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Lessons for us all from the financial crisis

The results of an official investigation by the US authorities into the financial crises were published last week.

Not surprisingly, it concludes that the blame for the financial crises falls on everyone’s favourite scapegoats – the bankers and the people who were supposed to regulate them.

Here are a few numbers from the report:

  • 26,000,000 – unemployed Americans
  • $11,000,000,000,000 – loss in house wealth
  • 5% – subprime mortgages as %age of total mortgages in 1994
  • 20% – subprime mortgages as %age of total mortgages in 2007
  • $2,900,000,000 – retained by Goldman Sachs out of the AIG insurance claims that were ultimately provided by US taxpayers

(In my recent review of the book Whoops! Why Everyone Owes Everyone and No One Can Pay posted on LinkedIn, I picked out a whole load of other mind-boggling numbers – I will feature this in my next blog  post.)

Rather more surprisingly, the report also makes it clear that home owners are also at fault for reckless borrowing. This is a relatively rare acknowledgement that just because we the general public were able to borrow money, that does not mean it was wise or advisable to do so. These days, we are so well protected from the dangers of life that I think we are losing the ability to assess risk. Some examples of this (and the reasons why) are: the speed we drive (airbags etc.); the food we eat (drugs); the money we borrow (insurance and, until now, the house price boom).

This is compounded by the (in my opinion) shocking lack of formal education in financial matters provided in school. If the curriculum had less obscure mathematical theory and more solid facts about understanding and managing money, we would all be a lot harder to manipulate.

I would be very interested to know if you agree, and what you think about how our education system could help more.

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