I think the issue here is that the Law was given to instruct how to do what is righteous in accordance with God's righteousness and how to avoid doing what is unrighteous, but it was never given for the purpose of making us righteous through obedience to it, perfect or otherwise. For example, the Law instructs us to help the poor, and by doing so we are acting in accordance with and reflecting God's righteousness to the world, but no amount of helping the poor will ever cause us to become righteous because the one and only way that there has ever been to become righteous is by grace through faith, and by the same grace through the same faith we are trained and required to be careful to act in accordance with God's righteousness. In other words, we are required to follow God's instructions for how to do what is righteous because we have been declared righteous, not in order to become righteous. The Law reveals our unrighteous acts not in order to show us that no one can be righteous through their works and efforts, that the Law cannot justify sinners, or it can only condemn them, but rather to show us where we need to repent and turn back to God by grace through faith. A relationship with Christ has always been the goal of the Law since the day it was given to Moses and there has never been condemnation for those who are in Christ. According to Jude 1:4, those who ungodly pervert grace into a licence to sin, or in other words, a licence to transgress God's Law.
Lutherans recognize three uses of the Law:
"Since the Law of God is useful, 1. not only to the end that external discipline and decency are maintained by it against wild, disobedient men; 2. likewise, that through it men are brought to a knowledge of their sins; 3. but also that, when they have been born anew by the Spirit of God, converted to the Lord, and thus the veil of Moses has been lifted from them, they live and walk in the law," - Solid Declaration of the Formula of Concord, VI.1
Explained more fully:
1. The Law curbs disobedience, that is, to declare what is good and right; the Law says "do this" and "don't do this" concerning righteousness and unrighteousness.
2. The Law is a mirror that reveals out own unrighteousness and sin, as we behold the righteous commandments of God we see our own failure to rightly obey them, and so the Law reveals our own sinfulness, that as the Apostle says, "All have sinned and fallen short of the glory of God" and "There is none righteous, no not one", we have fall fallen away, gone our own way, under sin, death, and disobedience. Which is why no one can be righteous through their works and efforts, the Law cannot justify sinners, it can only condemn them.
3. The Law exists that we, born again of God, might walk in new obedience.
The "under grace, not Law" is probably trying to articulate what Lutherans mean by the Second Use of the Law; but where it can be dangerous is thinking that the Second Use only deals with the unbelieving--that the believer, having been freely justified and made new in Christ by the Holy Spirit no longer needs to worry about the Law and what it says. This is dangerous because it can lead to Antinomianism, in which the Christian might be tempted to say, "Since grace abounds, let us go on sinning." If not explicitly, at least implicitly; or at the very least imagine himself or herself as no longer a sinner who, by his or her own efforts and failures to do what they ought, no longer has the command of God showing them what is right and that they do not do it--they therefore no longer grieve over their sins and dwell in repentance believing themselves somehow "more spiritual"--and thus is borne licentiousness, pride, and vainglory.
Lutherans emphasize, quite strongly, the paradoxical dichotomy that we are simul iustus et peccator, we are both saint and sinner. We are saints because of the new man, our regeneration from God by which we are new creatures, born again, renewed, with our sins freely forgiven, and alive to God in Jesus and His imputed righteousness by the power of the Spirit; but we are sinners because the old man continues to dwell in our members, the flesh is still clinging to us, and we sin; as the Apostle says, "The good that I want to do I do not do, and the evil I do not want to do I do"--the struggle between the old man and the new is a defining characteristic of the Christian life. Which is why repentance is so important, which is why the preaching of the Law and the Gospel, rightly divided, is so important. We preach the Law in order to crucify and mortify the flesh, that we might drown the old man in repentance; and we preach the Gospel that the new man might live, for our sins are forgiven and we are freely justified, being alive to God, and having all the promises of God freely by the Gospel.
The new man is free from the condemnation of the Law, but the Law remains for the new man the good works which we are called to do, for we have been created for good works in Christ Jesus (Ephesians 2:10); but it is not works of the law that justify us, only the grace of God justifies us as we have been saved by grace alone, through faith which is God's gift, apart from ourselves, not by our own efforts so that no one may boast (Ephesians 2:8-9). As such the third use of the Law does not abrogate the second use; the Law condemns sinners and the Law teaches the regenerate how they ought to live; and because we are sinner-saints we will strive to live in accordance to God's will to the service of our fellow man though, also, regularly fail to be righteous as we ought; therefore it is only the grace of God that saves us, and gives us life, and in which we can hope; never hoping or trusting in our efforts--and still called to live faithfully and obediently for the good of our neighbor according to God's will and command (even though we fall). There is grace for the broken, freedom for the captive, and resurrection for the dead.
-CryptoLutheran
How were the Old Covenant believers saved?
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