressly make mention of two testaments, or covenants, and distinguish between them in such a way as can hardly be accommodated by a twofold administration of the same covenant…Wherefore we must grant two distinct covenants, rather than merely a twofold administration of the same covenant, to be intended.” And, so as to prevent any wiggle room for Michael, Owen also says “Having shown in what sense the covenant of grace is called “the new covenant,” in this distinction and opposition to the old covenant, so I shall propose several things which relate to the nature of the first covenant, which manifest it to have been a distinct covenant, and not a mere administration of the covenant of grace.”

So an honest answer to the original question would be, “Yes, Owen’s view contradicts and expressly rejects WCF 7.5 and the identification of the old covenant with the covenant of grace.” I proceeded to point this out in the comments section. Michael, again, never responded. Instead, I received the following response from someone named David:

Brandon, I went to your site to see what you were talking about. What you said about Owen and thus about Mr. Brown’s research just sounded ‘off’. At your site I read this opening passage:

“Owen rejected the formulation of the Westminster Confession (one covenant, two administrations) and held that the new and the old were two distinct covenants with two different mediators and everything else that follows.”

Brandon, the above is a nonsense statement.

I replied with the following quote from Owen and told David he needed to ask forgiveness for his accusation:

The Scripture’s Doctrine on the Difference Between the Covenants Expounded on 17 Particulars:

#4  In Their Mediators:

They differ in their mediators. The mediator of the first covenant was Moses. “It was ordained by angels in the hand of a mediator,”  Galatians 3:19. And this was no other than Moses, who was a servant in the house of God,  Hebrews 3:5. And he was a mediator, by God’s design, chosen by the people, following the dread that befell them on the terrible promulgation of the law.  For they saw that they could no way bear the immediate presence of God, nor deal with him in their own persons. Wherefore they desired that there might be a go-between, a mediator between God and them, and that Moses might be the person,  Deuteronomy 5:24-27.

24 And ye said, Behold, the LORD our God hath shewed us his glory and his greatness, and we have heard his voice out of the midst of the fire: we have seen this day that God doth talk with man, and he liveth. 25 Now therefore why should we die? for this great fire will consume us: if we hear the voice of the LORD our God any more, then we shall die. 26 For who is there of all flesh, that hath heard the voice of the living God speaking out of the midst of the fire, as we have, and lived? 27 Go thou near, and hear all that the LORD our God shall say: and speak thou unto us all that the LORD our God shall speak unto thee; and we will hear it, and do it.

But the mediator of the new covenant is the Son of God himself. For “there is one God, and one mediator between God and men, the man Christ Jesus; who gave himself a ransom for all,”  1 Timothy 2:5. He who is the Son, and the Lord over his own house, graciously undertook in his own person to be the mediator of this covenant; and in this the new covenant is unspeakably superior to the old covenant.

What was the response? None, because Michael deleted my comment. I wrote a new comment asking why my comment was deleted. That comment was subsequently deleted. I emailed Michael to ask him why my comment was deleted. I wanted to revise my comment and re-post it if I had violated some terms or if he found my comments offensive. He has not replied to my email.

How can we ever hope to understand what the Bible teaches about these issues if we can’t be honest with one another in our discussions?

*[Update] Michael responded to my email and let me know why he deleted my comments. You’ll have to ask him yourself if you want to know why, as he said I don’t have permission to tell anyone. Just be warned he may not hear you all the way up in his ivory tower.

*[Update 2] Not sure what the deal is, but it seems Michael has removed all comments from the relevant posts on his blog now, not just mine.

What Caused the Financial Meltdown? A Guide to Understanding the Collapse in 3 Hours

I have been trying to find an efficient way to communicate and explain the causes of the financial meltdown. I have been driven by the fact that properly understanding the causes is crucial to preventing them again (and because it’s related to things like the recent health care reform), and by the fact that people don’t have a ton of time to read lots of articles and put everything together. But I think I have finally found a very helpful way of explaining everything in about 3 hours by watching 3 videos and comparing some notes.

In my quest to provide a simple, streamlined explanation of the financial meltdown, I came across CNBC’s documentary “House of Cards.” It does a pretty good job of simplifying the chain of events and connecting them with every day Americans, rather than leaving it all in the mystifying world of Wall Street. So the first thing you should do is watch House of Cards. Below are notes to follow along/review.

House of Cards

Host David Faber begins the entire show with the following statement (@8:30):

The economic crisis finds its roots in the U.S. housing market.

The entire financial meltdown is directly tied to the housing market. The remainder of the documentary attempts to show what happened in the housing market (and Faber’s thesis is that greed, specifically Wall Street greed, is to blame – but that’s only a half truth). The whole documentary is helpful in getting you to understand the links in the chain, you could really watch about 4 minutes of the beginning and end to learn all you need to know:

@10:00 [After 9/11] the outlook was bleak. The economy was still reeling from the dot com bust. And what the country needed was for Americans to start spending. Alan Greenspan made that easier. As Fed Chairman he controlled the country’s short term interest rates. The lower the interest rate, the cheaper it was for people to borrow money.

@1:27:55 Fed Chairman Alan Greenspan retired in 2006. Within a year, the age of euphoria he’d helped unleash would come to an end.

If you want the simplest, most basic explanation, you can stop right here.
It was a result of the Fed.
If you want a more detailed explanation, read/watch on.

Here is the chain of events Faber describes (below it will be a modified list with comments):

