This month could be considered the ten year anniversary of the start of the "Great Recession." Most of us will remember the trials and tribulations of the financial upheaval that worked its way through the U.S., Canada, and Europe in 2007-2009. Only in the last few years have we seen a significant recovery in all areas of these economies.
About this time ten years ago, the then "transitional" CEO of my employer, Wachovia Bank, appeared on an investment cable TV show called "Mad Money" and said that out of $500 billion in mortgage loans on the bank's books, only $10 billion were "bad". He was suggesting that although the bank had some real issues due to the acquisition of a large subprime mortgage portfolio, it should be able to weather the coming economic storm and remain independent, solvent, and intact.
But within a matter of weeks, Wells Fargo had bought Wachovia through a federal regulator-brokered deal for what essentially amounted to pennies on the dollar. That happened just after the failure of Washington Mutual and the FDIC was about to seize Wachovia because of its perceived loan problems. The "deal" understandably made the 20,000 or so Wachovia employees in Charlotte where I live very uneasy, including yours truly (I had been an employee since 1990).
As the financial crisis unfolded, the government and bank regulators reacted to the unprecedented events as they happened, doing what they could to "contain the damage." Although several financial institutions went under, many were propped up by the "Troubled Asset Relief Program" (TARP), which ended up costing U.S. taxpayers almost $500 billion.
Looking back ten years later, I think there are some key lessons to be learned:
Lesson #1: Economies built on debt are fragile
The "great recession" demonstrated just how dangerous debt-based finances can be, both personally and globally. There were many causes of the crisis that resulted in a financial "perfect storm" the likes of which had not been seen since the Great Depression—the main culprits being regulatory failings, low mortgage lending standards in the U.S. and elsewhere coupled with the packaging of those "sub-prime" mortgages into securities, loose U.S. Central Bank lending rates, and currency manipulation by China, Japan, and others.
And let's not forget that some viewed the "cure," which was government intervention in the form of the TARP to bailouts of AIG, the ten largest US banks, General Motors and Chrysler, Royal Bank of Scotland and Lloyds Bank, as worse than the problem.
Other companies and families didn't fare so well. Lehman Brothers was allowed to fail. As I mentioned earlier, Wachovia (my employer at the time) was sold to Wells Fargo. Merrill Lynch was bought by BankAmerica, as was Countrywide Mortgage. Washington Mutual, another large mortgage company, was bought by JPMorgan Chase. For individuals, high levels of home foreclosures, unemployment, and personal bankruptcies were the norm. Employment is just now getting back to pre-2008 levels.
The financial crisis of 2007-2009 was a stark reminder that a failure to build a financial foundation based on biblical principles can have devastating consequences. Much of the blame for the crisis can be put on governments and the financial services industry, but some lies squarely on the shoulder of individuals. Following a decade of robust economic expansion and skyrocketing real estate prices, consumers were in a state of "irrational exuberance" which led to all kinds of bad financial decisions, aided and abetted by their willing accomplices – the banks and investment firms.
Lesson #2: Debt is debilitating to individuals and households
A big part of the problem back in 2008 was debt, both individual and corporate, and high levels of speculation in the real estate markets, fueled mainly by greed. Interestingly, we are quickly getting back into a similar situation. Proverbs 26:11 reminds us that a fool repeats his folly and in spite of the experience of 2008-2010, U.S. household debt has increased by 11% over the last decade. A recent study found that the average household with credit card debt has balances totaling $15,482, and the average household with any kind of debt owes $134,058, including mortgages, student loans, and medical bills (so it's not all revolving credit accounts).
There is a direct correlation between over-spending and too much debt and a low savings rate. I don't have any statistics, but I think there would also be a relationship between high debt and low levels of giving as well. Therefore, freedom from debt is a worthy goal (Rom.13:8). And it isn't about being debt-free so that you can amass vast amounts of wealth; it's about the freedom to wisely save and generously give (Acts 20:35).
High amounts of debt can be especially burdensome for retirees who need to keep their expenses as low as possible. So, one of the best ways to reduce expenses in retirement is to get rid of debt to help ensure that the money you do have coming in is enough to cover your living expenses and also, hopefully, other things that truly enrich your life and the lives of others. In other words, it can give you some degree of financial margin, depending on your actual living expenses. And that is part of wise retirement stewardship.
So, if you are still working, now is the time to pay off debt, while you are bringing home a paycheck. In fact, that's actually a good idea regardless of which stage of life you're in. If you are younger, pay off debt to free up money to help you save and give more. If you are older, do it for the same reasons and also to better position yourself for retirement as it may be tougher when you are retired, and you certainly don't want to use your tax-advantaged retirement savings to pay it off down the road if you don't have to.
Lesson #3: It's important to diversify
Another valuable takeaway is the importance of diversification. Wachovia Bank that I was working for at the time was very big on employee stock ownership. They offered employees the opportunity to purchase it through payroll deduction and also awarded stock bonuses in the form of stock grants and options to some employees. Because the stock had been doing so well, I knew some co-workers who had invested most of their 401(k) in company stock, which turned out to be a disaster from a diversification point of view.
As employees, we were already 100% invested with our most valuable asset—our manpower—and were suddenly facing the threat of losing our jobs. All that additional risk from holding so much company stock was simply a bad idea no matter how well the stock was doing. It's one thing to lose something that had been promised in the future (like stock options), but something entirely different to lose your hard-earned retirement savings.
