What happened in 2008? I asked a millennial economist to explain the financial crisis
I started my career right before the financial crisis started to unfold. I was just out of university and very new to financial services, so some of the terms and technicalities that were being thrown around between reporters and economists were quite confusing.
The only thing that seemed entirely clear to me was that working for a hedge fund during a market downturn wasn't an ideal situation. I lost my job that October.
Even now, ten years later, I still find myself a bit bewildered trying to piece together everything that's happened in the context of 2008.
To shed further light upon my understanding of the financial crisis, I connected with Piya Sachdeva, an economist at Schroders, where I work.
She's based in London, while I'm in New York.
I wanted to get more clarity on what happened ten years ago (besides me losing my job).
Hi Piya - Thank you for taking the time to talk with me. To start off - when did stuff start to go down? I remember Bear Stearns, the New York-based investment bank, ran out of cash in early 2008? Was that the start?
You're welcome! Exactly - some people will remember Bear Sterns as “the first domino to fall in the financial crisis” in the run-up to the collapse of Lehman Brothers later that year in September.
One of my first memories of the financial crisis is the collapse of Northern Rock high street bank here in the UK in September 2007, and the huge queues of people trying to get their money out (if you have never heard of it, it is now rebranded Virgin Money...).
But it depends on what you think “the start” was. One of the things you can do when trying to find signs of a looming recession is look for imbalances across the economy, such as “asset bubbles” (where prices of assets rise so sharply and at such a rate that a sudden collapse is likely).
With the beauty of hindsight, you can see some of the causal factors at play in the early in the 2000s.
Were these events primarily caused by US banks and lending practices? Was it all doom and gloom during those days across world markets? I was pretty wrapped up with my own job search and what was going on in the US, so I don't have any idea of what the "macro" implications, the bigger picture, was back then.
As you can imagine, there has been A LOT of work on the causes of the financial crisis.
It was definitely all doom and gloom. The global equity market fell by more than 40% and you were not the only one to lose your job...
But the story is pretty complex. The subprime mortgage crisis, where borrowers with low credit ratings could not afford to make payments following the crash of the housing market bubble, led to a banking crisis.
But then the question is why? US bank lending practices, as you say,were partially to blame. But there are so many other factors that, looking back, had a part to play: government and central bank policy, easy credit conditions, de-regulation, incorrect pricing of risk, financial innovation and excessive risk-taking are just some of them.
In terms of the macro implications, we went into a deep recession and the recovery has taken years, with help from extreme policy measures.
When did it start to get better and how? I would say for me personally it turned around during the second quarter of 2009, because I finally found employment, but was that really the case?
Hmm, in typical economist fashion: it depends. Technically the US came out of recession in June 2009, but then unemployment in the eurozone as a whole is still higher than in 2007 and so has been very slow to recover. It took until mid-2013 for the global equity market to recover and bond yields are still below pre-crisis levels.
You touch on an important point, and that’s the question of when you actually felt like you were better off.
The rise of populism, championing of ordinary people and not just the elite, has been partly attributed to the financial crisis.
For investors, there are many factors that we need to consider which ultimately stem from the financial crisis. For example, central banks are only now beginning to remove liquidity from the system and bond yields are still very low. The lack of wage growth and productivity growth since the financial crisis is something that is also a puzzle.
Have we learned from our mistakes or are the markets going to come crashing down again?
Safeguards are very much in place for large banks now. There are definitely more checks and balances than there were before the financial crisis – so in that way we have learned some lessons.
The problem is that what tends to happen is people are so focused on the thing that caused the last recession, that the next one comes from somewhere else…