The Financial Crisis Was Caused by You, Not Big Banks

Posted in Banking , Financial Literacy • May 22, 2012

financial crisis
The financial crisis of 2008 is one of the most memorable economic episodes in United States history. The aftermath was nothing short of devastating for hard-working Americans who lost their jobs and homes after some of the world’s top banking companies fell apart at the seams.

But unlike what most people think, the crisis can’t be blamed on Wall Street. Everyday borrowers have to accept responsibility for America’s downfall because, whether you like it or not, the financial crisis was caused by you, not big banks.

Remembering the Financial Crisis

Much like the Great Depression, the financial crisis will forever be remembered as one of the most impactful moments in history. The event not only hurt the United States, but left residue around the world as top companies and banks fell apart.

While the crisis was a long time in the making, its start can be pinpointed to the deregulation of derivatives — complex investment packages — in the year 2000. Wall Street firms were able to create enticing packages for investors that made making money, whether from straightforward investments or bets against losses, seem essentially foolproof.

Around the same time subprime mortgage lending became popular, prompting the housing industry to take off like never before. Neighborhoods around the country began sprouting with lovely — and expensive — homes that needed homeowners, whether they could afford them or not.

Adjustable rate mortgages were popular options for lenders who wanted to get borrowers with not-so-great credit and low-to-mid incomes into homes. By making it easier for people to sign mortgage loans, lenders were able to make tons of money on the debts — especially when monthly mortgage payments would eventually skyrocket by hundreds or thousands of dollars.

What’s interesting is that lenders and members of Wall Street were aware that many borrowers wouldn’t be able to keep up their payments.

The solution was collateralized debt obligations (CDOs) — complex derivatives consisting of bank loans (auto, student, personal, mortgage, etc.) and other types of debt that made it possible for lenders to get rid of these debts, rather than hoping borrowers would repay their loans. Investors who purchased these CDOs didn’t realize that the mortgage loans included would soon default in droves. But even if they had known, they wouldn’t have worried because insurance firm AIG was to cover the losses.

Shockingly, by 2007 a large number of mortgage loans were already headed toward default. But it wasn’t until 2008 that millions more homeowners defaulted on their loans, prompting a domino effect of CDO losses, which AIG failed to cover. At the same time, firms like Lehman Brothers fell apart.

Just like that, the U.S. economy began to crumble and not even the government and its attempt to bail out major companies could stop the major financial turmoil that rest ahead.

Economic Meltdown and a Lack of Financial Literacy

The economic meltdown in 2008 surprised a lot of people who thought they’d made the right decision when taking on their mortgage loans prior to the crisis. This is due to the fact that very few people in the United States receive any type of financial education that can assist them in making responsible choices.

Some statistics from the 2012 Consumer Financial Literacy Survey, released by the National Foundation for Credit Counseling (NFCC), speak to the lack of financial literacy in the nation:

  • Only 43 percent of adults have a budget and keep close track of their expenditures.
  • 22 percent don’t have a good idea of how much they spend on housing, food and entertainment.
  • 33 percent, or 77 million American adults, don’t pay their bills on time. This is an increase from 28 percent in 2011.
  • 40 percent of adults say they save less now than last year.
  • 55 percent of adults have not reviewed their credit score in the past 12 months, while 62 percent haven’t looked at their credit report.
  • 86 percent of adults feel there are circumstances that may justify defaulting on a mortgage, no matter the consequences.
  • 80 percent of Americans admit that they could benefit from advice and answers to everyday financial questions from a professional.

Even more astonishing is that 2011 stats from the NFCC found that 64 percent of Americans don’t even have $1,000 in their savings accounts to cover emergency expenses. Most people don’t know to — or don’t know how to — create this type of financial cushion.

Don’t believe that we as a country lack financial education? Well, think about how much you really know about the bank lending process. Can you say you truly understand how to read your credit report? Do you know your debt-to-income ratio? Can you estimate how much money you need to retire?

If you can’t answer these questions confidently, you’re not alone. Most Americans were never given a financial literacy course by the time they reached adulthood, so they have jumped out into a financially-driven society ill-equipped.

Unfortunately, when experts question what caused the financial crisis, you may not want to admit it, but the answer is you — or anyone who went out and borrowed loans they couldn’t afford. With help from lenders who made it possible to purchase unaffordable homes, you contributed to the economic meltdown.

