Financial Literacy Lesson No-7

A Tale of the banking crisis.

Income pays expenses
Income buys assets.
Hence proved, it's not income but the act to use the income that decides our financial strength.

– Ms. Vinita. V. Pal

Would you believe if I say that the current trend of the banking crisis could be the result of the domino effect of the 2008 global financial crisis? If this sounds a little ambiguous, wait let me put this up in a timeline to make the trends appear more explanatory.

This timeline shows how the trends started in the year 2008 to contain the crisis snowballed into another major banking crisis after 14 years. Those trends were 1st- Quantitative Easing measures proposed by then FED Chairman- Ben Bernanke and second Aggressive buying back of bonds and stocks with the borrowed money of the Fed at low to no interest rates. The decades of quantitative easing make the market and financial institutes addictive as they were earning profits without having to pay interest rates on their aggressive buying. This behavior of negligence on the part of the financial system made the working class more vulnerable to inflation. The result of decades of QE and aggressive buying back of stocks and bonds by the financial system instead of putting the money for growth and development led to non-regulation of financial institutions including banks.

The outcome of the non-regulation of financial institutions began to show up in recent times when FED undertook the task of Quantitative tightening to bring inflation back to 2%. With the Quantitative tightening policy FED began to increase the interest rate as a result of this the banks who had borrowed the money at low and invested in Bonds hit harder as they had parked all their investment in the bonds and now with the rising interest rate their liquidity are dried up. Banks like Silicon Valley and Signature met the same fate. If I can put it in other words, Silicon Valley and Signature banks fall victim to the trends of Quantitative easing. Most of the financial systems that were enjoying the waves of quantitative easing high tide are now caught in it and are vulnerable to getting exposed. In the words of Warren Buffet, “ Only when the tide goes out do you discover who’s been swimming naked.”

If you are wondering, did I lose sight of our financial literacy lesson? No, I did not. The whole story at the beginning of the blog is very much related to our financial literacy lesson no 7- Income pays expenses, and Income buys assets, hence it’s proved, it’s not the income but the act of managing it decides our financial strength. The present banking crisis which is the result of the snowball effect of the 2008 global financial crisis loudly speaks about the importance of managing the income and if it is left unmanaged or unregulated then god forbid be prepared for another financial crisis.

Having read through the entire story of the crisis I have come to realize that financial literacy is a need of an hour. It is very important for you, me, and even the financial system as well.

Following are the lesson that I learned from these two crises:-

1. Don’t become addicted to the trends in the market.
2. Never take the advantage of the schemes or measures implemented to stabilize the economy.
3. Always hedge the investments from unforeseen risk.
4. Never indulge in the non-regulatory act as it is highly exposed to the crisis.
5. Diversification of investment is a safe investment practice.
6. Risk management is one of the fundamentals of achieving a strong financial system.

What about you? If you too have some lessons learned do share them with us.