1. September 11, 2001 terrorist attack shocked the economy and essentially put it on hold. People stopped transacting.
2. Lack of transactions – people saving rather than spending – will destroy the economy.
3. @10:18 “The outlook was bleak. The economy was still reeling from the dot com bust. And what the country needed was for Americans to start spending. Alan Greenspan made that easier. As Fed Chairman he controlled the country’s short term interest rates. The lower the interest rate, the cheaper it was for people to borrow money.”
4. The Fed sharply lowered the interest rate.
5. As a result, borrowing money became cheaper than it had been in a generation.
6. President Bush told people to go out and spend money. If you don’t spend your money, the terrorists win.
7. Americans took advantage of the lowest mortgage rates since 1971 and they started buying houses.
8. This increased demand for houses drove the price of houses up. (This is the law of supply and demand)
9. This increased cost of houses meant fewer people could afford them.
10. Banks decided to make loans to these people.
11. Getting a housing loan used to be very, very difficult (@14:30). People were subject to incredible scrutiny to decide if you could pay back the loan.
12. “Our industry… has been driven by small and medium sized mortgage bankers that deal with Fannie and Freddie.”
13. Fannie and Freddie, created by Congress, buy home loans from mortgage lenders.
14. Fannie and Freddie then receive the mortgage payments from people. They pool this money and sell it in shares for investment called the “Mortgage Backed Security” that big institutions like pension funds learn to love.
15. @16:50 “We were used to being led by Fannie and Freddie. We got our rules from those guys, and that’s what we did.”
16. Fannie/Freddie in penalty box, Wall Street took over so that small mortgage loaners could “bend the rules” and make loans to people who couldn’t pay them.
17. @18:40 “The mortgage market caught fire (grew) because the world was flushed with cash.” (It was flushed with cash because foreign countries who used to be poor became rich by being productive)
18. Dallas the lender gave people loans that he knew couldn’t afford it. The only thing stopping him from doing it before was Freddie/Fannie’s rules. Wall Street didn’t have those rules.
19. @23:00 In 2002 Bush pushes for more people to own homes.
20. @24:30 “I didn’t actually understand all the terms in the paperwork, but I just trusted the broker.”
21. @27:44 “I did ask, ‘How exactly is this going to work?’ She said ‘Oh we’re going to refinance in 5 years. You’ll be fine.’ Did I get more information? No.” -Her mortgage lender lied on the application about her income
22. @28:30 Wall Street was profiting and so were these new home owners with cash from their homes, “thanks in large part to interest rate cuts engineered by Fed Chairman Alan Greenspan.”
23. @33:30 “part of the problem here” is that “loan officers” had no training and were not regulated by the state
24. @38:15 “It was a pretty shocking claim – that Wall Street would knowingly create a market for the worst kinds of mortgages.”
25. “Wall Street became intoxicated by the sheer volume of mortgages they could repackage and sell, no matter how toxic the loan.”
26. 39:25 Bush brags about new home construction highest in 20 years. “Home ownership rates the highest ever.”
27. Greenspan encouraged mortgage industry to come up with new kinds of loans.
28. which resulted in “Pay Option Negative Amortization Adjustable Rate Mortgage”
29. @41:20 Mantra was that housing prices had not gone down one year since the Great Depression
30. In order to divide up and sell loans, Wall Street had to get them rated
31. AAA -> BBB, change in housing market made BBB “safer” – so they lowered standard for AAA
32. Rating agency conflict of interest – paid by banks they were rating
33. Nobody was paying attention to reliability of rating agencies
34. Banks created “Collateral Debt Obligation” CDO – small pieces of lots of different mortgages. They were all betting on the continuing rise of housing prices.
35. Norway bought CDOs.”The contents of which were a mystery to them.”
36. @55:30 Fannie/Freddie plunged into the loans they once shunned (sub-prime).
37. @56:30 “Why didn’t you stop yourself from giving out bad loans?” “Because I wouldn’t be able to compete because my volume would go to zero.” “Greed is hard to control, huh?” “There’s nobody there saying, ‘Stop it! We can’t do this anymore, even if we go out of business.”
38. @1:01:34 There’s nothing the Fed could have done to prevent a collapse – that is aside from stopping the growth and causing a recession.
39. Warning sign #1 – it was unregulated market
40. Warning sign #2 – housing prices rising much faster than income
41. Wall Street sellers were fresh out of college. When asked “What if these are bad and you can’t sell anymore?” He said “It will never stop.”
42. @1:08:30 How do banks get people to buy CDOs with bad loans? Get them a AAA rating.
43. @1:09:30 No one I met with thought it was remotely possible home prices could go down.
44. @1:10:00 It was easy to break the rating rules and make a crappy loan a AAA. “There was not a lot of sophistication involved.”
45. @1:11:40 Alan Greenspan couldn’t understand CDOs.
46. Sub-prime loans started going bad.
47. Wall Street stopped buying.
48. Sub-prime lenders stopped lending.
49. Nobody could get a loan.
50. Which resulted in decreased housing demand.
51. Which stopped rising housing prices.
52. Which meant people could no longer refinance to keep up with their loans.
53. @1:19:45 black woman “I’m being held accountable for my bad choices. But who in that industry is being held accountable?… I’m stupid, but you’re guilty. You’re literally guilty.”
54. @1:22:45 “Norwhich still has no clue what they invested in.”
55. @1:23:05 Wall Street sold all kinds of CDOs, not just mortgage backed CDOs. But when the mortgage CDOs went bad, people started to doubt, and their value went down.
56. @1:23:40 Norway: “We have learned a lot. If things sound too good to be true, they are. I have learned not to trust nice man in Armani suits.”
57. @1:24:46 “People borrowed too much. Lenders loaned too much. That will not correct itself until the Darwinian flush. Until there is a flush of people that can’t afford to pay these loans and they get wiped out and home values get back to a level people can afford them.
58. Banks began failing.
59. @1:28:00 Greenspan retired in 2006. “Within a year, the euphoria he helped unleash would come to an end.
60. “They knew what they were doing. They weren’t dumb. It was simply a failure to get out at the right time.”
61. Greenspan: We will be having this conversation again in the future. It will be a long time, but it will happen again. There is no law you can pass to stop it because the flaw is in our human nature.

Why the Meltdown Should Have Surprised No One

Now compare what you have just watched with Peter Schiff’s video. Take special note of his explanations as to why things happened. That is the most important question. Why? (After the video is my CNBC outline with added notes that implement Schiff’s insights)

Transcript of Schiff’s lecture: http://mises.org/daily/3493

CNBC Chain of Events + Notes

1. September 11, 2001 terrorist attack shocked the economy and essentially put it on hold. People stopped transacting.
2. Lack of transactions – people saving rather than spending – will destroy the economy. This assumption is the result of a particular economic theory called Keynesian. This has been the standard U.S. government theory for the last 100 years – but it is defunct. The assumption is false, but all that follows below is a result of this faulty assumption. The theory believes that the Federal Reserve plays an important role in getting people to spend, and thus saving the economy. This theory is most strongly opposed by Austrian economic theory.
   
3. @10:18 “The outlook was bleak. The economy was still reeling from the dot com bust. And what the country needed was for Americans to start spending. Alan Greenspan made that easier. As Fed Chairman he controlled the country’s short term interest rates. The lower the interest rate, the cheaper it was for people to borrow money.”
4. The Fed sharply lowered the interest rate.
5. As a result, borrowing money became cheaper than it had been in a generation.
6. President Bush told people to go out and spend money. If you don’t spend your money, the terrorists win. This is Keynesian economics rearing it’s ugly head again.
7. Americans took advantage of the lowest mortgage rates since 1971 and they started buying houses.
8. This increased demand for houses drove the price of houses up. (This is the law of supply and demand) Note this carefully. Normally housing prices rise because incomes rise. Increased productivity = higher incomes = more demand for housing = higher house prices. That is the normal market function. However, the Fed artificially raised house prices by creating an artificial demand. No one increased productivity. No one actually earned more money to buy a house with. Instead, the Fed interfered by injecting more money into the economy, making it seem like people had earned more. Also, some important steps are missing in the CNBC chain of events. Credit became cheaper everywhere, so why did demand and thus prices only rise in the housing market? In other words, why was this new influx of money all directed towards the housing market? Because 1) Interventions in the market by government creations like Fannie Mae and Freddie Mac had already started artificially raised housing prices, making it an attractive option, and 2) Fannie and Freddie, plus other government agencies had made access to credit for home mortgages easier (ie. They had lowered lending standards, not Wall Street)
   
9. This increased cost of houses meant fewer people could afford them.
10. Banks decided to make loans to these people. The question that must be asked here is why? Why would banks make loans to people who couldn’t pay them back? Furthermore, there have always been people who want a house but can’t afford it. So what is different about this situation? See #16 below
    
11. Getting a housing loan used to be very, very difficult (@14:30). People were subject to incredible scrutiny to decide if you could pay back the loan. What changed this?
12. “Our industry… has been driven by small and medium sized mortgage bankers that deal with Fannie and Freddie.
13. Fannie and Freddie, created by Congress, buy home loans from mortgage lenders.
14. Fannie and Freddie then receive the mortgage payments from people. They pool this money and sell it in shares for investment called the “Mortgage Backed Security” that big institutions like pension funds learn to love.
15. @16:50 “We were used to being led by Fannie and Freddie. We got our rules from those guys, and that’s what we did.” Note what a big player Fannie/Freddie are. And note that they set the rules.
16. Fannie/Freddie in penalty box, Wall Street took over so that small mortgage loaners could “bend the rules” and make loans to people who couldn’t pay them. There’s no other way to put this: CNBC is lying. Fannie and Freddie, and other government agencies, were the ones who “bent the rules.” See this 1999 NYTimes article talking about Fannie/Freddie’s push to lower standards http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html Read Ron Paul’s warning before Congress about Fannie and Freddie in 2003 http://www.lewrockwell.com/paul/paul128.html In addition, banks were threatened with discrimination lawsuits if they did not lend to minorities they felt did not meet lending requirements: http://www.independent.org/pdf/policy_reports/2008-10-03-trainwreck.pdf
17. @18:40 “The mortgage market caught fire (grew) because the world was flushed with cash.” (It was flushed with cash because foreign countries who used to be poor became rich by being productive) This is an important point. Why was the world flushed with cash? Was it because the world had suddenly become more productive (as Faber suggests)? No. The world was flushed with cash because the Fed flushed the world with cash. The Fed is connected to the entire world economy, not just the U.S. See Schiff’s video @27:50
18. Dallas gave people loans that he knew couldn’t afford it. The only thing stopping him from doing it before was Freddie/Fannie’s rules. Wall Street didn’t have those rules. See #16
    
