The bankruptcy filing of Lehman Bros. 10 years ago this month signaled that an already weak economy was in deep trouble.
Caught in the storm were homeowners who found themselves underwater on their mortgages. The stock market plunged, leaving investors frightened about losses in their retirement savings. And the economic collapse exposed how badly people were weighed down by debt.
What follows are observations from financial, housing and consumer experts on what happened and how people can protect themselves before the next economic crisis hits.
Q: What was the impact of the financial crisis on homeowners, investors and consumers?
A: Jesse Van Tol, CEO of the National Community Reinvestment Coalition: “If you were a homeowner during the Great Recession, then almost all your wealth was in your home. For the black community — the most targeted for subprime mortgages — the foreclosure crisis sank the rate of black homeownership to just over 40 percent. That’s a 50-year low and pretty much unchanged from the homeownership rate before the civil rights movement. Homeownership is the foundation of wealth building in America. Without it, the racial wealth gap is growing.”
Jon Stein, co-founder and CEO, Betterment: “For a lot of folks, it was a scary experience to see their potential retirements disappear in such a short time. We surveyed U.S. consumers on the crisis and, of those who said they were affected, 65 percent said they still have not fully recovered from its effects even a decade later.”
Caroline Ratcliffe, co-director of the Urban Institute’s Opportunity and Ownership Initiative: “Consumers lost vast amounts of wealth as a result of the Great Recession, with the typical family losing 40 percent of their wealth between 2007 and 2010. And family wealth still hasn’t recovered, except for the wealthiest families. This wealth drop is significant, as wealth provides both insurance against tough times and a path toward mobility and opportunity.”
Don Blandin, president and CEO, Investor Protection Trust: “People with 401(k)s and IRAs lost approximately $2.4 trillion in just the last two quarters of 2008. Many, including much of the millennial generation, also lost faith in the stock market and are hesitant to invest or buy a home.”
Q: What personal responsibility do homeowners, investors and consumers share in the financial crisis?
A: Former secretary of labor Robert Reich: “You might say [people] shouldn’t have been lured into buying homes they couldn’t afford, but they were systematically misled by predatory lending and real estate practices. Most small investors had no idea what risks they were taking on. Consumers went deeply into debt in the years leading up to the 2007-2008 crash. You could say they were living beyond their means. But you might also conclude that their means didn’t keep up with what a growing economy should have been able to provide them. After all, most of the economic gains went to the top. Had the gains been distributed slightly more equitably, consumers wouldn’t have had to go into such debt.”
Q: What lessons should we learn as we mark the 10-year anniversary of the financial crisis?
A: Alys Cohen, attorney, the National Consumer Law Center: “The crisis was created by deregulation and companies acting for their own benefit at the expense of consumers, communities and the market as a whole. Yet, consumers can learn some lessons for the future. First, they should look at their home equity as a last resort, because, for many, it is their only source of savings, retirement funds and personal wealth. More generally, people should hold on to the wariness about credit and debt that came with the crisis and resist the onslaught of offers to overextend themselves. Just because a company is willing to make you a loan doesn’t mean that it is affordable for you or a good idea.”
Ratcliffe: “Our research shows that families with $250 to $750 in savings are less likely [than those with less saved] to miss a housing or utility payment, be evicted or receive public benefits after an income drop. Of course, having more savings is better, but building even a small nest egg helps reduce economic hardship.”
Stein: “According to our survey, 85 percent of Americans believe there will be another crisis within the next 10 years, and 39 percent think big banks will most likely be the cause. Wall Street is seeing record revenue right now and, at the same time, regulations to protect investors like the fiduciary rule have been struck down. The financial sector needs to continue moving in a direction that gives consumers a fair chance at reaching their financial goals.”
Many experts are already warning another financial crisis is inevitable. But if you study the past, you’ll have a better chance of weathering the next storm.