5 Big Lessons From The Lehman, Global Economy Meltdown

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Summary

As one decade has passed since the financial crisis, people start to reflect the lessons taught and re-examine the current global economy. Simon Kennedy and Sam Dodge from the Bloomberg describe the impact of the global financial crisis to the global economy in terms of cut interest rates of central banks, enlarging government debts that indicates potential risks in the future, moderate growth rate in economic output for most economies, falling but still high unemployment rate, recovered housing price, and even its political implications. 

Mr. Wasik, on the other hand, summarized the influence of the financial crisis on the middle class and ordinary people. Perhaps the most profound harm of the financial crisis is its destruction of the middle class’ dream to lead a decent life through earning from wages and their expectation of stabilizing wealth through home-owning. Given the aftershocks of the financial crisis still exist, Mr. Wasik shares his five takeaways from his experience. First, people should set up regular savings and emergency fund to increase their financial stability. Second, people should diversify their investment so that the crash in one part would not ruin the whole. Third, set a threshold of money loss that should be alerting and adjust investment portfolio accordingly. Fourth, people should not chase the back and forth of the world economy because it is too complex and unpredictable. Instead, they should always balance their investment in various sectors and geographic areas. At last, Mr. Wasik recommends that investing yourself and enlarging the talent pool is always the best practice.

 

 

 

 

5 Big Lessons From The Lehman, Global Economy Meltdown

John Wasik, Forbes

 

It’s been a decade since Lehman Brothers went bust and the global economy was gobsmacked. What have we learned? The most obvious lesson is that greed is not good.

Everyone from home flippers in Florida to high-powered Wall Street traders hawking crappy mortgage securities were in on this avarice avalanche. I know because I had a front-row seat starting in 2007 when I was writing a column for Bloomberg News. My book Cul-de-Sac Syndrome summarized some of the debacle.

The worldwide wreckage that came after the Lehman bankruptcy is still haunting us. Some 6.5 million jobs were lost (including mine). Trillions in home equity evaporated (ours never recovered). Credit markets from Athens to New York would never be the same. Government debt has skyrocketed.

While many observers say that the 2008 meltdown led to our current age of uncertainty and political turmoil, I wouldn’t go that far. Sure, the crash cruelly killed a lot of jobs and retirement funds, but trends in globalism, automation and corporate employment shrinkage were at work long before Wall Street nearly tanked our economy.

The biggest banks and corporations got bigger and richer still. There was no moral justice on that front. Corporatists are still fueling a debt burden which is exacerbated by trillion-dollar federal deficits, rising interest rates, $1.4 trillion in college debt and fewer, higher-paying jobs.

Then there’s the even more palpable theory that the crash incinerated a few rungs on the ladder of middle-class economic progress. Once you could bank on home equity as a nest egg. You didn’t really have to save in a 401(k), which was never meant to be a mainstream retirement account. Since both got creamed in 2007-2009, the American dream got scorched.

“The financial crisis didn’t just kill the dream of getting rich from your day job,” writes Nelson Schwartz in The New York Times. “It also put an end to a fundamental belief of the middle class: that owning a home was always a good idea because prices moved in only one direction — up. The bubble, while it lasted, gave millions in the middle class a sense of validation of their financial acumen, and made them feel as if they had done the Right Thing.”

Where are we now? Thanks to the draconian, anti-middle class tax code changes of late last year, you’d do well to have a business,  a passive investment portfolio or own stock in a multinational corporation. If you earn your money primarily from wages, you won’t be able to keep up with inflation — particularly in health care, retirement and education. Here are five takeaways:

— Make Savings Automatic. It doesn’t matter if you’re saving through a 401(k), 403(b) or your own Roth IRA. Set up a regular amount to invest every month. This is money you don’t touch, so you can’t spend it. Also have an emergency fund. When we got nailed by the crash, we got hit with job loss and life-threatening illness — in the same year. Had I not aggressively saved in the prior seven years, we would’ve been financially ruined.

— A Big Basket is Best. Those who loaded up on one kind of stock or real estate were burned big time in the last crash. Diversification makes sense. This means stocks, bonds and real estate from across the world. You can find a pre-diversified mix in any target-date fund, which you can buy on your own or through a retirement plan.

— Know Your Gut-Punch Threshold. How much money can you afford to lose when you really feel it? For some it’s 10%, for others 20%. You have to gauge your gut-punch pain to invest prudently. Adjust your portfolio accordingly. When the Lehman bust hit, my wife and I were 80% in stocks. That was too much, because we lost 40% on paper. We rebalanced. For most, the bond percentage of your portfolio should match your age.

— Don’t Watch the Pendulum. The market and world economy swings back and forth and can get really wobbly. You have no idea which way it’s going to swing, so don’t get hypnotized. Keep investing in all markets. Saving is the key, not finding the perfect moment to invest. Oh, about that pendulum: Those who stayed in just a cheap, broad-based stock index fund — and basically did nothing — roughly tripled their money since 2009.

— Invest in Yourself. You are your best investment. The world is changing. Artificial intelligence and automation are going to snuff millions of jobs. The best thing you can do is improve your human skills. Improve your knowledge base (but avoid for-profit colleges). Communicate better. Collaborate. Think about complex systems and how you fit in. Start a business that builds on your unique skills. I don’t care how old — or young — you are. Keep learning. Stay nimble in mind and body.

I’ll leave the ongoing post-mortem of Lehman and the resulting chaos to others. Focus on yourself and the goals you have for you and your family. That’s the only thing you can do anything about. The rest is history, which tends to repeat itself.

 

 

Source: John Wasik, Forbes, Sep.14 , 2018. Photo credit to Getty Image.