Valuable lessons from the great financial crisis for today

Length of pandemic crisis in perspective

We are almost two years in the global Covid pandemic, and it is obvious that people are getting tired of it. Everyone wants to go back to normal, or to a better than current new normal. This crisis is so intense as it is a health crisis, a freedom crisis, a financial crisis and the way we work & interact is being disrupted. Equity, housing and commodity markets and alternative asset classes have all been rallying over these two years, but we are still in a financial crisis due to several economic sectors in distress and a sharp increase in central banks balance sheets, government debt and inflation.

Officially the great recession, also referred to as the credit crunch, lasted from 2007 to 2009 and found its origin in the US housing bubble. Yet the great financial crisis lasted longer, into 2015 as the credit crunch was followed by the European Euro & debt crisis. In July 2012 European central bank president Mario Draghi held his famous speech saying that “within its mandate the ECB is ready to do whatever it takes to preserve the Euro, and believe me, it will be enough”, which marked the turnaround of the Euro crisis. Global unemployment only fully recovered to pre-crisis levels as of 2015. So that crisis lasted eight years, while we are just in year two of the pandemic…to put things in perspective.

A big difference between current crisis and the great financial crisis is the lack of austerity measures today (and very importantly the current loss of lives of course but my focus here is the economic impact). Contrary to austerity the US has actually implemented helicopter money to support its economy, although that term, first used during the great financial crisis related to then Fed president Bernanke’s tool box, was not used during the pandemic. It was helicopter money though, first implemented via stimulus checks in 2020, who would have thought that?

Although equity markets had bottomed in 2009, a long stretch of another six years followed with economic uncertainty, hardship and mass unemployment in Europe from fierce austerity measures, and the word crisis remained part of our everyday lives and media coverage. People got tired of it back then as well. There seemed to come no end to this constant crisis mode. But it effectively bottomed after Draghi’s speech and since 2015 we moved into an economic boom which lasted into 2020 till the pandemic hit.

What are my lessons from this multi-year great financial crisis, which are valuable to consider today?

Do not get distracted by media noise

Most people recall the collapse of Lehman Brothers as the start of the great financial crisis, but it was Bear Stearns which already collapsed in March 2008. CNBC cheerleader Jim Cramer, still cheerleading on CNBC today, said on air the week before Bear Stearns collapsed; “Bear Stearns is fine”. Also so-called economic experts & politicians claimed this was supposedly a US problem which would not have an impact on Europe. My lesson from this, which has been confirmed over and over again in the following years is that the financial news media are cheerleaders or doomsayers, without any accountability for their statements or views. 2020 turned out the be the shortest ever recession and 2021 turned out to be one of the best years for the US stock market, yet Mohamed El Erian, Michael Burry, Stanley Druckenmiller, Robert Kiyosaki, Nouriel Roubini, Jeremy Grantham, Peter Schiff and a host of others have been constantly worried, concerned, alarmed, and predicting Armageddon…….. They are selling a snippet, a large part of what they do is financial entertainment and clickbait and many strategists are just part of the big Wall Street gravy train whose interest it is for you to “act” in the markets, in, out, rotate, re-balance, re-allocate, driven by fear and greed, and short term hype and noise. Guests of financial news networks are often biased, have positions to defend, and no one, neither the credible people, can predict the future. No one person can follow the thousands publicly traded companies in detail and from years exposure to the pension fund industry I know all those surely intelligent financial professionals can’t predict interest rates nor inflation trajectory. Listen (or not) to them with that in mind, always make up your own mind and act accordingly with a long term view. You cannot trade or invest basis someone else’s views. Build a credible only social media and/or newsletter feed and don’t end up in an echo chamber.

A house is not a trade, but an investment in your family

In 2006 I moved for Cargill from Geneva back to Amsterdam and started a 2 year endeavor with my girlfriend of finding a house to buy. Today we are in a housing market boom (or crisis, depending on the way you look at it), back then too. We had been chasing shadows for two years, had seen an awful lot of crap, had extended our budget a couple of times, had worked with two brokers and finally managed to buy a house in August of 2008. Bear Stearns had already collapsed earlier in the year but after two years of searching we just wanted to buy that house, get it over with and get settled. Just two weeks after we sealed the deal Lehman Brothers collapsed (famous picture of Lehman staff being informed added to this article) and the great financial crisis erupted in full force, first in the US, but of course the crisis spilled over into Europe and it turned out I, the experienced Cargill trader, had bought the top of the housing market, fully leveraged at the start of a huge financial crisis. Although I was a bit annoyed by buying the top being a professional trader, what I learned from this was not to feel bad about this situation as if I had made a trade, but instead to focus on the purpose of the purchase; buying a comfortable house in the city and area we loved, with the outlook to live there at least 10 years with sufficient space to raise a family. We loved the house and in the midst of the great financial crisis our two kids were born, in 2010 and 2012. Kids were healthy, the house catered well for us as a family, there was no crisis, just joy, and there still is. Since then the price of the house almost doubled, which is nice but it is just paper, equity locked in stones.

From 2008 till about 2015/2016, not many people wanted to buy a house in Holland, neither in Amsterdam……it was a very long housing market winter. But in 2021 house prices hit all-time highs, for the fifth straight year…... So another lesson is, focus on the long run and the purpose of the house for you as a person and your family, and even when you buy a house at the top of the market, like so many have done before you, don’t see it as a trade and make sure you enjoy the house with a minimum 10 year outlook. But it is true also, just like in the equity markets, for the housing market counts, time in the market is more important than timing the market.

