Although I am not an economist, personally, I really do not believe that a country’s overall GDP is reflective of a country’s overall economic well-being, and this is based on many factors that I have witnessed over the past decade, especially during the financial crisis of 2008 and the subsequent economic recession in 2009. However, GDP is also widely considered one of the better indicators yet to refer to when it comes to measuring a country’s overall financial health compared to other indexes. Although personally, I would also look at the overall expenditures of a country, that is, the balance sheet, A.K.A national debt, and compare it with its total revenue from all sources. In the 2009 economic recession, the U.S. GDP contracted by about 4.3 percent compared to the same period in 2008, which was largely believed to have been triggered by poor investment decisions made by institutional and retail investors.

It might not sound like a lot on paper, but it created a tidal wave of financial setbacks for everyone, with some of its financial repercussions still in existence to this date. This, quite frankly, when combined with the ridiculously risky lending practices by the banks, is a literal boiling pot and the very definition of disaster. For instance, having lived through that time, I personally know someone, a close family friend of ours, that brought a single-family house that they clearly could not afford with their income at that time because, when combined with his family’s other financial obligations, buying this house would blow their debt-to-income ratio completely out of proportion, a staggering 80 percent of their income. However, because the banks were so laid back with their lending criteria at that time, people like this family friend of ours were able to qualify for a mortgage and car loan and skip income verifications and financial scrutiny, something that we see as a normal lending practice today and some of the many safeguards that were put in place following the crisis.

Nevertheless, it is important to note that the financial crisis is not triggered by one event, as numerous factors come into play. In 2007, before the financial crisis began, it started off as a booming housing market. And, of course, shadowed by an impending crisis in the mortgage-backed bonds and securities. This is mainly caused by people taking out loans they cannot afford to pay back, primarily with ARM loans, which stand for adjustable rate mortgages. The main selling point for adjustable rate loans is that they tend to and usually to provide the borrower with a ridiculously low introductory interest rate that is locked in for about one to five years, depending on the lender, then at the end of that introductory period, automatically transition towards an adjustable rate loan based on market fluctuations and rate adjustments made by the Federal Reserve.

Now you might ask, what did the government do to alleviate this impending mortgage crisis? Well, as the foreclosure rate continued to rise and house prices continued to fall in the following months, the federal government implemented more tax credits to incentivize people to purchase more houses and drive up demand. The Federal Reserve at that time also saw this sharp nosedive of interest for people to buy homes as an indicator to keep their adjustment rates at an all-time low in order to keep mortgage loans affordable to prevent a housing market collapse. Unfortunately, now we know that if we artificially drive up demand and not fixing the underlying ticking time bomb, that is, the horrifying lending practices, the issue will never be solved.

With all of these fiscal policies and market control measures failing to revitalize the decaying economy, in early September 2008, one of the biggest investment companies of that time, Lehman Brothers, defaulted on their debt and was unable to pay back many of its financial obligations and it was clear from that point on that the company was going to fail and is in the verge of collapse. And finally, on September 15th, 2008, they filed for Chapter 11 bankruptcy and ceased operations. At that time, Lehman Brothers employed roughly 26000 people globally. This means that these people who just lost their work might be unable to provide for their families and afford to pay their own financial obligations to their own banks and, of course, their loans. This has a huge ripple effect if you think about it from a broader economic viewpoint because if these individuals fail to pay their obligations to their banks, their banks are going to suffer financially. And since a lot of banks were encouraged to lend by the Federal Reserve’s low borrowing cost, they did not have the incentive nor the foresight to keep some of their money in reserves in case things got out of control. When massive default happens, these banks themselves are also going to be on the verge of bankruptcy, and that is exactly what happened to Washington Mutual bank, one of the largest banks in the U.S. at that time.

Now, with the banks starting to fail, people who deposited money with Washington Mutual bank will also suffer tremendously from this seemingly unlinked and unrelated situation, that is, the failing of a company. If people lose their whole life’s savings, these people are also going to go broke and unable to pay their own financial obligations, and the cycle repeats. It’s also worth keeping in mind that this is only taking into account one company and one failing bank, and not even taking into account its other financial sector jobs that rely on these banks or companies to provide services or goods. Now, bring yourself out of this analogy and, instead of picturing one company, picture the entire economy as a whole, with tens of thousands of companies failing concurrently. It’s bad, isn’t it? But, here’s the bad news, it seems like we are on the same path again in recent years, and of course, with some catches and subtle differences here and there. At the end of the day, what we, human beings, learn from history, is the hard cold fact that we never learn from history.