19. @23:00 In 2002 Bush pushes for more people to own homes. Did Bush just say ‘Hey, it would be nice if more people owned homes?’ No. He, and Congress, and other government agencies interfered in the market to get people into homes (people who couldn’t afford those homes). See Thomas E. Woods’ “Meltdown” and the links in #16
    
20. @24:30 “I didn’t actually understand all the terms in the paperwork, but I just trusted the broker.” That’s stupid. This guy deserves what came to him. He’s not a victim. He was greedy. And the market (though not entirely free) did its job by punishing him for that.
21. @27:44 “I did ask, ‘How exactly is this going to work?’ She said ‘Oh we’re going to refinance in 5 years. You’ll be fine.’ Did I get more information? No.” -Her mortgage lender lied on the application about her income. Same thing here. This lady got what she deserved for being greedy and lying. She signed the paperwork. She lied right along with whoever helped her. Did the government regulate her bad behavior by punishing her? No, government rewarded her mistake. See point #53
22. @28:30 Wall Street was profiting and so were these new home owners with cash from their homes, “thanks in large part to interest rate cuts engineered by Fed Chairman Alan Greenspan.” Note this well. It is impossible to argue that what happened was the result of the free market because of this point.
23. @33:30 “part of the problem here” is that “loan officers” had no training and were not regulated by the state. No, the problem was that fear of losing money – which is what regulates bad decisions like this in the market, was inhibited. See Schiff @32:15
24. @38:15 “It was a pretty shocking claim – that Wall Street would knowingly create a market for the worst kinds of mortgages.” Yes, it is a shocking claim. And it’s also not true. See #16
25. “Wall Street became intoxicated by the sheer volume of mortgages they could repackage and sell, no matter how toxic the loan.” Which was stupid. See Schiff @7:40 But note two important points: 1) This sheer volume was a direct result of the Fed’s injection into the economy, and 2) They got burned (or would have without government) for their intoxication – which is the market working.
26. 39:25 Bush brags about new home construction highest in 20 years. “Home ownership rates the highest ever.” Why is Bush bragging if he had nothing to do with the market? He has a lot to do with it. See this very important 2002 speech here http://www.ronpaul.com/2008-09-26/gw-bush-on-the-housing-boom-oct-2002/ Note Fannie and Freddie’s role in Bush’s speech: “And so what are the barriers that we can deal with here in Washington? Well, probably the single barrier to first-time homeownership is high down payments. People take a look at the down payment, they say that’s too high, I’m not buying. They may have the desire to buy, but they don’t have the wherewithal to handle the down payment . . . I’m proud to report that Fannie Mae has heard the call and, as I understand, it’s about $440 billion over a period of time. They’ve used their influence to create that much capital available for the type of home buyer we’re talking about here.” Fannie and Freddie were the super-weights in the housing industry. None of this could have happened without them – and they were created by Congress (ie. they simply would not exist in a free market). Here is a helpful 2002 article showing how Freddie/Fannie distorted the housing market http://mises.org/daily/986
27. Greenspan encouraged mortgage industry to come up with new kinds of loans.
28. which resulted in “Pay Option Negative Amortization Adjustable Rate Mortgage”
29. @41:20 Mantra was that housing prices had not gone down one year since the Great Depression See Schiff @28:10
30. In order to divide up and sell loans, Wall Street had to get them rated You should be aware that these rating agencies are a cartel created by government regulation. There is no competition.
31. AAA -> BBB, change in housing market made BBB “safer” – so they lowered standard for AAA
32. Rating agency conflict of interest – paid by banks they were rating Same as Review magazines who carry ads by companies they review. This is a common problem – but the market solves that problem. See Schiff @36:55
    
33. Nobody was paying attention to reliability of rating agencies And guess what? Capitalism worked and those companies paid the price (or would have if they hadn’t been bailed out by the government)
34. Banks created “Collateral Debt Obligation” CDO – small pieces of lots of different mortgages. They were all betting on the continuing rise of housing prices. Again, see Schiff @28:10. This dependence on rising house prices is a result of the Fed and Fannie/Freddie interfering in the market.
35. Norway bought CDOs.”The contents of which were a mystery to them.” Are you noticing a theme here? Making dumb investments that you don’t understand, in the end turn out to be too good to be true and you pay the price. That is the market working, not failing.
    
36. @55:30 Fannie/Freddie plunged into the loans they once shunned (sub-prime). See #16. Faber is lying. Fannie/Freddie never shunned bad loans. They pioneered it.
    
37. @56:30 “Why didn’t you stop yourself from giving out bad loans?” “Because I wouldn’t be able to compete because my volume would go to zero.” “Greed is hard to control, huh?” “There’s nobody there saying, ‘Stop it! We can’t do this anymore, even if we go out of business.” This is the exact opposite of how a free market works. In a free market, you don’t go out of business for making wise choices. Instead you go out of business for making bad business choices like lending to people who can’t pay back. So again, what was interfering with this natural free market function? See Schiff @32:15
38. @1:01:34 There’s nothing the Fed could have done to prevent a collapse – that is aside from stopping the growth and causing a recession. Which is what the Fed should have done. WE NEED A RECESSION to recover from the artificial booms created by the Fed.
39. Warning sign #1 – it was an unregulated market This is not a warning sign. Government regulation provides a false sense of security. Regulated markets prevent people from worrying. It makes them think it’s safe. See Schiff @39:50
40. Warning sign #2 – housing prices rising much faster than income This is a correct warning sign and, again, these rising prices are a direct result of government interference in the market (both the Fed lowering interest rates and the various direct government interferences in the housing market).
41. Wall Street sellers were fresh out of college. When asked “What if these are bad and you can’t sell anymore?” He said “It will never stop.” And guess what? The people who hired that idiot paid the price (or they would have if the government had let capitalism do its job).
42. @1:08:30 How do banks get people to buy CDOs with bad loans? Get them a AAA rating.
43. @1:09:30 No one I met with thought it was remotely possible home prices could go down. And those people paid the price for their poor estimations. Those who saw that rising house prices were phony made a profit. That is capitalism rewarding safe practices and punishing unsafe practices. Government rewards mistakes like this, not the free market.
    
