BREAKING NEWS Traffic Alert: Madison County Coroner responding to fatal Huntsville wreck Full Story

There's no way to avert the next financial crisis, warn former regulators from 2008 meltdown

Reforms have strengthened the financial system. Banks have bolstered their balance sheets. Regulators now ex...

Posted: Sep 13, 2018 3:00 PM
Updated: Sep 13, 2018 3:00 PM

Reforms have strengthened the financial system. Banks have bolstered their balance sheets. Regulators now examine financial institutions once a year to make sure they can weather a downturn.

Yet a decade after the financial crisis, there's no telling when the next calamity will strike, according to three regulators who helped steer the country through the meltdown.

"It's a forever war," Timothy Geithner, the former New York Fed chairman and Obama administration Treasury secretary, said during a panel discussion on the financial crisis at the Brookings Institution on Wednesday.

"There's no way to anticipate the full range of things that can cause a system to break down. It's good to worry about all the potential sources of shock but you must be humble and skeptical about the ability of people to identify, and therefore, preemptively defuse those things," he said.

The collapse of the Lehman Brothers investment bank 10 years ago sparked a panic that rippled across Wall Street, and forced an unprecedented rescue of the financial system. Millions of Americans lost their homes to mortgage foreclosures in the Great Recession, and the jobless rate hit 10%.

Financial crises rarely strike the same country twice in any person's lifetime, and for now, former regulators say that while the next crisis is more likely to start outside the United States, the country could still affected.

But such painful episodes can be difficult to predict, said Hank Paulson, former Treasury Secretary under President George W. Bush.

Even still, economic calamities require similar solutions: capital injections, a government backstop and freedom by regulators to respond quickly.

"Memory fades of what you're supposed to do," Geithner said. "And the one thing we are trying to do is preserve the body of knowledge of what works and what doesn't."

Speaking on the same panel, Ben Bernanke, the chairman of the Federal Reserve during the crisis, said regulators during the Great Recession "did respond aggressively, and did bring it under control pretty quickly."

"We didn't succeed obviously in that we didn't persuade the country, generally speaking, what we were doing was necessary, even though we firmly believed it was," he said.

Necessary tools

Etched into that warning is a growing concern by former officials who fought the last crisis that regulators won't have the necessary tools to halt another panic.

Bernanke, Paulson and Geithner, all architects of the government's response in 2008, echoed that sentiment in an op-ed in The New York Times.

While Congress has since ushered in important reforms under the Dodd-Frank law, it has also stripped away necessary tools used by the Fed, Treasury and the Federal Deposit Insurance Corp., they argue.

Those changes included barring the FDIC from providing emergency support as it had during the crisis, placing limits on the Fed's emergency lending powers, and ending Treasury's ability to backstop money market funds.

"That's a consequential choice," Geithner said of the changes made by Congress to regulators' toolkit.

The risk, he argues, is that the economy will have to be teetering on the brink of collapse before Congress is willing to provide tools regulators need to abate the panic.

"We are choosing to run a system that creates the risk at some point in the future," said Geithner. "That things have to get really terrible again before there's freedom to act. I think that's a choice no serious country makes around the world today, and I don't think it's a right choice for us as a country."

'Risk of a panic'

Still, the 2010 Dodd-Frank Act did bring with it other tools regulators could use to safely unwind a failing institution. And Bernanke said such measures approved by Congress would be tried if there's a new downturn.

But while Bernanke and Geithner said it could work on a limited basis with only a single firm on the precipice of failure, it would have done little to solve the problem that had been facing Lehman.

"Even the wildest dreams of the architects of that authority [said] it wasn't designed to save us from the risk of a panic," said Geithner.

For now, all three emphasized the importance of ensuring the economy is as strong as possible to address future threats, including stagnant wage growth, growing income inequality and a ballooning fiscal deficit.

"The best defense we have against a financial crisis is having a strong economy," said Paulson.

Huntsville
Broken Clouds
76° wxIcon
Hi: 78° Lo: 70°
Feels Like: 76°
Florence
Overcast
78° wxIcon
Hi: 87° Lo: 71°
Feels Like: 81°
Fayetteville
Clear
73° wxIcon
Hi: 85° Lo: 70°
Feels Like: 73°
Decatur
Few Clouds
76° wxIcon
Hi: 83° Lo: 71°
Feels Like: 76°
Scottsboro
Broken Clouds
77° wxIcon
Hi: 82° Lo: 71°
Feels Like: 78°
WAAY Radar
WAAY WAAY-TV Cam
WAAY Temperatures

Alabama Coronavirus Cases

Confirmed Cases: 46424

Reported Deaths: 1032
CountyConfirmedDeaths
Jefferson5486155
Montgomery4246105
Mobile4219136
Tuscaloosa234644
Marshall177011
Madison15548
Lee143337
Shelby135724
Morgan11285
Walker98525
Baldwin9809
Elmore96215
Dallas9109
Franklin90216
Etowah79013
DeKalb7615
Chambers64327
Autauga63612
Butler63228
Tallapoosa60469
Russell5680
Unassigned52226
Limestone5181
Houston5106
Lauderdale5016
Lowndes47821
Cullman4705
Pike4525
Colbert4266
St. Clair4162
Escambia4118
Calhoun3875
Coffee3863
Covington3727
Bullock36810
Barbour3572
Talladega3237
Marengo31711
Hale31521
Dale3020
Jackson3022
Wilcox2948
Sumter28512
Clarke2836
Winston2663
Chilton2622
Blount2511
Monroe2412
Pickens2386
Marion23613
Conecuh2177
Randolph2169
Macon1999
Choctaw19712
Bibb1961
Greene1868
Perry1791
Henry1363
Crenshaw1253
Washington1187
Lawrence1090
Cherokee1037
Geneva840
Lamar801
Fayette721
Clay692
Coosa591
Cleburne391
Out of AL00

Tennessee Coronavirus Cases

Confirmed Cases: 53514

Reported Deaths: 665
CountyConfirmedDeaths
Shelby12176202
Davidson11599127
Rutherford311136
Hamilton286736
Sumner167053
Trousdale15035
Williamson142015
Knox13098
Out of TN10958
Wilson99917
Putnam9197
Sevier8573
Robertson85511
Bradley7734
Unassigned7312
Lake6940
Tipton6535
Bledsoe6231
Montgomery5877
Bedford5847
Macon5004
Maury3793
Hamblen3744
Hardeman3574
Fayette3282
Madison3182
Loudon2931
Rhea2890
Blount2623
Dyer2613
McMinn24318
Cheatham2361
Dickson2190
Cumberland1884
Washington1820
Lawrence1726
Lauderdale1543
Jefferson1471
Anderson1432
Sullivan1412
Monroe1406
Gibson1331
Coffee1250
Smith1241
Greene1172
Obion1172
Hardin1157
Cocke1050
Marshall981
Haywood962
Franklin903
Wayne890
Hickman880
Warren810
Marion794
McNairy760
White763
Carter701
DeKalb700
Giles701
Lincoln680
Weakley661
Overton651
Hawkins642
Roane640
Grundy631
Unicoi550
Campbell541
Claiborne530
Carroll491
Henderson480
Grainger470
Polk460
Henry450
Johnson450
Sequatchie420
Crockett403
Cannon370
Chester370
Humphreys352
Perry350
Meigs320
Jackson300
Morgan281
Fentress240
Stewart240
Decatur220
Clay190
Union190
Scott180
Houston150
Moore150
Benton131
Hancock80
Van Buren70
Lewis60
Pickett60

 

 

Community Events