Fear: Millennials and the Effects of the Financial Crisis
“At 27, my biggest fear was losin’ it all
Scared to spend money, had me sleepin’ from hall to hall
Scared to go back to Section 8 with my mama stressin’
30 shows a month and I still won’t buy me no Lexus
What is an advisor? Somebody that’s holdin’ my checks
Just to fuck me over and put my finances in debt?” — Kendrick Lamar (Fear)
The Times We All Remember
Every millennial had their own experience with the “Great Recession”. I remember driving home from school seeing foreclosure signs graffitied across the whole neighborhood. All of the abandoned houses and the families forced to leave town. Things weren’t easy. Even my family had to squeeze tight. The mental effects of the crisis are undeniable for most. I didn’t own a credit card until I was 23 years old.
“The Big Short” directed by Adam McKay did an amazing job breaking down the housing crisis into its most unadulterated form. Although the movie showcased the greed of institutions, it also did a masterful job at humanizing each player on the field. The personal dilemmas of average people who were incentivized to behave poorly thanks to a sequence of unique events and circumstances. At the end of the film, I was forced to debate whether I’d do any better. I could’ve been that added more angst to the vendetta between the elite class and the rest of America.
A Quick Summary of the Crisis
The “dot-com” fiasco forced the Federal Reserve to lower interest rates. Because of this, banks had to find different ways to find returns, driving them to invest in high-yield (high-return) mortgage-backed securities. Even though these securities were full of mortgages that were likely to default, credit-rating agencies like Moody’s and S&P still gave these securities high ratings. They had to do what they had to do to keep the lights on.
Regulation was low. Banks began to use more and more debt, enhancing their risk. Many players within the beast were incentivized to look for short-term profits and engage in risky behavior. Lending standards for mortgages become more and more lenient. And eventually, the bubble popped. A stew of bad decisions that America was bound to eat one day. No way around it (enhanced briefs of the crisis here and here).
History has shown that every generation deals with their own financial disaster that comes to shape its behavior. Crises find ways to breed more regulation and more conservative actions. We’ve seen it in the tightened lending standards over the past few years and the emergence of the Dodd-Frank Act. But how are people affected on a micro-scale? How are millennials getting haunted by their past? I didn’t use a credit card until last year! The effects are both subtle and overt.
- Millennials don’t trust banks
- Millennials are dealing with tighter real estate markets
- Millennials are more financially conservative
After seeing what big banks did to their parents, many millennials don’t trust banks. For obvious reasons. That mistrust has become an opportunity for big brand tech companies like Google and Apple, who are more trusted than bulge-bracket banks. Fool me once, shame on you. Fool me twice, shame on me. Millennials would also rather follow a friend’s advice than a financial professional’s.
Buying a Home
In some ways, buying a home is pretty accessible for a young millennial. Organizations have created programs that make buying a home easier and more affordable. FHA does the job. In other ways, it’s harder. If you want a conventional mortgage, you’re dealing with tighter lending standards. 750 credit scores and solid debt-to-income ratios. Everyone could get a home in the early 2000s. Not so much now. Even psychologically, millennials are taking more time to rent and stay with their parents, waiting to have the necessary financial stability to take the big leap. They’re not jumping without a bungee cord.
Millennial Money Habits
Millennials have been coined as pretty good savers. That’s a good thing on the surface. Fair enough. But on the flip side, many young professionals are more conservative than previous generations with their investment strategies. More bonds anyone? 82 percent claim that the financial crisis affected how they look at investing. Hard knocks. Investing can be scary, but it’s better than just saving. Millennials have to find the courage to beat the fear and put that money to work.
No one knows what the next day might bring. But history shows that over time, history often repeats itself. Millennials will likely continue to loosen up as the memory of crisis becomes more and more distant. It’s happened before and it’ll likely happen again. But for now, we’re hurting. It’s hard to know who to trust. And we’ve got our own set of problems like student debt, tech automation, and stagnant incomes. So before you call us entitled, cut us a little slack. We’re still grieving.