44. @1:10:00 It was easy to break the rating rules and make a crappy loan a AAA. “There was not a lot of sophistication involved.” Again, they paid the price for that lack of sophistication.
45. @1:11:40 Alan Greenspan couldn’t understand CDOs. Neither did Warren Buffet – which is why he didn’t invest in them and why he didn’t lose money in them. That’s the market working. See this 2003 article http://news.bbc.co.uk/2/hi/2817995.stm
46. Sub-prime loans started going bad. A very important point here: it was not just sub-prime mortgages that were going bad. Contrary to Faber’s entire premise, sub-prime loans were not the root problem. Prime loans were defaulting as well, and for the same reason – they were depending on the continued, unsustainable, artificial rising price of houses. See “Anatomy of a Train Wreck” PDF link above and “Meltdown” pp.22-23
47. Wall Street stopped buying. (ie. The market was working)
48. Sub-prime lenders stopped lending.
49. Nobody could get a loan. Good.
50. Which resulted in decreased housing demand.
51. Which stopped rising housing prices. Faber has this backwards. He says sub-prime defaults brought housing prices down. This is not true. Falling housing prices caused both prime and sub-prime defaults. If housing prices had continued to increase at the same rate, sub-prime mortgages would not have defaulted.
52. Which meant people could no longer refinance to keep up with their loans. For #46-52 see Schiff @59:00
53. @1:19:45 black woman “I’m being held accountable for my bad choices. But who in that industry is being held accountable?… I’m stupid, but you’re guilty. You’re literally guilty.” Wow. And she’s not guilty for lying? It is this absolute lack of personal responsibility that creates this mess in the first place. People naively think we have reached a certain place in the progress of society where we should no longer have to actually worry about making catastrophic, bad decisions. There will always be a safety net, so I don’t have to worry. This is what “moral hazard” refers to. It is this idea that you are not really at risk for decisions that you make in life. There will always be a safety net to catch you or a safety regulation to keep you from making bad decisions. For example, see Schiff’s comments about FDIC @38:13. Also, Wall Street was held accountable by the market, which is why some banks were going to fail without government intervention – and that would have been a healthy thing.
    
54. @1:22:45 “Norwhich still has no clue what they invested in.” Which is a good lesson.
55. @1:23:05 Wall Street sold all kinds of CDOs, not just mortgage backed CDOs. But when the mortgage CDOs went bad, people started to doubt, and their value went down. Again, this is the market working. Companies mixed good investments with toxic ones and it destroyed their companies (or should have if government didn’t interfere with a bailout)
56. @1:23:40 Norway: “We have learned a lot. If things sound too good to be true, they are. I have learned not to trust nice man in Armani suits.” And there you go my friends. That is capitalism.
57. @1:24:46 “People borrowed too much. Lenders loaned too much. That will not correct itself until the Darwinian flush. Until there is a flush of people that can’t afford to pay these loans and they get wiped out and home values get back to a level people can afford them. Absolutely. That is always the case. However, the government will not allow this to happen. They will come up with some way to help citizens for making stupid decisions, and the big companies are just “too big to fail.” There will be no Darwinian flush because the government will not allow it. There should have been flushes like this after every bubble – but the government prevented it. See Schiff’s comments @14:08
58. Banks began failing. As they should.
59. @1:28:00 Greenspan retired in 2006. “Within a year, the euphoria he helped unleash would come to an end.
60. “They knew what they were doing. They weren’t dumb. It was simply a failure to get out at the right time.”
61. Greenspan: We will be having this conversation again in the future. It will be a long time, but it will happen again. There is no law you can pass to stop it because the flaw is in our human nature. Greenspan is half right. He is right to say there is no law you can pass to prevent people from making stupid choices. It is impossible. Only the market can properly provide the necessary disincentive to making stupid choices. However, he is wrong to say that these booms and busts and meltdowns are the natural result of the free market. They are not. He, as Chair of the Fed, was the direct cause. People will make bad decisions in the free market, but it will not result in “systemic failure.” Only an economy being orchestrated by one entity can cause “systemic failure.” See Schiff @32:15 regarding the “trigger” and see below.

Faber concludes: “Greed runs all through this.” That may be the case, but is that really the answer to why? A few questions would have to be answered first.

1. What exactly is greed? Is it the same thing as profit? Is it the same thing as self-interest? (see my post on self-interest https://contrast2.wordpress.com/2008/10/02/self-interest-2/ )
2. Was greed somehow involved here where it is not everywhere else, including in government?

The reality is that blaming the crisis on “greed” is like blaming plane crashes on gravity. Certainly planes wouldn’t crash if it wasn’t for gravity. But when thousands of planes fly millions of miles every day without crashing, explaining why a particular plane crashed because of gravity gets you nowhere. Neither does talking about “greed,” which is constant like gravity. (T. Sowell)

Q & A

Q: Did the free market fail in 2008?

A: No.

Q: Then why did all the experts in Washington tell Congress they had to bail out banks or the economy would collapse?

A: Because they’re politicians.

A2: Because they are driven by Keynesian economic theory, which, as stated above, believes that the heart of a good economy is lots and lots of consuming. This false theory believes that if people save their money instead of spend it, then the economy will decline and fail. Thus under the Keynesian view, if big banks failed and therefore caused people to be more careful with their money, people would stop spending and therefore the economy would fail. But this is a false theory. It is good to be wise and to save money. In fact, after an artificial boom created by the Federal Reserve, it is very necessary for there to be a recession where people start saving their money. It is the only way to recover from the government’s manipulation of the market.

A3: Even the specific evidence the Fed brought forward to support their claim that the economy would collapse turned out to be untrue. The Fed said bank lending had frozen, along with interbank lending. This, along with other claims, simply were not true as a study by some economists for the Federal Reserve Bank of Minneapolis showed: http://www.minneapolisfed.org/research/WP/WP666.pdf

A4: A great quote from Thomas Woods: “For whatever reason, Secretary Paulson suddenly decided that this (purchasing toxic assets) was not the way to spend the hundreds of billions of dollars he had asked for. Instead, it was now the consumer credit markets that needed to be propped up. “Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,” Paulson warned. Because if there’s one thing Americans need more of, it’s credit card offers. And the cruel fate of having to keep your car for an additional year or two instead of buying a new one – it’s just too terrible to contemplate.
Should consumer credit actually become slightly more difficult to come by, full-fledged panic does not seem like the sensible response. The market would thereby be saying that Americans needed to start saving a little, instead of buying another plasma TV on credit. But our rulers cannot leave well enough alone. The very thought never occurs to them. If they weren’t looting the general public to bail out some wealth destroyer they would hardly know what to do with themselves.”

Q: So you think its good for big banks to fail?

A: Yes. If they have made bad business decisions, then they should pay the price. That is the sign of a healthy free market. Isn’t this exactly what people are complaining about? Aren’t people saying the free market failed because greedy Wall Street wasn’t punished? Well they were, except that government stepped in and prevented them from receiving the consequences for their decisions (like big boys). The economy would not stop. See Schiff’s comments

Q: But what about all those innocent people who had their retirements invested in Wall Street?

A: Those people are not innocent. They chose to place their savings in Wall Street. They took a risk. There is no such thing as a free lunch. There is no such thing as a safe investment. Every investment is a risk. No one has a right to retirement just because they invested in the stock market. It is a very sad thing to see happen, but the fact that so many people think Wall Street is a relatively safe investment is because the government has continually intervened to protect it from the consequences of bad decisions. The effect is cumulative. (The same is true for our trust in banks for simply keeping our deposits secure. The FDIC creates a false sense of security. Whether or not a bank conducts trustworthy business should be a factor in our choosing a bank – rather than if the bank lets you put your favorite picture on your debit card. See Schiff)

Q: Is Wall Street the heart of the free market?

A: No.

Q: But aren’t all these booms and busts proof that the free market is unstable?

A: No. Those booms and busts are a direct result of the Federal Reserve’s manipulation of the market.

Q: You seem to place a lot of blame on the Federal Reserve. Are you one of those weirdo conspiracy theorists?

A: No. Some people believe the creation of the Federal Reserve was part of a global conspiracy. That may or may not be true. It could just as easily have been the creation of Wall Street bankers who wanted a way to cheat the market, or maybe it was even created by well-intentioned, but mistaken politicians. Either way, the Federal Reserve is to blame for the boom and bust cycle.