Money is not a sustainable driver for a job

In the summer of 2008 I was running the cocoa trading desk for Cargill in the Netherlands. I was approached by an ex Cargill trader for an interview at Merrill Lynch in London to build a commodities trading desk with him and another trader. I liked the ex-Cargill trader, we spoke the same language and shared the same values, you feel that immediately when you meet former Cargill employees. But I wasn’t too fond of the other guy. I also didn’t really like the atmosphere on the floor which came across less personal and with less of a team spirit which I thrived in in Cargill. The potential financial upside was big though, a multiple of my Cargill package. That financial upside was tempting, but already on my way home I decided not to continue the process, as I knew I was not going to be happy there. To me this was just another trading decision, basis limited information but I knew I could trust my judgement. Not long after the interview, in September 2008 Merrill Lynch collapsed and that commodity desk never got started. I made the right call for two reasons; money is not a sustainable driver in isolation for a job, and Merrill Lynch was a sandcastle.

The purpose of governments and central banks in times of crisis cannot be decentralized

Talking about sandcastles… In 2009 I had Euro 20k in a savings account at Dutch bank DSB. This was one of Holland’s most popular banks with interest rates on savings accounts of 5%, yes, those were the days! Euro 20k per bank was guaranteed by the Dutch government in case of a bank default. The banking crisis in the US was supposed to remain a US crisis…Well, at some stage the financial shit storm was blowing over from the US to Europe and in October of 2008 Belgian Fortis Bank collapsed, one of the consortium of banks which had purchased ABN-AMRO bank together with Santander and Royal Bank of Scotland. The Dutch government bought and thereby nationalized ABN-AMRO which was perceived as too big to fail. Another bank too big too fail in Holland was ING and they were bailed out by a Euro 10 billion government loan.

With all those big banks collapsing I was also getting a bit concerned about my DSB bank, although this was just a simple savings and loans bank, with no financial weapons of mass destruction (derivatives) on their balance sheet. In Cargill we also noticed that our customers had more trust in Cargill than in the banks as they preferred to pre-pay us for their contracts, instead of leaving money in their banks, this was unprecedented. I decided to give DSB bank a call to get a feel for how they were doing. I will never forget that phone call. I was sitting in a train, and I was happy to still get them on the phone. I wanted to confirm my account and the Euro 20k in it. They did not recognize my account. I had no account and no Euro 20k with them, according to the lady on the phone. Yes I raised my voice a couple of times but had to hang up eventually with a very uncomfortable feeling. Not long after that call DSB was hit by a bank run which was set off by a financial investigator who doubted DSB’s sustainability and advised people to take their money out. When you tried to log on to their website it was blank. In October of 2009 DSB bank collapsed, and they were not too big to fail.

Now, I wondered how that government guarantee would work. Well, about six weeks after DSB’s collapse I received a letter from the Dutch ministry of finance stating my savings account with the Euro 20k, and the message that by the end of the year I would receive back my Euro 20k, including the full amount of interest…. I told this story to one of my Italian team mates a decade later and in disbelief he said that that would never had happened in Italy, at least not at the time.

Governments are not perfect, far from it, but one of my lessons from that very scary time when the global financial system was melting down, banks were collapsing and money went up in smoke, either through equity & housing markets collapsing or savings accounts vanishing, is that you need a central government and central banks with the ability to step in.

Nowadays there is so much chatter and excitement about decentralized finance and a push back towards governments and central banks (seen as the evil empires debasing currencies and creating inflation), but that is very easily said when things are ok, when there is plenty money sloshing around, and when equity and housing markets are making all time highs and there is so much trust in the perception of value and infinite liquidity that people are paying millions for JPEGs of apes.

What if things go wrong? If things go wrong again like they did in 2008/09 and during that long stretch till 2015 it is not likely that your bank, or anybody else, will accept that ape JPEG as a means to pay off your mortgage, not even if you say Eminem has one... Where do you go if your decentralized and non-regulated crypto exchange blows up? You will be on your own. Now people may think this exactly what they want, but that is from current perspective, current goldilocks environment. They will feel differently when they actually need access to money which is generally accepted. 2008/09 really felt like Armageddon, like the end of the world, with empty ATMs, as if we would have to move to the forest to search for berries or would have to eat tulip bulbs and zoo animals. It was that crazy & chaotic. No toilet paper hoarding I recall though….like when things did go wrong again in a big way in 2020 when the pandemic hit and markets tanked, and global healthcare systems collapsed.

Central banks & governments acted swiftly and aggressively in 2020 and prevented the type of hardship and mass unemployment we faced during the great financial crisis. You can never do that in a decentralized way. And inflation? As I have outlined before in a LinkedIn article, there are no free lunches, inflation is an indirect tax, and that is the price we as a society need to pay to be saved from worse alternatives.

Being optimistic about the future makes your life easier and happier

So what to conclude from all of this? Crises come and go, and we will be ok. There is an awful lot of noise in the media with a focus on the short term. Bad and alarming news sells. Your life will be easier and happier being optimistic, trusting your own judgement, and making your own decisions and taking accountability for it. Have a long term view and trust in better times ahead. When you are happy, enjoy it with your loved ones and don’t take it for granted, life is fragile. Free markets and innovative, risk taking entrepreneurs have brought us prosperity yet we need governments and central banks to course correct in times of crisis, which cannot be replaced by decentralized networks or autonomous organizations.?