By Jill Schlesinger
Tribune Content Agency
This month we marked the seventh anniversary of the financial crisis. Sometimes people forget just how close to the brink the U.S. and global financial system was. To appreciate the stability that has been restored, it might be helpful to remember just how intense it was in that first week.
September 15, 2008: Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection; Bank of America announced its intent to purchase Merrill Lynch.
September 16: The Federal Reserve Bank of New York lent $85 billion to AIG. The net asset value of shares in the Reserve Primary Money Fund fell below $1. When the fund "broke the buck," it caused panic among investors, who considered money market accounts nearly the equivalent of bank savings accounts.
September 19: The Treasury Department announced that it would insure up to $50 billion in money market fund investments. The yearlong initiative guaranteed that the funds' value would not fall below the $1 a share.
September 21: The Federal Reserve Board approved the applications of investment banking companies Goldman Sachs and Morgan Stanley to become bank holding companies so that they could access money from the Federal Reserve to fund their daily operations.
Many people thought that the government's intervention was over the top. "Let them fail!" was the rallying cry, but I always believed that saving the system was paramount, even if I did not necessarily agree with the terms of the various bailout deals (I thought that taxpayers should have gotten more of the upside of the financial service companies' recovery, rather than simply receiving a repayment of the dollars, with interest) and the government's more than $800 billion stimulus plan ("The American Recovery and Reinvestment Act of 2009"). Still, while both of the shotgun measures could have been more effective, they likely helped the country avert what could have been a depression rather than the horrible recession that we endured. The so-called Great Recession, which started in December 2007 and concluded in June 2009, was the worst contraction since the Great Depression.
Seven years later, what have we learned? Because the financial crisis stemmed from too much easy borrowing and lending in the housing market, one of the best lessons was the concept that borrowing can be dangerous. Even if some bank is willing to lend you a lot of money to buy a house or to extend a giant credit card limit, that does not mean that you should take it. For most people, making a 20 percent down payment for a house is prudent. Even if FHA allows borrowers to put down less than 10 percent to qualify for a mortgage, there is a good reason why the 20 percent down rule of thumb exists: If the housing market collapses, you have more equity in the house. Similarly, even if you have the ability to buy a lot of fun stuff on your credit card, you should only be charging what you can pay off on a monthly basis.
A corollary of the loan warning is to read the fine print on all documents. There were too many instances when borrowers really did not understand the terms of the loans that they were assuming. Although many regulations now require more transparency and disclosure on everything from mortgages to credit card statements, after the financial crisis we still must be vigilant in reviewing documents to protect ourselves.
Finally, the crisis taught us that an adequate emergency reserve fund (six to 12 months of expenses for those who are employed and 12 to 24 months for those who are retired) could prevent us from selling assets at the wrong time and/or from raiding retirement accounts.
Nobody wants to test these lessons any time soon, but let's heed them.
Contact Jill Schlesinger, senior business analyst for CBS News, at askjill@JillonMoney.com.
(c) 2015 JILL SCHLESINGER
DISTRIBUTED BY TRIBUNE CONTENT AGENCY, LLC
This was printed in the November 1, 2015 - November 14, 2015 edition.