Conclusion

So, the problem, and the real problem that we have, of course, is now that the bubble has burst — first from the stock market, now the real-estate market — and now that we’re having this massive recession, which is just getting started, we’ve barely gotten a taste of it. But, unfortunately, all the blame is on the free market. All the blame is on capitalism. It’s because there wasn’t enough regulation. There was too much greed. Right?

And Alan Greenspan, or, not Alan Greenspan. President Bush, in one of his speeches, said that Wall Street got drunk. And he was right, they were drunk. So was Main Street. The whole country was drunk. But what he doesn’t point out is, where’d they get the alcohol? Why were they drunk?

Obviously, Greenspan poured the alcohol, the Fed got everybody drunk, and the government helped out with their moral hazards, and the tax codes, and all the incentives and disincentives they put in — all the various ways that they interfered with the free market and removed the necessary balances that would have existed, that would have kept all this from happening.

We’ve always had greedy people. Everybody’s been greedy, not just Wall Street. But all of a sudden everybody was greedy all at the same time? Can’t they understand there’s a trigger for this, there’s a reason that everybody acted this way?

Normally, when people are greedy, they’re also fearful of loss, and people’s fear of loss overcomes their greed and checks their behavior. But what the government did, repeatedly, was try to remove the fear — they tried to make speculating as riskless as possible.

First, they provided us with almost costless money with which to speculate. And then they created the idea or the Greenspan Put. But whenever there’s a problem, don’t worry, the government is going to rescue you.

The government’s not going to let the stock market go down. The government’s not going to let your bets go bad, so go ahead and keep placing them. That was the idea, that was the mentality. It was nothing that the free market did.

Additional Resources:

• Meltdown: A Free Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse Thomas E. Woods
• The Great Boom and Bust | Interview with Ben Powell (5 minutes)
• The Housing Boom and Bust with Ben Powell (1 hour lecture) very helpful, very clear explanation
• Thomas E. Woods on C-SPAN 2 Book-TV
• Meltdown Lecture at University of Colorado
• The Bailout Reader
• The Depression Reader
• Skyscrapers and Business Cycles, or How You Can Predict the Next Economic Crisis
• Various Mises Institute Lectures on the Business Cycle
• Don’t Bail Them Out

Please let me know if you have found this helpful and if I can clarify anything.

Don’t Tell Me Who to Love

Over a year ago I wrote a post about Ray Boltz’ apostasy, including an analysis of his songs in light of his apostasy. https://contrast2.wordpress.com/2008/09/30/who-is-ray-boltz-god/

Boltz, a Christian music icon, recently abandoned his wife and children and moved to Florida to fulfill his homosexual desires anonymously. Yet he does not claim he is no longer a Christian. As is typical, he simply rejects those backwards Christians who say homosexual acts and desires are sinful.

Well, he hasn’t stopped making music (though it appears he should have). He has released a single from his new album called “Don’t Tell Me Who to Love.” It’s supposedly a song about an interracial couple fighting injustice in the 60’s, but I’m sure you can figure out what he’s really talking about.

Here is his flamboyant, Cher inspired diatribe against the Word of God http://rayboltzblog.files.wordpress.com/2008/11/dont-tell-me-who-to-love-mix5.mp3

The Inspiration:

While I was writing the song “Don’t Tell Me Who To Love” I was not familiar with the supreme court case “Loving v. Virginia.”  Growing up in the sixties, however, I was aware of the attitudes concerning people of different races being allowed to marry.  As early as the 1800’s, judges had claimed that such behavior would lead to “deplorable results” producing children that were “generally sick and effeminate.”   Preachers also claimed that it was “immoral, unnatural and against the will of God.”

It was only as the song was nearing completion that I read about how Mildred Jeter (a woman of color) and Richard Loving (a white male) met during the fifties, fell in love and were married in Washington DC.  When they returned to Virginia they were arrested and faced spending a year in prison unless they left the state.  Eventually, they challenged the Virginia law and in 1967 it led to a landmark supreme court decision, in which Chief Justice Earl Warren said, “Marriage is one of the basic civil rights of man, fundamental to our very existence and survival.”

At the time this decision was made a vast majority of Americans felt that the court  was wrong.  Fortunately, today, this is not the case and that is evident by our nation’s recent decision to elect  a president whose parents are of different races.

The only line in the song that was changed after my research was in the first verse.  Originally, I had written that in 1966 the couple were “making their wedding plans” but this was changed to “wearing their wedding bands” because I felt it was more reflective of Mildred and Richard’s situation.

On Saturday, November 15^th, 2008 I sang this song before a thousand people who had joined together to protest the recent passage of Prop 2 in Florida.  As I sang the words, “now there always will be hatred and voices that condemn, but I believe that true love is going to make it in the end,” I remembered a statement made by a beautiful black pastor at a conference I recently attended.  She said that people of color did not receive equality because white people suddenly decided they were worthy of equality but rather when people of color decided they were worthy of equality.  I hope this song encourages us all to say “I know what’s in my heart and that should be enough…don’t tell me who to love.”

Ray Boltz

SONG LYRICS: “Don’t Tell Me Who To Love”

written by Ray Boltz (c) 2008 Shepherd Boy Music/ASCAP

VERSE ONE

The year was 1966 and they were wearing their wedding bands

She was black and he was white and some people didn’t understand

The judge said that’s not legal, the preacher called it a sin

But they couldn’t stop them cause he loved her and she loved him

CHORUS

Don’t tell me who to love, don’t tell me who to kiss

Don’t tell me that there’s something wrong because I feel like this

I know what’s in my heart, that should be enough

Don’t tell me, don’t tell me no, don’t tell me who to love

VERSE TWO

Maybe you’re in love today and you’ve been making wedding plans

But there is someone in your way shouting things cause they don’t understand

The judge says that’s not legal, the preacher calls it a sin

Oh you just remember they were wrong before and they’re wrong again

REPEAT CHORUS

BRIDGE

Now there always will be hatred and voices that condemn

Oh but I believe that true love is gonna make it in the end

REPEAT CHORUS (fade)

http://rayboltzblog.wordpress.com/

Hebrews 6:1 Therefore let us leave the elementary doctrine of Christ and go on to maturity, not laying again a foundation of repentance from dead works and of faith toward God, 2 and of instruction about washings, the laying on of hands, the resurrection of the dead, and eternal judgment. 3 And this we will do if God permits. 4 For it is impossible, in the case of those who have once been enlightened, who have tasted the heavenly gift, and have shared in the Holy Spirit, 5 and have tasted the goodness of the word of God and the powers of the age to come, 6 and then have fallen away, to restore them again to repentance, since they are crucifying once again the Son of God to their own harm and holding him up to contempt. 7 For land that has drunk the rain that often falls on it, and produces a crop useful to those for whose sake it is cultivated, receives a blessing from God. 8 But if it bears thorns and thistles, it is worthless and near to being cursed, and its end is to be burned.

Inside the Meltdown

I was recently talking to some friends of mine about health care reform. They had read an overview of some of the things the health care bill would do and they did not understand why people would be opposed to it.  I briefly explained that people are opposed to it because it interferes with the free market.  One of their responses was to point out that free market health care has failed and the government needs to step in, just like how free market financial institutions failed and the government had to step in.  The Bush administration had pushed for more and more deregulation of the financial market.  They said these people just couldn’t handle the freedom and nearly destroyed the economy, so the government had to intervene to save us all.  That’s what’s happening in health care right now.

Now that some of the dust has settled after the meltdown, this seems to be the standard explanation people have been left with.  Well it’s wrong, very wrong, and I’ve been trying to find some helpful resources for people who care about understanding these things, but just don’t have time to really dig into it. Video is perhaps the most efficient means of communicating information (though not always the best), so I’ve been trying to find videos that do a good job of explaining what really happened. It’s not easy.

