How quickly we forget.
Less than two years ago the all but unthinkable happened when venerable investment bank Lehman Brothers collapsed into bankruptcy.
Only a massive taxpayer-funded government intervention prevented the likes of American International Group (AIG: 37.436, -0.334, -0.88%), Bank of America (BAC: 16.729, -0.801, -4.57%), and Citigroup (C: 4.1, -0.0875, -2.09%), among other large and influential financial services firms, from following suit like so many dominoes.
Lehman’s implosion was perhaps the most high-profile event stemming from the bursting of the U.S. housing bubble, but the street-level collateral damage has been just as devastating: 8.5 million jobs lost, an unemployment rate still hovering near 10%, and many millions of homes in foreclosure.
But the economy is slowly recovering. Profits are up at many bellwether companies, notably at the very banks whose near-demise caused the crisis in the first place. Employment numbers are holding steady rather than getting worse. And stock markets have practically returned to their pre-crisis levels.
The return of these data-related barometers to more comfortable heights begs some larger questions: what are the lessons to be learned from what is now commonly referred to as the worst financial crisis since the Great Depression. And, more importantly perhaps, is a major reform of the U.S. financial system needed to prevent another similar crisis.
That latter debate is currently raging in Congress, as Democrats and Republicans wrangle over a sweeping bill that would enhance the government’s ability to regulate big banks and beef up consumer protections.
To many, the argument boils down to a simple debate over government activism versus personal responsibility. Since foreclosure rates began to skyrocket last decade as the housing market cooled off and home prices began to plummet, blame has been cast at so-called “predatory lenders” who allegedly foisted complicated loans on unsuspecting consumers, and alternately on those same consumers, many of whom very likely purchased homes they clearly couldn’t afford.
Gary Thurber, assistant director for the Consumer Credit Counseling Service of Central New York, believes personal responsibility will play a bigger role than government intervention in any efforts to prevent another economic crisis.
“This might have been the wake up call. There was greed on all sides,” said Thurber, whose agency counsels individuals and families on how to live within their means.
“But I’m not a big fan of more government. People have to take some personal responsibility by tracking their finances and making sure they’re not taking on too much. There has to be change on philosophy away from having to have everything right now,” he added.
Thurber said he supports government efforts that specifically target consumer protection. But there’s little the government can do if consumers are either ignorant of how best to stay out of debt, or too cavalier with their credit cards.
As in most things, knowledge is vital. Thurber said more emphasis should be put on teaching personal finance to children so they are prepared when they reach adulthood.
Employers in Central New York have stepped up efforts to educate their employees, according to Thurber. After all, he noted, workers concerned about their homes being foreclosed on, or dodging calls from collection agencies will undoubtedly be distracted from their paying jobs.
Thurber has faith that people will learn from their past mistakes.
“A vast majority of people will say we can’t make those same bad decisions again,” he said. “We’ve seen that — requests for personal finance education have tripled in the past year. Our clients want to learn how not to make the same bad decisions again.”
Personal finance expert Lita Epstein is less optimistic that behavioral changes alone are enough to ward off another economic crisis.
The ripple effect that swept across all facets of the economic landscape in the wake of Lehman’s collapse “showed the weaknesses of the system,” she said.
“When they allowed Lehman to fail, that was the start of the avalanche. We went from failure to failure after that and the government had to step in,” she said.
Epstein sees an immediate need for addressing the issue of ‘too big to fail’ banks.
“That hasn’t been corrected. That’s the most important need for legislation how we’re going to handle them, wind them down if they get into trouble,” said Epstein, author several personal finance books including the recent ‘Complete Idiots Guide to Personal Bankruptcy.’
The reform package still trying to find its way to the Senate floor includes a provision for breaking apart big banks at the first sign of trouble. The legislation would require big banks to pay into their own insurance fund that would be used to prop one of them up should it begin to falter.
Epstein said she supports those measures because they would “save the taxpayers from having to bail them out next time.” She is also in favor of a stronger federal consumer watchdog.
“That’s the other clear failure that came through. Nobody acted to help the consumer when all of these crazy mortgages were out there,” she said.
Complacency may pose the greatest threat toward another financial meltdown, according to both Thurber and Epstein. As the panic of 2008 subsides, peoples’ memories will get shorter and the momentum for change – both at the individual and government levels – could dissipate.
“Complacency is definitely a concern,” said Epstein. “If that happens reform could amount to nothing more than the name. I’m definitely concerned that could happen.”
By Dunstan Prial – FOXBusiness.com
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