The Financial Crisis Was Caused by You, Not Big Banks
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- By Stacey Bumpus
- May 22, 2012
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:
- 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.