At the 10th Anniversary of the U.S. Financial Crisis, is our Financial System Safer?
Mid-March marked the 10th anniversary of the Bear Sterns bailout. Six months later in 2008 Lehman Brothers collapsed and shuttered its doors after 158 years in business. In the years since, Congress and our financial regulators have tried to stabilize the system and have created new laws that try to minimize the likelihood and severity of another financial crisis here in the U.S.
So how successful have they been? And is another financial crisis in our near-term future?
To address the first question, Marketplace host Kai Ryssdal interviewed former Federal Reserve Chairman (2006-2014) Ben Bernanke on March 13: Source: https://features.marketplace.org/bernanke-paulson-geithner/
“Well, you asked if the system is safer. I think it is safer. I think the reforms were, on the whole, quite constructive. The banking system is stronger, oversight is better. The tools are mostly better, although some of the tools we used during the crisis were taken away. So it's not an unambiguous improvement, but overall I think the system is stronger.”
As a brief reminder, back in 2008 no U.S. government agency or regulatory body had the authority to help non-bank financial institutions (such as investment banks like Bear Sterns and Lehman Brothers and mortgage companies). Not until Congress gave them the authority could our financial leaders act in a meaningful way.
Using emergency authority from Congress, the Treasury Department was able to put the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) under government conservatorship. Congress also later passed the Troubled Asset Relief Program — the $700 billion bailout package for banks.
In the interview mentioned above, all three individuals (Ben Bernanke, Former President of the New York Fed, and Treasury Secretary Timothy Geithner, and former Treasury Secretary Henry Paulson) stressed that at the beginning of the crisis, they did not have appropriate tools and authorities to deal with problems at hand. One of the reasons the 2008 recession hit the U.S. so hard was because the system had outgrown the protections that had been put in place after the Great Depression. As a result, said Geithner, the U.S. found itself facing a crisis with “a very fragile, dangerous system,” and the regulators had to appeal to the U.S. Congress for unprecedented powers.
Moving past the immediate actions they took in 2008 and 2009, in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted to help strengthen the financial system and provide consumer protections. Specifically, it required banks to have thicker buffers of capital to absorb losses, more reserves of cash and liquid assets to pay off skittish creditors, restrictions on trading and compensation that incentivize risk-taking, and new procedures for winding down failing institutions (including non-bank financial institutions) without taxpayer bailout or a chaotic bankruptcy. Though President Donald Trump’s appointees and Congress are beginning to dial back some of the regulations, most of Dodd-Frank looks like it will remain in place.
So, are we poised for another financial crisis in the U.S.?
Given the laws and regulations put in place over the past 10 years, it looks unlikely the U.S. will have another crisis of a similar magnitude in the near future though there are some ‘yellow’ warning signs flashing: ample flows of capital across borders, mounting debts owed by governments, corporations and households, and ultralow interest rates that nurture risk-taking in hidden corners of the economy.
Total U.S. government debt, at around 250% of GDP, still stands at crisis-era peaks while debt levels in China have caught up and passed the U.S., according to the Bank for International Settlements. U.S. companies’ debts had reached 34% of assets by the end of 2016, the highest at least since 2000. Debt-servicing burdens haven't risen commensurately thanks to low inflation and low rates, but interest rates have begun climbing and if this continues, it will become harder for some companies and countries to service their debts.
Longer-term, if history is a guide, financial crises will never be eradicated because 1) the global financial system is complex and interconnected, 2) it is difficult for regulators to know what will trigger the next crisis and 3) even if they do, they may have to convince politicians for special powers to act appropriately and in a timely fashion.
In conclusion, one of the themes from the joint interview of Bernanke, Geithner and Paulson, that I wasn’t expecting, was their unanimous concern for our hyper-partisan political system and how that can affect our future response to a crisis.
“It's not the best way to run a country, run a financial system, which is to require politicians to decide in the moment that they need a stronger fire station because the politics for the politicians are just terrible in this context and the risk is that they'll be late,” Geithner added. “And because they are late, the country will be left with much more damage than is necessary in that context.”
According to Geithner, the economic challenge that we face today is not lack of ideas or solutions, but getting those solutions “through a deeply damaged, dysfunctional political system.” “The great strength of our country [is] that in the crisis we were able to craft a relatively nonpartisan strategy to try to protect the country from much worse damage,” he said.
Alex Petrovic III