Frontline: Inside the Meltdown

One of the videos I watched was the first in a series on Frontline by producer Michael Kirk called “Inside the Meltdown.” It’s an interesting video and it does a decent job of at least introducing you to the characters and giving you a sense of the layout of things and how they went down. However, in the producer’s own words, the series is primarily character driven narrative, so it doesn’t necessarily go to extra lengths to explain everything – only enough to make the drama make sense.

http://www.pbs.org/wgbh/pages/frontline/us/kirk.html

It’s worth watching, but do so discerningly. Why? Well, one reason is Peter Schiff. After I watched Inside the Meltdown, I watched a short “making of” video where the producer talks about the process of making the show. I was very surprised to see footage of the producer interviewing Peter Schiff – surprised because Schiff didn’t show up anywhere in the finished show. Here’s the short “making of”:

Who is Peter Schiff?

Peter Schiff is a stock broker (president of Euro Pacific Capital) and financial analyst. He has appeared on all the finance news shows. He wrote a book that was published in February 2007 called Crash Proof: How to Profit From the Coming Economic Collapse. He wrote that book before anything went down and everyone laughed at him because he said things like “The U.S. economy is headed for a crash because of growth, particularly over the last 7-8 years has been phony…” (see video here http://www.amazon.com/gp/mpd/permalink/m9NA2D6ADKBP0 )

Every time he was on the finance news shows warning people of the coming collapse he was laughed at, literally. There was a great video called “Peter Schiff Was Right” on Youtube that showed clips of Schiff making these warnings and getting laughed at from as early as 2002 – but that video has been removed from Youtube.

Schiff is a great person to interview for the Frontline shows on the meltdown. Here is someone who not only knew precisely what was going to happen, and why (at a time when no one else had a clue) – but he put his money where his mouth was. Such a perspective would be incredibly valuable on such a show, which I’m sure is what producer Michael Kirk thought too. In the “making of” clip above you can hear Schiff say things like:

All the geniuses with Nobel Prizes [didn’t see this coming]… The very same investment bankers who brought us all the dot.coms… But they created this problem [who?]

As a viewer, isn’t that exactly the kind of thing you’d want to hear more of?

So why was Schiff cut from the show? (Well, he wasn’t entirely cut. If you read the transcript you can see he has too lines in the show, but both are off camera and the show never credits the words to Schiff on screen). Here’s an email PBS received:

Great, great program.What ever happened to the Peter Schiff interview that was on “The making of Inside the Meltdown” video?

Thanks.

Elmas Fregon
Milford, ct

FRONTLINE’s editors respond:

Unfortunately , due to the time constraints of a one hour report, we are unable to include everyone who was interviewed.

and here’s another:

Dear FRONTLINE,

Hear they left Peter Schiff out, even after they promoted the program with his quotes. All they needed was thirty minutes with Schiff, and maybe Lew Rockwell and they would have had the full story.

These Austrian Schoolers understood what was going on long before it hit the fan (back in 2003). As it stands, they put the people on who were blind and largely caused the bubbles, the same people who are going to create the next and bring system down. I’ll pass on actually watching the video.

Kent Cowan
Kingsville, Ontario

FRONTLINE’s editors respond:Schiff, a well known investment adviser and economic commentator, was one of many interviewed by producer Michael Kirk for this report. Unfortunately, due to the time constraints of a one-hour program, not all those interviewed could appear in the final film. The writer is referring to clips of Kirk interviewing Schiff that did appear in a video piece we produced about the report, called “The Making Of…” You can view thathere.

I can understand that. The focus of this first video “Inside the Meltdown” wasn’t necessarily to try to explain why things happened so much as it was to simply describe what happened from the inside, and so you have to make important editorial decisions to meet your time limit. But then what are we to make of all the extra footage that Frontline included on their website that they didn’t have time to include in the 1 hour program? http://www.pbs.org/wgbh/pages/frontline/meltdown/etc/sitemap.html, none of which includes Schiff’s interview?

The Warning

But if the first video in Kirk’s series didn’t have room for Schiff, surely the last in the series “The Warning” did. That whole show is about how one lone woman in government saw the dangers of what was happening and tried to warn people but no one listened, and some tried to shut her up. This would be a perfect place to hear about Schiff’s attempt to warn people. But he was nowhere to be found.

Why? Well because, again using Kirk’s own words, he’s telling a “character driven narrative.” The narrative of “The Warning” was that this lone woman, Brooksley Born, a pro-regulation head of the CFTC, who worked her way up the ladder despite sexist discrimination, tried to challenge the free market libertarian Alan Greenspan to get him to regulate the derivatives market before the impending doom. So you have this great setup between man and woman and between two opposing ideologies: regulation/deregulation – and the drama ensues.

So what would happen if you threw Schiff into the mix, a true free market libertarian (unlike Greenspan) who also saw this coming? Well, you would destroy that narrative because it would become obvious that Greenspan was not really the libertarian Frontline goes to great effort to paint him as. And furthermore, it makes you doubt that Born’s analysis was right. That doesn’t make as great of a story.

So Schiff is cut.

Why the Meltdown Should Have Surprised No One

I’m not trying to paint any vast conspiracy here. I’m just trying to get you to see, at the very least, that there is more to the story than you are hearing in the common media. Grab a sandwich and something to drink and please, sit down and listen to this explanation of the meltdown by Peter Schiff:

You can read a transcript of the above video here http://mises.org/daily/3493 – and you can also download an mp3 there if you want to listen on the road.

Shutter Island

***SPOILER ALERT***
DON’T READ IF YOU HAVEN’T SEEN IT

For the wrath of God is revealed from heaven against all ungodliness and unrighteousness of men, who by their unrighteousness suppress the truth. For what can be known about God is evident within them, because God has made it evident to them. For his invisible attributes, namely, his eternal power and divine nature, have been clearly perceived, ever since the creation of the world, in the things that have been made. So they are without excuse. For although they knew God, they did not honor him as God or give thanks to him, but they became futile in their thinking, and their foolish hearts were darkened.

These verses imply that it is unnecessary for the Christian to try to prove the existence of God to people. They would suggest rather that every human being already knows at some level of consciousness or unconsciousness that God “is really there.” The unregenerate, of course, do all they can to suppress this knowledge (Rom. 1:18), although they are never completely successful. It is for this reason that the Bible speaks of the unregenerate person as both knowing God (Rom 1:21, 32; 2:14-15) and not knowing Him (1 Cor 1:21; 2:14; 1 Thes. 4:5; 2Thes. 1:8) at the same time, that is, he knows God is really there but he does not know Him savingly.

Obviously, there is some psychological complexity here: “The unbeliever knows things at one level of his consciousness that he seeks to banish from other levels… he knows God, he knows what God requires, but he does not want that knowledge to influence his decision, except negatively: knowledge of God’s will tells him how to disobey God.”

–A New Systematic Theology of the Christian Faith :  Dr. Robert L. Reymond

Obviously there is some psychological complexity here. When I first read that, I wondered what exactly that looks like. After watching Shutter Island, now I know.  Shutter Island and the Noetic Effects of Sin

Is the Abrahamic Covenant Conditional or Unconditional?

[Please note the date of this post. It does not necessarily reflect my most current views. See posts linked at the end for more consideration.]

I’ve been teaching a Wednesday night Bible study through the book of Genesis for about a year now. We’ve finally made it to Genesis 17 and the question has come up: Is the Abrahamic covenant (the covenant of circumcision, Acts 7:8) conditional or unconditional? This is not an easy question to answer, but it’s a very important one to answer. In a very helpful essay, Richard Pratt Jr. notes:

In recent years, it has become increasingly apparent that contemporary reformed theologians are taking different stances on whether the covenants God made with Abraham and David were conditional or unconditional. This is not to say that we have enjoyed complete unanimity on this and related matters in past centuries. Covenant theology has always been riddled with varying opinions. Yet, in our day, differences on this particular issue have so impacted other theological and practical dimensions of the Christian faith that they should no longer be ignored.

