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

Even with tax reform, mortgages were kept in the game. Many people have argued that interest and/or property taxes should not be deductible against taxable income. The limits may have come down under tax reform, but this implied subsidy remains. Again, both sides of the government know that there has to be a healthy housing market to have a strong economy. And the real estate and mortgage lobbies are quite powerful and influential in protecting their interests when it comes to housing.

An early 2018 figure from Zillow showed that the value of the U.S. housing market was almost $32 trillion. That’s 1.5 times the size of the entire U.S. GDP. The housing market remains subsidized because another housing crisis would scar yet another generation of home buyers.

8. The World Is Addicted to Economic Stimulus

Despite a major economic recovery, the world remains addicted to fiscal stimulus. You can debate the whys and hows all day long, but at the end of the day there is no single world leader or central bank head that wants to preside over the next financial meltdown. Economic stimulus is new and was used, via traditional easing methods, prior to the financial crisis. It’s at a whole new level these days, and parts of this have been addressed or alluded to here.

Despite the U.S. Federal Reserve hiking interest rates and signaling that it wants additional rate hikes, the Fed still refers to its economic policy as “accommodative.” That is stimulus via lower than normal interest rates, even if it falls short of the efforts in prior years. The Fed still also holds well over $4 trillion worth of Treasuries, mortgage-backed securities and agency debt. And the Fed is doing a very slow bleed-off of those assets so it doesn’t spook the market. There was also tax reform in the United States, which some people argue only helps America’s wealthiest but all tend to agree was a huge boom for corporations.

We already mentioned the negative interest rates in parts of Europe and in Japan. European Central Bank head Mario Draghi has used the term “whatever it takes” to keep Europe moving back toward recovery. His timeline for when rates will be hiked points to the end of 2018 or early 2019, but it seems to have been delayed and delayed. Japan has bought up much its own debt with money created out of thin air, but the Bank of Japan also owns stocks and has proven that it is willing to buy more if it thinks it needs to.

The media and market professionals have referred to China as the “growth engine of the world,” but in a 2018 world it is doing whatever it can come up with (within reason, anyhow) to keep bolstering its growth and to keep its economy growing. With risks of a trade war growing each month, China’s equity markets have suffered in 2018. China has made moves to lower the value of its currency without damaging its credit ratings and ability to trade. It has made some efforts to lower taxes by a marginal amount, it has injected capital into its banking system and it still has trillions worth of ownership in its “state-run entities” in energy, telecom, metals and commodities, and so on.

And now there are real-world currency scares and instances of incredibly high interest rates in some of the world’s formerly prime emerging markets. Even after the United States finally turned in GDP growth of 4% again, the world remains addicted to stimulus, and there is no end in sight.

The reality is that there are an endless number of instances where you can see the continued scars of the financial crisis and the Great Recession still quite present today. We have only been able to touch upon a few of them here, but here are just a few more to consider.

Many employees have been and remain without the basic modern era skills needed to fill jobs. Many business owners remain scared to fill all of their vacant job openings, and one of the reasons is the reminder that a recession can come again. And many businesses do not want to invest in new plants and capital equipment to fund future growth because they have mountains of excess capacity.

Lower pay for many millennials persists if they entered the workforce from 2007 to 2012. The level of student debt keeps rising and limits the ability of people to go out and buy homes, cars and other items that prior generations took for granted. There is even a growing percentage of Americans who think a move toward socialism would be good. And the opioid crisis in America riddles many areas where the recession hit an area harder than others.

There will be another recession one day. It’s inevitable in the economic cycle. And right now the United States is a $20 trillion economy in GDP terms, with about only a 4% unemployment rate and with more job openings than able bodies to fill those jobs. Still, many deep scars are very evident as holdovers from the financial crisis a decade ago and are very likely to persist in the years ahead.

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