10 Years Later, Many Deep Scars From the Financial Crisis Remain

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It has been about 10 years since the collapse of Lehman Brothers and since the forced buyout of Bear Stearns. The financial crisis turned into the Great Recession, and many of the former top banks and financial institutions have vanished or altered drastically. Even though the financial markets and economies have all by and large recovered from the financial crisis, there are still scars left over from it that are clear and present today.

The causes of the financial crisis were too many to list. Entire books have been written about them, the drama during the crisis has been covered in the media endlessly, and there are warnings every day that the next crisis could be around the corner. Beyond cause and effect, many issues scarred the public during and after the financial crisis and Great Recession that are still very present, even in 2018. And many of these scars seem very likely to persist in the coming years as well.

24/7 Wall St. has evaluated those scars. Admittedly, this has more of an American focus than an international focus. Also worth noting is that an indefinite number of additional scars will remain in place for years and are the aftermath of the Great Recession and financial crisis of the past decade. There is also no way to categorize which scar is the most prevalent because that varies from person to person and from group to group.

Specific instances are included to keep the generalizations from being too broad and vague, but again there are simply too many scars to adequately address here. So, here are eight deep scars that are still very evident a decade after the Great Recession and financial crisis.

1. A New Financial Vocabulary Was Created

Before we get into all the painful scars from the financial crisis, it is important to understand that the financial terminology that governed investing and the economy has changed. Some of it has been made up, some from thin air. After all, the crisis was unprecedented, so unprecedented terminology had to be created.

Former Fed Chair Alan Greenspan was notorious for terms such as “irrational exuberance” and “cupidity” during speeches and testimony. The financial crisis went above and beyond that for new terminology. Many readers know these terms as though they have been burned into their brains over the past decade. That said, one simply cannot overlook how much this has changed since pre-crisis levels. Many of these terms overlap, but they also never really existed before the crisis:

  • Quantitative easing: When you have already taken interest rates down to zero but have to keep coming up with ways to save the system.
  • Negative interest rates: Yes, you might not make any money at all lending to a government, and you might even just be happy to let them keep some of that money when you get it back.
  • Too big to fail: After the pain of seeing Lehman, Bear Stearns and the takeovers of Countrywide, Wachovia, WaMu and others, the nation’s top banks became so large that if any single one of them were to fail then they could topple the entire financial world.
  • Systemic risk: Similar to the too big to fail notion, this term became synonymous with bailouts and was applied to many institutions in which the failure of one might cascade throughout larger and smaller banks and institutions alike.
  • The Great Recession: Your grandparents may have endured the Great Depression of the 1930s, but there had never been anything worse than “normal recessions” in the post–World War II years until 2008 or so. The recession was so bad that they named it the Great Recession. So what if there was nothing positive about it?
  • Algorithmic and machine trading: There has been an explosion in trading by machine. This was present before the financial crisis, but nowhere close to what it is today, in a world where physical financial market exchanges have no floors or are run by a skeleton crew. Now the “algos” and machine-trading, in part aided by the explosion of exchange traded funds, account for the majority of individual stock trading. They also control billions upon billions of dollars worth of financial market trading every hour in equity indexes, futures markets, Treasury and debt markets, currencies and commodities, and so on.
2. Long-Term Savers Suffer as Treasury Yields Remain Muted

If you feel like you just don’t get paid that much for buying long-term or short-term debt these days, there is a reason. Despite the fears of quantitative easing, Treasury yields still remain vastly muted compared with pre-crisis years. In fact, the new normalized yields are probably going to be lower for a lot longer than the pre-crisis levels. Even with all the dread over the Federal Reserve hiking interest rates in 2017 and 2018, and likely ahead, the yields still remain very muted for long-term savers who want safety.