Details notwithstanding, two tendencies have emerged. On the one side, some theologians in our circles have argued that the covenants with Abraham and David were unconditional. That is to say, these covenants guaranteed future blessings unconditionally to Abraham and David.

On the other side, other theologians in our circles have argued that the covenants with Abraham and David were conditional. In this view, the future blessings of these covenants were gracious but in some ways dependent upon the condition of human loyalty.

God of Covenant

The reason it is so difficult to determine if the Abrahamic covenant is conditional or unconditional is because we seem to get two different answers from Scripture. In Genesis 15 God instructs Abram to cut animals in half and spread them out on the ground. This was a typical covenant ceremony wherein the covenanting parties then both pass through the parts of the animals, signifying that if either of them broke the covenant, they would be torn apart like the animals (take a look at Jeremiah 34:18, referring to the Mosaic covenant). However, in Genesis 15, Abram does not walk through the parts. Instead, in a vision, a flaming torch and a smoking fire pot (signifying God) pass through the parts. This would seem to communicate that Abram was not obligated to keep the covenant, that it was unconditional.

However, when we get to chapter 17, God tells Abram “As for you, you shall keep my covenant, you and your offspring after you throughout their generations (v9).” What does that mean? Well, in context, it is referring to circumcision:

10 This is my covenant, which you shall keep, between me and you and your offspring after you: Every male among you shall be circumcised. 11 You shall be circumcised in the flesh of your foreskins, and it shall be a sign of the covenant between me and you. 12 He who is eight days old among you shall be circumcised. Every male throughout your generations, whether born in your house or bought with your money from any foreigner who is not of your offspring, 13 both he who is born in your house and he who is bought with your money, shall surely be circumcised. So shall my covenant be in your flesh an everlasting covenant.

So it would seem that there is something required for Abraham to do. There is a condition. This is made very, very clear in the next verse: “Any uncircumcised male who is not circumcised in the flesh of his foreskin shall be cut off from his people; he has broken my covenant.” Verse 14 very clearly establishes that this covenant is conditional and that a failure to meet the conditions will result in being “cut off,” which means put to death (cf Exodus 12:15, 19; Leviticus 7:25, 27).

Pratt notes:

These two chapters are the only places where the term “covenant” (berith.) appears in the Abrahamic narratives, but they are very different from each other. On the one hand, Genesis 15:9-21 reports how Abraham killed animals in a ceremony of malediction and how Yahweh passed through the carnage to confirm by divine oath that Abraham’s descendants would certainly inherit the land of Canaan. On the other hand, in Genesis 17:9-14 the maledictory cutting ceremony of circumcision is required of Abraham and his descendants as a sign of their loyalty to Yahweh. These texts report truths about Abraham’s covenant in very different ways.

So what are we to conclude? I believe the analogy of faith provides us with helpful guidance. Chapter 1 paragraph 9 of the London Baptist Confession says:

The infallible rule of interpretation of Scripture is the Scripture itself; and therefore when there is a question about the true and full sense of any Scripture (which is not manifold, but one), it must be searched by other places that speak more clearly.

What we have is an apparent discrepancy between Genesis 15 and Genesis 17. One appears to say the Abrahamic covenant is unconditional, the other says it is conditional. How should we try to resolve the problem? Well, if we agree with the confession, then we should seek to answer the question using the passage that speaks most clearly. Genesis 17:14 is very clear. It is not possible to get a clearer answer to our question. Furthermore, the relevant part of Genesis 15 is a vision. A clear, explicit passage should guide our interpretation of a less clear vision – not the other way around, as is common.

So if Gen 17 is to guide our understanding of Gen 15, where does that leave us? How can we harmonize these two accounts? Well, it would seem we have two options:

1. Gen 15 and Gen 17 refer to two different covenants. This is the conclusion reached by Paul R. Williamson, for example: Abraham, Israel and the nations: the patriarchal promise and its covenantal development in Genesis
2. There is some other way of understanding the vision in Genesis 15 that does not lead us to conclude that the Abrahamic covenant is unconditional.

In my limited studies, I don’t think option 1) is an option. Pratt notes:

First, we should note that we are not dealing with two covenants made with Abraham. In Genesis 15:18 we read that “the LORD made a covenant with Abram,” or more literally “cut a covenant” (karath), a common way to speak of the initiation of a covenant. In Genesis 17:2, however, God said, “I will confirm my covenant,” using the Hebrew expression ve’ettenah>, meaning to confirm or establish what was already in existence. So, we find here not two covenants, but two facets or dimensions of God’s one covenant with Abraham, the latter being a confirmation and further explanation of the earlier.

That leaves us with 2). But what other meaning could the vision and ceremony have?

The Meaning of the Genesis 15 Vision

In short, I believe the vision means not that there are no conditions for its fulfillment that depend upon Abraham and his offspring, but that God promises to work in the lives of Abraham and his offspring to meet those conditions and thus bring about the fulfillment of the covenant promises.

For example, the fulfillment of God’s promises to Abraham clearly depend upon him having an offspring. If Abraham does not have an offspring, then the promises cannot be fulfilled. But remember what we read in Genesis 17. If Abraham does not circumcise himself then he will be cut off, killed. And the same goes for his offspring. If Abraham had failed to obey God in chapter 17, then it would have been impossible for God’s promises to be fulfilled. If Abraham and his offspring are killed, then so is the hope of the Messiah.

The fulfillment of God’s promise depends upon the obedience of Abraham. But Abraham did obey. In an act of faith, he circumcised himself at 99 years old. Abraham obeyed because God gave him a new heart that was willing to obey.

If we look at the nation of Israel, we see a similar dilemma. If the nation is destroyed, then so is the hope of the Messiah. And yet God warns in Deuteronomy 28 and elsewhere that if Israel does not obey, they will be destroyed. In Ch. 28 we read a lengthy list of blessings and curses for obedience and disobedience to the Mosaic law. Numerous times we read that “all these curses shall come upon you and pursue you and overtake you till you are destroyed” (v45), “until he has destroyed you” (v48), “until you are destroyed” (v51), “until they have caused you to perish” (v51), “until you are destroyed” (v61).

So, again, the fulfillment of God’s promise depends upon the obedience of Abraham’s offspring. If they disobey, God will curse them until they are destroyed, and with their destruction comes the destruction of the hope of the Messiah. How is this dilemma handled? The same way it is handled in Abraham’s account in Genesis 17.

Take a look at Deut 30:1-10. Here (and in ch 28 to an extent), Moses is not simply giving warnings, but is instead prophesying of what will happen.

1 “And when all these things come upon you, the blessing and the curse, which I have set before you, and you call them to mind among all the nations where the LORD your God has driven you, 2and return to the LORD your God, you and your children, and obey his voice in all that I command you today, with all your heart and with all your soul, 3then the LORD your God will restore your fortunes and have compassion on you, and he will gather you again from all the peoples where the LORD your God has scattered you. 4 If your outcasts are in the uttermost parts of heaven, from there the LORD your God will gather you, and from there he will take you. 5And the LORD your God will bring you into the land that your fathers possessed, that you may possess it. And he will make you more prosperous and numerous than your fathers.

So the destruction of Israel will be prevented when Israel turns to the Lord and obeys him. But notice how this will happen. In 30:6 we read: “And the LORD your God will circumcise your heart and the heart of your offspring, so that you will love the LORD your God with all your heart and with all your soul, that you may live.”

