Vignettes from the crisis highlight the paradigm shift
We're all just economic agents seeking to maximize market efficiency, right?
Few people believe that today but reading through the stories of people lives who were unalterably changed after the financial crisis highlights the shift. Aside from the financial shift, it was a deep financial blow that completely changed their relationship with risk and undermined their trust in the financial system, if not the entire economy.
"I am also more cautious. I don't think people my age are as comfortable taking out loans to buy houses and cars. I am quite an ambitious individual, but in my job search I am looking for an employer that was stable during the financial crisis and the dotcom bubble, that wasn't laying off thousands of people. Maybe if I had grown up without the crisis overshadowing my decisions, I might have taken more risks," says Joanna Ntoukaki, 23, in one of a series of sobering stories in the FT today.
Here's another one from Karim Ullah, a magazine publisher who lost his business in the crisis:
"I've been helping my wife start a pop-up Indian restaurant, and we run it very differently. My approach to risk has changed in a major way. One rule I follow now is to never borrow money to start a business. There are so many other creative options. The start-ups I'm working on now have tremendous potential, but if they don't work we won't lose out financially."
How do you account for that in your model?
It's clear that central bankers haven't for 10 years. Forecasts have been far too optimistic everywhere and the big reason why is that people just don't act like they used to.
The belief was that low rates would encourage risk taking but as Mark Dow argues, the cost of capital is at least third on the list of what inspires people to borrow.
The point about job security is especially salient. Aside from the crisis hit, there's a secular shift toward more precarious work and that's going to make economies more risk averse generally.