Taking Steps to Obtain Financial Education

The good news is you don’t need to feel guilty for your lack of financial literacy. Here are a few resources to get you started on the right path:

For adults:

  • 360 Degrees of Financial Literacy: This free program from the American Institute of CPAs aims to help Americans understand their personal finances through every stage of life.
  • Smart About Money: This program, offered through the National Endowment for Financial Education, teaches practical steps to get smart about money, including getting out of debt, budgeting and setting financial goals.
  • Free online classes: Top universities like Yale, MIT and Purdue offer free online classes or past curriculum to anyone who is interested in advancing their financial literacy.

For children and teens:

  • Young Americans Center for Financial Education: This bank, located in Denver, CO, is an amazing resource for providing children under age 21 with financial education. The bank offers checking and savings accounts, as well as loans, CDs and credit cards for children.
  • Junior Achievement: Junior Achievement is a nonprofit organization that places a huge focus on personal finances. Students at all grade levels can participate in the various programs that help develop financial literacy.
  • DECA: DECA is an international association that prepares students to become leaders and entrepreneurs in marketing, finance, hospitality and management. High school and college students are encouraged to participate.

States are also taking steps to push personal finance objectives. According to the National Council for Economic Education, as of 2011, 36 states have personal finance standards or guidelines that are required to be implemented by districts.

However, there’s still work to do as only 14 of those states require a course in personal finance content to be offered in high schools. And currently, only 13 states require students to take them to graduate.

In a capitalistic society that places a huge focus on money and credit, it’s critical that you work to improve your own financial literacy. This way, you will know how to gauge the affordability of a loan, even if a bank insists you qualify.

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  • MarkWest

    I agree with you that Americans probably don’t have the best financial literacy, and, to be frank, that’s what your article is really about. To say that the average American and his/her financial illiteracy is what caused the financial crisis, though, is nothing short of insulting. If people bought homes they couldn’t afford, it was because the mortgage companies allowed them to think it would be possible for them to do so. Your own words about adjustable rate mortgages (something the mortgage companies pushed, not the buyers) prove this: “lenders wanted…to get borrowers…into homes.” Contrast that attitude with today’s attitude by mortgage companies, where it’s very difficult to qualify, and the question has to be asked: why weren’t mortgage companies this cautious and restrained back THEN? Potential homeowners aren’t holding a gun to the poor mortgage companies’ heads and demanding that they get the mortgage they want. They go through hoop after hoop to see if they qualify, and who does the qualifying? The mortgage company. To continue disagreeing with your flawed assessment, your undocumented statistic that 86% of people in this country believe it’s ok to walk away from a mortgage, no matter the consequences, is purely laughable. That means almost 9 out of 10 people think such an action is ok whereas, in reality, I personally know no one who believes such an action is ok. “40% of people save less now than last year.” Wow; what a revelation. I guess it’s because all of our salaries have been cut, making it harder to do anything. I know, I know: you’re trying to make the point that they’re not putting money away as much anymore because their budgets aren’t allowing it with the decrease in pay, but, again, to draw a line from average Americans needing more financial restraint to their causing the recession is just not even believable. So all those big banks who were messing around in derivatives and didn’t even know if they had toxic assets on their books is the average American’s fault, too? Give me a break, lady.

  • Charlie O

    I agree, they didn’t have to take the loans. They got robbed without a gun.The Love of Money,is a powerful tool.I can’t feel sorry for a lot of defaulted borrowers, because they knew they were incapable of paying their mortgages off.

  • http://www.gobankingrates.com Stacey Bumpus

    @MarkWest. Thanks for your response. I understand your position in this issue. Anyone who has been directly or indirectly impacted by the financial crisis, whether they’ve lost jobs, homes, cars, or any other form of financial security, should feel this way. But as you acknowledged, this article is about helping people avoid becoming victims of their own financial illiteracy.

    Refer to my statement: “With help from lenders who made it possible to purchase unaffordable homes, you contributed to the economic meltdown.” I acknowledge that we share the responsibility.

    Yes, the lenders absolutely convinced borrowers to sign on the dotted line. And yes, no borrowers pointed guns at lenders. But where is evidence that lenders pointed guns at borrowers to make them sign on the dotted line?

    This is where financial literacy becomes important. Lenders made borrowers believe they could afford the homes. But if Americans were taught to understand mortgage loans, they hopefully would not have agreed with those predatory lenders.

