Intelligence

A Dicey Decade: 10 Years After the Financial Crisis

Vested

Jacqueline Gogel

Vice President

There were warning signs earlier. But August 9, 2007, sounded the alarm on the financial crisis. That day, French bank BNP Paribas basically told investors that they couldn’t take out their money. The bank had invested those funds in subprime mortgages and couldn’t determine what those investments were worth anymore.

On August 16, 2007, another alarm. Fitch Rating cut the credit rating of Countrywide Financial, a giant mortgage lender. January 11, 2008, Bank of America agreed to buy Countrywide for $4 billion.

The shit, as they say, hit the fan.

Bank of America also bought Merrill Lynch; Wells Fargo bought Wachovia. Washington Mutual Bank failed, its assets sold to JPMorgan Chase. The government took over Fannie Mae and Freddie Mac, and offered a bailout to American International Group. The Federal Reserve guaranteed Bear Stearns assets in a government-sponsored sale to JPMorgan Chase. Other institutions weren’t saved. Lehman Brothers, American Home Mortgage Investment and subprime mortgage lender New Century Financial filed for bankruptcy.

Huge financial behemoths crumbled under the greed of a small group of bad actors working within them, and the poor, risky underwriting that resulted. Their names have largely evaporated into history.

What mammal-named brand was acquired by JPMorgan Chase in the midst of the 21st century global financial crisis? reads a Trivial Pursuit 2050 question.

Also evaporated: individuals’ assets. In January 2014, the New York Times covered three economists’ worthy attempt at quantifying the cost of the crisis. This paragraph is telling:

At a bare minimum the crisis cost nearly $20,000 for each American. Adding in broader impacts on workers’ well-being — an admittedly speculative exercise — could raise the price tag to as much as $120,000 for every man, woman and child in the United States. With this kind of money we could pay back the federal debt or pay for a top-notch college education for everyone.

Twenty thousand dollars per person is a hefty sum. It was a crisis, so one would assume the cost per capita is high. It’s the following sentences that seem particularly telling in retrospect. “The broader impacts on workers’ well-being…” There were no headlines about bread lines during this century’s crisis, but there were stock images of job fairs; protests about and research into the growing disparities between income groups; a troubling boom in racism and contempt for the poor.

“With this kind of money…” The underlying sentiment of the sentence is sweet, if naive. We could have balanced our national books. We could have paid to better the entire American populace. Could have, would have, should have. If the crisis was a whopping, bruising, swift kick in the collective American ass, at least it was a teachable opportunity.

So what then have we learned? What’s evolved in the last 10 years?

Governments tightened bank regulations, mandating that institutions hold more capital to cover potential losses. Eight years into a bull market, Congressional leadership wants to revisit some of those initiatives their predecessors enacted to reduce the chances of another financial crisis or deal with one when it occurs.

Regulators sought to protect consumers. In the United States, the Consumer Financial Protection Bureau was authorized by Dodd-Frank and is responsible for consumer protection in the financial services. The bureau’s priorities include mortgages, credit cards and student loans, all debt. The CFPB was established as an independent agency, but the U.S. Court of Appeals is currently reviewing this status.

Low is the new normal for interest rates. In August 2007, the Federal Reserve benchmark interest rate stood at 5.25 percent. Today, it’s 1.25 percent. Low interest rates encourage borrowing and help those with mortgages and other debts. For those trying to save money, low interest rates hurt. This shift may further exacerbate wealth disparity.

Debt remains the American darling. Though the total U.S. consumer debt balance dipped during the recession, at the end of Q1 2017 it was $12.73 trillion, roughly the same as Q3 2008, when it was $12.68 trillion. What’s changed is the composition—student loans now account for 10.6 percent, up from 3.3 percent in 2003. Meanwhile, federal debt has more than doubled – from $8.95 trillion in 2007 to a budgeted $20.4 trillion in 2017.

Americans say all is honky-dory. According to a Pew Research Center study, nearly six-in-ten Americans (58 percent) believe the economic situation in the U.S. is good — this compared to 2007, when, before the economic downturn, 50% said conditions were favorable. There’s a lot to be optimistic about. The U.S. economy has experienced roughly 80 months of job growth and the unemployment rate was only 4.9% in 2016. The last peak in the Dow Jones Industrial Index was October 2007, when it surpassed 14,000. This month, it passed 22,000.

What goes up must come down. We’re 102 weeks into a bull market. The average bull market is 57 weeks. The longest was during the 90s, in the lead up to the dot-com crash. Additionally, despite global economic optimism, new societal shifts may create a domino effect that poses risks to markets. The Bank for International Settlements, which serves central banks, noted in a June report that rising inflation, weaker consumption and investment, and increased trade protectionism may threaten global economic recovery.

And so we keep on.

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