This is how God can ensure that His promise will come to pass. He will cause the elect to fulfill the conditions necessary to the fulfillment of His promise to Abraham. Note that this is not the same thing as saying the Abrahamic covenant is unconditional because it’s conditions were fulfilled by a mediator (like the New Covenant).

So we see the obedience of Abraham and his offspring as a condition for the fulfillment of God’s promise to Abraham, and we also see that God will provide the necessary cause of that obedience: a new heart. I believe this is what the vision in Genesis 15 is promising.

Further support for this claim is found in Deut 28:26. In the midst of reciting the curses upon Israel, we read:

25 “The LORD will cause you to be defeated before your enemies. You shall go out one way against them and flee seven ways before them. And you shall be a horror to all the kingdoms of the earth. 26 And your dead body shall be food for all birds of the air and for the beasts of the earth, and there shall be no one to frighten them away.

A parallel warning is found in Jeremiah 7:33

30″For the sons of Judah have done evil in my sight, declares the LORD. They have set their detestable things in the house that is called by my name, to defile it. 31And they have built the high places of Topheth, which is in the Valley of the Son of Hinnom, to burn their sons and their daughters in the fire, which I did not command, nor did it come into my mind. 32 Therefore, behold, the days are coming, declares the LORD, when it will no more be called Topheth, or the Valley of the Son of Hinnom, but the Valley of Slaughter; for they will bury in Topheth, because there is no room elsewhere. 33 And the dead bodies of this people will be food for the birds of the air, and for the beasts of the earth, and none will frighten them away. 34 And I will silence in the cities of Judah and in the streets of Jerusalem the voice of mirth and the voice of gladness, the voice of the bridegroom and the voice of the bride, for the land shall become a waste.

In both instances, the warning is that when Israel disobeys, there will be no one to frighten away the birds from eating their corpses. What is this referring to? What does it mean for someone to frighten away the birds? Where else do we see this imagery in Scripture? Genesis 15:11 “And when birds of prey came down on the carcasses, Abram drove them away.”

Abraham, or rather, the promise God made to Abraham, is what fightens the birds away. God’s promise to Abraham prevents Israel from being utterly destroyed. But how exactly does it prevent Israel from being destroyed? How does Abraham frighten away the birds? These passages say that if they disobey, there will be no one to frighten the birds away. So again, we see that obedience is a crucial condition for the fulfillment of God’s promise to Abraham. And thus, God works obedience in the elect to bring about the fulfillment of His promise to Abraham. Obedience frightens the birds away.

Take note of Leviticus 26:

40″But if they confess their iniquity and the iniquity of their fathers in their treachery that they committed against me, and also in walking contrary to me, 41 so that I walked contrary to them and brought them into the land of their enemies—if then their uncircumcised heart is humbled and they make amends for their iniquity, 42 then I will remember my covenant with Jacob, and I will remember my covenant with Isaac and my covenant with Abraham, and I will remember the land.

The condition for God remembering his covenant with Abraham is the circumcision of Israel’s heart – something only He can do. That is the meaning of the vision in Genesis 15. It does not mean there are not conditions to be met by Abraham’s descendants. It means God will cause them to obey and meet those conditions. And I will add that He does that by means of the new covenant. Only the new covenant provides the regeneration necessary for faith and obedience. Witsius notes, regarding the Mosaic covenant:

Nor Formally the Covenant of Grace: “Because that requires not only obedience, but also promises, and bestows strength to obey. For, thus the covenant of grace is made known, Jer. xxxii. 39. ‘and I will give them one heart, and one way, that they may fear me for ever.’ But such a promise appears not in the covenant made at mount Sinai. Nay; God, on this very account, distinguishes the new covenant of grace from the Sinaitic, Jer. xxxi. 31-33. And Moses loudly proclaims, Deut xxix. 4. ‘yet the Lord hath not given you a heart to perceive, and eyes to see, and ears to hear, unto this day.’ Certainly, the chosen from among Israel had obtained this. Yet not in virtue of this covenant, which stipulated obedience, but gave no power for it: but in virtue of the covenant of grace, which also belonged to them.”

http://www.reformationtheology.com/2008/11/the_mosaic_covenant_works_or_g.php

Conclusion

Though the thesis of Pratt’s essay is slightly different from mine, he concludes:

To reinforce what we have seen at this point, we should mention that the language of conditionality is the same in all three covenants God made with Israel. As we have already seen, in Genesis 17:9 God told Abraham and his descendants to “keep my covenant” by observing circumcision. This expression also appears in the Mosaic covenant when God says to Israel in Exodus 19:5 “and you must keep my covenant”. In the same way, in Psalm 132:11 the Davidic line is also required to “keep my covenant.” This shared language makes it clear that the fundamental dynamics of all three covenants are the same…

…In my estimation reformed theologians who argue that the Abrahamic and Davidic covenants were unconditional are fundamentally misguided. Although we may distinguish the central concerns of Abrahamic, Mosaic and Davidic covenants from each other and from other biblical covenants, there is little justification for arguing that the difference is conditionality and unconditionality.

However, Pratt makes a very serious error in his essay. He makes a number of helpful observations about the Abrahamic covenant, including observations about Royal Land Grant and Suzzerain-Vassal Treaties, so I encourage you to read it. But after establishing that the Abrahamic, Mosaic, and Davidic covenants were conditional, he erroneously applies these conclusions to the New Covenant, because he believes that the New Covenant is only an historical administration of the covenant of grace, of which the Abrahamic, Mosaic, Davidic, and Noahic are all parts or dispensations. He therefore concludes that our salvation is conditioned upon our obedience:

“a measure of conformity to God’s standards of holiness is a necessary condition for receiving salvation…the New Testament makes sanctification a necessary condition for eternal salvation…faith that justifies has always resulted in meeting the requirements of good works.”

Pratt’s error is that he lumps in the New Covenant with all the others and fails to recognize it’s utter distinctness, it’s utter newness. Furthermore, he fails to recognize that the New Covenant, working throughout the OT, was the means God used to fulfill His promise to Abraham in Genesis 15. The Abrahamic Covenant was not the New Covenant/Covenant of Grace. See how John Owen explained this:

“When we speak of the “new covenant,” we do not intend the covenant of grace absolutely, as though it were not before in existence and effect, before the introduction of that which is promised here. For it was always the same, substantially, from the beginning. It passed through the whole dispensation of times before the law, and under the law, of the same nature and effectiveness, unalterable, “everlasting, ordered in all things, and sure.” All who contend about these things, the Socinians only excepted, grant that the covenant of grace, considered absolutely, — that is, the promise of grace in and by Jesus Christ, —was the only way and means of salvation to the church, from the first entrance of sin.

But for two reasons, it is not expressly called a covenant, without respect to any other things, nor was it called a covenant under the old testament. When God renewed the promise of it to Abraham, he is said to make a covenant with him; and he did so, but this covenant with Abraham was with respect to other things, especially the proceeding of the promised Seed from his loins. But absolutely, under the old testament, the covenant of grace consisted only in a promise; and as such only is proposed in the Scripture,

-Exposition of Hebrews 8:6″

Abraham’s disobedience would cut him off from the covenant of circumcision. Our disobedience can never cut us off from the New Covenant because our obedience is found in our mediator Jesus Christ.

For I am sure that neither death nor life, nor angels nor rulers, nor things present nor things to come, nor powers, nor height nor depth, nor anything else in all creation, will be able to separate us from the love of God in Christ Jesus our Lord.

See also

• Additional Answers to Founders Conference Q&A (Is the Abrahamic Covenant “of works”?)
• Galatians 3:16
• Some Disagreement with Coxe on Galatians 3:17