Nine years after the so-called Great Recession of 2008, many people who were deeply affected by the financial crash still do not understand quite how it all went wrong. The collapse of Lehman Brothers made headlines around the world, and yet only a handful of those reading the newspaper knew exactly what had caused a major American bank to fail. It is quite complicated, and to some degree, the banking industry has partially escaped a potentially greater punishment exactly because the court of public opinion was not sufficiently informed to pass judgement. Perhaps this paradigm was the the thing that prompted Henry Ford to say that ‘it is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.’ The actions of bankers all over the world prior to the recent financial crisis seem to bear out his words. The reason that there still has not been a revolution is because the people of the nation still do not understand how the banking and monetary system.
Just as in a Shakespearean tragedy, the action that precipitated the fall can be traced to a single, overarching motive. In this case it was greed. As difficult as it is to acclimate, the truth is that major international banks gambled with the trust that people put in them, and therefore gambled with their livelihoods. One specific instance can be seen in how banks tried to not only manage the risk of something like a mortgage or a student loan, but attempted to capitalise on it. In the decades before the financial crisis, someone who borrowed money would slowly pay it back to the person or company from whom they had borrowed it. Of course, they would be charged interest but it would usually not be an egregious amount. This was a good system because it allowed average working people to buy a house while also keeping the banks in business. Over time, interest was not enough of an incentive to induce the banks to lend so they started to take greater risks to earn greater rewards.
The banks which had issued the loans or mortgages, perhaps because they felt they were somewhat risky, did not want to be the ones to incur the loss, so they sold the loans to investment banks as a form of insurance. Investment banks bought many, many loans and mortgages and collected them into derivatives called collateralised debt obligations. The investment banks sold these packages to investors so when someone paid the mortgage on their house, that money was now going to those wealthy investors rather than the bank with whom they had taken out the loan. Of course the problem now is no different than it was before except instead of the original bank being at risk if the loan or mortgage was not repaid, it was the investors. To protect themselves from this risk, they took out insurance on the failure of the loans. The insurance company would pay off the investors if the mortgages became worthless. In exchange, they accepted a type of premium. However, the greed of the insurance companies did not end there. They also sold insurance to speculators who would bet that such mortgages would fail. These sorts of deals were completely unregulated so the insurance companies did not have to set aside any funds to insulate themselves from the reality that they would actually have to pay out.
When the housing market in particular began to fail, and regular people started to default on their mortgages, the investors who had bought these loans looked towards the insurance companies, to whom they had been paying a premium, to bail them out. At the same time, the speculators who had bet against the American economy sought out the money that they believed they had earned. Since the insurance company had not anticipated that they would actually have to meet their obligations, they simply did not have the money to pay off those to whom it was promised. If this farce was not irritating enough, the bankers at these insurance companies made immense amounts of money and were granted bonuses too.
In any case, private citizens that are necessarily part of the modern economy cannot help but be implicated by this sort of behaviour: the financial crisis of 2008 hurt everybody and its effects are still being felt. For example, in December 2007, just before the crisis, the unemployment rate was at a reasonable 5%. By October 2009, it had doubled so that one in every ten people were out of work. As of last month, it was at 4.7%. Either way, the fact remains that any responsible person needs to look after themselves. It is clear that the bankers do not have our best interests in mind. President Obama tried to change this when he passed the 2010 Dodd Frank Act. His successor, Donald J Trump, has described it as horrendous and wants to repeal many of the regulations so that banks can start helping create jobs again. In a climate where greed still seems to go unchecked and the bankers have not really felt the consequences of their avarice, it is common sense to act in your own best interests to shield yourself from any more potential crises. Here are a few ways of doing that:
It may seem counterintuitive, but saving money may not actually be the best idea. If you slowly accumulate a fund that you can use in the event of another financial crisis, you may find that when that crisis hits, the money that you spent years working hard for will suddenly not be worth nearly as much as it had. The depreciation of currency occurs in every economy to one degree of another. One stark example if Germany’s hyperinflation of the 1920s which led their currency, the Mark, to become practically worthless. Notes for once immense amounts were so useless that they were cheaper than wallpaper so people decorated their houses with them. It became absurd. One required whole suitcases of notes to buy a loaf of bread. That sort of inflation will likely not occur in Germany again, but your money can depreciate substantially in a financial crisis so simply saving it is just inviting it to lose its value when you need it most. It is old advice but it remains true: the most sensible thing to do is invest it in a diverse portfolio. This ensures that you will not lose everything in the failure of one sector of the economy. If you spread out the risk, you have a greater chance of weathering a potential storm.
A reality for many people now is that as a result of the financial crisis their credit ratings are not as great as they would like. If you missed loan payments, or even filed for bankruptcy, then your credit rating is likely to be low for quite a long time to come. These sorts of events are not easily forgotten by the people who will be lending you their money. However, you can slowly rebuild their trust and the way of doing it is simple: meet your obligations on time and in full. This can be both large and small debts, from the mortgage on your house to the minor purchases on your credit card. Proving that you can handle these things will encourage lenders to give you a more generous interest rate in the future.
Next, you should take advantage of the protections granted to you. Going into work every day, whatever you do, can potentially be dangerous. Suffering an injury in the course of your duties is not within the reasonable expectations of your employer. Consulting a personal injury lawyer is a wise thing to do. If you are injured and unable to work, you still need to be able to support yourself. Besides, the law is clear and if your employer allowed you to work in an environment that was unsafe, they should be held accountable. The financial aspect of this accountability stems from your potential lost earnings. In today’s economy, failing to make a living is simply not an option.
Finally, and although it can seem rather unfair, the best way to improve your personal finances and potentially insulate yourself from a future crisis is to have as few debts as possible and to be as self-reliant as you can. If your livelihood is intertwined with the actions of self-interested bankers, you are probably going to be stung again when their greed gets the better of them once more. This could mean working more than one job until you pay off what you owe, or reassessing your spending to allow you to be more versatile in the event of another crisis. The banking and monetary systems are still poorly understood which sometimes seems ironic since everybody is subject to them. Correcting the mistakes of bankers is the responsibility of politicians. All that you can do is try to prepare yourself if something goes wrong again in the future.