    I think we should take responsibility for making better financial decisions. Mortgage companies always look out for themselves, so of course they’re stricter now than they were back then. Wall Street investors took steps before the financial crisis to protect themselves as well, placing bets on soon-to-default loans in hopes of earning huge returns in the complex derivatives you mention.

    When will we take steps to protect ourselves? We were taken advantage of, but we don’t have to suffer the same fate in the future.

    I appreciate your passionate response. We wanted to get a discussion going on this issue, so I’m glad you shared your thoughts.

    @Charlie O

    I actually knew a few people who absolutely were aware that they could not afford the homes they purchased. One person purchased a $200,000 home on a $35,000 income. She said she wanted to live the good life while she could. I do feel sorry for many who really didn’t know they couldn’t afford their homes, but as you said, there are others who were well aware of their decisions.

    Regards,
    Stacey

  • Tom Wilkinson

    I believe that there is plenty of blame to go around: Buyers with unrealistic expectations, realtors anxious to make bigger commissions on pricier homes, lenders making more by lending on expensive homes, appraisers jacking up the estimate of a home’s value to please the lenders and the realtors who hire them. But in the end, it was the lender’s underwirters who bear the most blame for this disaster. They are the gate keepers, the ones who review your income statements, tax returns, paycheck stubs, bank statements, and all the other financial documentation a borrower is supposed to submit. Certainly they can’t know whether every appraisers estimate of value is correct, but they certainly know whether or not the borrower can afford the loan, and when an industry has a product called a “Liar’s Loan”, they knew what they were doing. They only cared whether the borrower could make the payments for the first six months until the loan could be sold in the secondary market. We may all be equally to blame, but the lender’s underwriting department is where it all started.

  • Tom Wilkinson

    Wait! Wait! I just re-read my post to check for spelling and grammer mistakes, and I want to change my position…We are NOT equally to blame…Mortgage lenders WERE the cause of the financial crisis.

  • terri morris

    My husband and I have purchased different properties through the years before this mess happened. Our daughter became ill at 11 years old and died in 2007 as a result of an incurable brain cancer. Our assets and liquidating them, helped us through that crisis. But, as many other people who have gone through a major illness, and even with insurance, it left us struggling to get back on our feet. Then my husband could’nt work for 3 months and our home lenders’ mortgage collector wouldn’t work with us. I went to HUD for advice and was told not to make another house payment until told to do so by them. I also hired a real estate attorney who told us the same thing. You know why? because our loan got sold and packaged to investors and the title and deed got separated. We put $80,000 down on our home, and payed on it for 4 years before our circumstances changed. Now tell me; is it our fault for contributing to this economic disaster? is it really the american public that made it this way for us? It has been 4 years since we made a payment, and we are still in our home. The reason they cannot foreclose is because no one seems to know who holds the title and deed to our home, and it cannot be traced because the conveyance of the notes was electronically recorded. This all happened without my permission. If I remember right, it was our money that is missing, and I may never even be able to truly own my home unless they find both pieces of paper. For the lender to foreclose, they have to show up on the steps of the courthouse with those papers to prove they own it before they can take it. If they say they do, and we tell them to prove it and they can’t, we keep the house until they do find them.
    Who is the irresponsible party in this caseThere are a lot of homes that are empty and cannot be sold right now in this country, and for the same reason as ours.
    The only thing I can agree with in your article is that people need to educate themselves, but don’t be nieve about who is in control here; it is the people with the most money, and most of it is gone and unretrievable.
    In the meantime, people like us sit and wait because it is out of our control.
    Oh; and the only people I ever get a hold of to discuss anything are in India and have no idea what is going on.

  • http://www.itsfraud.com Gordan Finch

    I can understand some of the writers comments but really its a load of trot.

    Zurich the insurer caused the financial crisis, AIG hit the headlines so did AIGFP. But the real life Gangsters in this are the Zurich insurance group companies (ZFS) zurich financial services.

    Its recently changed its name and now called (ZIG) Zurich Insurance Group.

    If I remember correctly Chartis Insurance is a subsidiary of AIG and AIG is a subsidiary of the Zurich Group, AIG is 61% held still by the US Treasury.

    The insurance industry is blatantly committing fraud and the banks are doing the same today as well.

    And its because (they) its officers are safe protected by LTD Liability Companies, that were deregulated by Money in Black Plastic Bags paid to Government officials.

    Big Money Corrupts.

    What the US should do is jail the lot.

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