During the "Great Recession," the stock market was down almost 50% percent at one point. Investors who had all their assets in stocks or stock funds were walloped. (To be fair, if they held on and didn't sell, they would have seen their investments come back with a vengeance, but most didn't.) Those who had a more "balanced" portfolio of stocks and bonds fared slightly better, but still lost money. I had a basic 60% stocks/40% bonds portfolio in my 401(k) at the time, and I remember losing approximately 35%. That stung, especially since I thought I was properly diversified.
The obvious lesson is to keep your investments diversified using a variety of asset classes—stocks, bonds, etc. If you decide to be 100% in stocks you need to be prepared for a rocky ride and you may still want to reduce your exposure as to get closer to retirement to avoid "sequence of returns risk."
Lesson #4: Expect the unexpected
Surprisingly, very few people saw the crash of 2008 coming. The economy in general, and stock prices and real estate values in particular, seemed like they would keep going up forever. We were captivated by what financial behaviorists call "present bias," the belief that things will continue just as they are, and also the "fear of missing out" as stock prices and real estate values continued to rise lots as people just kept buying more.
Most of us working for Wachovia Bank at the time thought that everything would work out okay—the "temporary" CEO had said so. But there were so many other forces at play that he was proven wrong as neither the government nor the financial markets could prevent the crash.
The sudden collapse of your employer is probably one of the worst things that can happen to you professionally. I was fortunate to have retained a position with the bank (Wells Fargo) that purchased Wachovia. But many, many people lost their jobs during that time. Many felt angry and helpless.
Situations like this are not just hard to predict, they're also very difficult to control (it's hard to stop a downhill snowball). There is very little that governments, corporations, and individuals can do once the dominos start falling. We certainly shouldn't go through life gripped by the fear that the next "great recession" is right around the corner. Better to wisely manage our affairs – our lives, careers, and money – in accordance with biblical principles and then trust God with the rest knowing that his purposes alone will stand (Prov. 19:21).
The 2008 "crash" wasn't the first, and it probably won't be the last. While market "corrections" are relatively common, "crashes" (steep double-digit percentage losses over a period of days) seem to happen every 10 or 20 years. We can't necessarily know when they will happen or how severe they can be, but despite these seemingly unavoidable events, stocks still tend to go up over time. For that reason, it may be unwise to avoid the stock market altogether, especially if you are a younger investor.
If you invest in stocks, you need to be comfortable with volatility. As famous investor Warren Buffet once said, "You shouldn't own common stocks if a 50% decrease in the short term would cause you acute distress." If that's you, instead of bailing out of the stock market altogether, come up with an investment mix that is more suitable to your appetite for risk, perhaps a more moderate allocation to stocks (60 to 80%, depending on your age) and the rest in bonds and cash.
Even with a fairly conservative balanced portfolio, you can still lose money. As the crash of 2008 taught us, sometimes all assets will go down in value, offering no "safe haven" except going to all-cash. But if you do that, deciding when to "get back in the game" becomes a big challenge; some never do.
Lesson #5: There is only one sure foundation
The "Great Recession" showed us just how easily all things financial in our society can come undone. We are reminded that everything in this world is temporal; it is passing away (1Cor. 7:31; 2 Cor. 4:18). Although we are highly dependent on money, it is not a sure foundation; like all other things in this world, it is "shifting sand." As followers of Christ, we have to continually remind ourselves that there is nothing apart from God and his Word that will last forever. He alone is our rock and our salvation.
In difficult financial times such as what occurred in 2008 thru 2009, we can be tempted toward anxiety, unrest, uncertainty, and turmoil. There is no doubt that the world we live in is full of turmoil and uncertainty, but God is our refuge and strength. Because of his goodness and faithful, we don't need to fear.
I am reminded of Psalm 62 where David describes four different ways in which he experiences God as a Rock: He is a Rock of Salvation, a Rock of Refuge, a Rock of Provision, and a Rock of Hope. Like us, David had many difficult times; he often felt overwhelmed by circumstances and events. But through those times, he discovered that you cannot hope in man or the things of this world, only God is a solid immovable foundation.
In Luke ch. 22, Jesus tells his disciples not to worry about the things of this life. Easier said than done, right? He asks, "Can any of you by worrying add a moment to your lifespan?" Yet we sometimes struggle to trust him just the same. Our relationship with God and faith in him does not keep us from financial hardship (especially global events like the "Great Recession"). We all still have to deal with these hardships or bad times, but holding fast to what we believe about God and His character, and the truth of His Word, will help us through.
Have we taken these lessons to heart?
Has the financial industry changed for the better in the last 10 years? I'd like to think so, but I'm not so sure. What about individuals—have we applied the lessons that the previous crash taught us in our situation?
In the years after 2008, there was a lot of talk about how people were reducing their spending and debt levels and reassessing the priorities in their lives. But the recent increase in personal spending, consumer debt, and escalating real estate prices seem to suggest a reversal. I certainly hope not, or history will indeed repeat itself. It would be wise to heed the words of the prophet Zechariah:
"Do not be like your fathers, to whom the former prophets cried out, 'Thus says the Lord of hosts, Return from your evil ways and from your evil deeds.' But they did not hear or pay attention to me, declares the Lord" (Zec. 1:4).