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A Decade Later: Lessons Learned from the Financial Crisis

financial crisis

While September 15 probably wasn’t circled on your calendar for any particular reason, it did mark an important milestone. Ten years earlier, Lehman Brothers filed for bankruptcy, which many view as the start of the financial crisis.

A lot has changed in the economy and the financial markets over the past decade.  For example, the stock market as measured by the Dow Jones Industrial Average has almost quadrupled since it bottomed out in early 2009, while the unemployment rate — which hit 10 percent in the fall of 2009 — recently fell to its lowest level in 18 years.

Factors Impacting Recovery

While much of the country has recovered from the financial crisis, some areas still haven’t. Based on the Census 2000 and the 2016 American Community Survey, the degree to which economic recovery has occurred depends largely on factors such as geographic area and an individual’s education and income levels.

For example, median household income has increased the most in large urban areas with vast technological and natural resources. And according to a study conducted by The Hamilton Project in August 2017, employees with low levels of education still haven’t recovered from the recession. Also, most economic gains over the past decade have been enjoyed by households in the top 10 percent of the wage scale.

In addition, the civilian labor force participation rate for men has fallen from 72.5 percent in November of 2008 to 68.7 percent, according to the Federal Reserve Bank of St. Louis. This is attributed in large part to the fact that blue-collar jobs in many industries are struggling to bounce back to the their pre-recession levels.

Meanwhile, the median household net worth in the U.S. is below what it was 20 years ago, according to the Federal Reserve. And some areas of the country are dealing with a shortage of affordable housing as demand exceeds supply, pushing prices up. This is the opposite of 2008 when housing supply exceeded demand, which helped keep home prices in check.

Root Causes of the Crisis

In 2011, Congress established the Financial Crisis Inquiry Commission to try to determine the root causes of the financial crisis. One of their main conclusions was that the crisis didn’t just occur by accident — it was brought about by government policies and decisions made by legislators, regulators and leaders of the financial services industry.

For example, during the 1990s Congress rolled back legislation that kept some banks from getting too big and complicated. Bankers and financial executives, meanwhile, created new types of complex securities like collateralized debt obligations (CDOs) that ultimately played a large role in the mortgage meltdown. And some argue that the Federal Reserve didn’t move fast enough to ease monetary policy once the extent of the nation’s mortgage problems became clear.

Actions Taken by Congress

In the immediate aftermath of the crisis, Congress passed a $787 billion economic stimulus package in 2009 to try to boost economic growth and stem the tide of job losses. Congress also created new home mortgage modification programs to try to help those who were in danger of losing their homes to foreclosure.

And in 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created new oversight bodies to coordinate financial regulators responsible for keeping watch on the financial services industry. The Act also created a new government agency, the Consumer Financial Protection Bureau (CFPB), which was charged with looking out for the financial interests of consumers.

However, some feel that the Dodd-Frank Act went too far in placing restrictions and obligations on banks and financial services providers. Early this year, Congress passed new legislation rolling back some of the Act’s provisions. For example, banks with under $250 billion in assets are now exempt from enhanced regulatory supervision.

Looking Ahead…

Some fear that a decade after the worst financial crisis to hit the U.S. since the Great Depression, we could be headed toward another financial meltdown. They point to the weakening of Dodd-Frank and other factors like rising corporate debt and the budding trade war between the U.S. and some of our foreign trading partners as causes for concern.

Others, however, note that tremendous progress has been made in financial industry regulation and oversight — especially with regard to toxic home mortgages, which triggered the financial crisis. They believe that sufficient safeguards are in place to prevent another major financial meltdown.

Of course, only time will tell who is right. In the meantime, the best advice for most people is to stay focused on your long-term financial and investing goals and not get sidetracked with short-term market and economic gyrations.

Please contact us if you have questions about how the economy could affect your financial goals and strategies.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.