By David Wessel
Anniversaries are occasions for reflection. So you may hear quite a bit in the next couple of days about the 10th anniversary of worst moments of the global financial crisis back in Sept 2008. I’ve been doing a bit of reflection myself as we at the Hutchins Center prepare for a conference at which architects of the government’s responses will discuss the reasons they did what they did as well as the alternatives they considered and rejected. (We’ll be webcasting it live on September 11 and 12 and archiving the video on our website if you want to watch.)
Ten years is not enough time for the final verdict of history. Heck, economists and historians spent more than half a century arguing about the Great Depressions. But 10 years does provide us with some perspective.
One. What happened in 2007-2009—the housing bust, the financial panic and all that—was economically catastrophic. And much of it was preventable. Sure, banking crises and panics recur throughout history. But this episode was a failure of almost every check on excesses, irresponsibility and fraud … regulators, legislators, boards of directors, chief executives, rating agencies, accountants, rating agencies, lawyers, the financial press. They all failed. We let the financial system outgrow the regulatory apparatus, we borrowed too much, and we didn’t appreciate just how vulnerable the financial system was to a disturbance like a bursting housing bubble. When we weigh the costs and benefits of financial regulation today—and there are costs—we should remember that the costs of too little oversight and too loose regulation can be enormous.
Two. The government—the Congress, the President, the Treasury, the Federal Reserve—were slow, too slow, to react. Even after the housing bubble burst around 2007, they didn’t appreciate how bad things would get. Of course, the decision makers didn’t know then what we know now. Nevertheless, some folks worried about pumping too much water onto the fire too soon. They worried that cutting interest rates too much would spur inflation or provoke a crash in the value of dollar. They worried that helping too many people would lead others to take unwise risks (known as moral hazard). They were wrong. We would have been better off had the most potent government actions—housing, monetary, fiscal, regulatory—been taken sooner and with more force.
Three. For all the missteps, the changes in director, the political backlash, the clumsy communication, remember that we did not suffer a repeat of the Great Depression—and we could have. Ben Bernanke, the former Fed chairman, says that the 2008 financial panic was WORSE than 1929’s. This time, every major financial institution was shaking. No one ever gets applause for saying: It could have been worse if not for me. But the fact is that it WOULD have been worse if not for the efforts of people like Bernanke, Hank Paulson, Tim Geithner, and their colleagues.
Four. The public knew that times were bad, but never understood what the government was doing and why. Some of this was inevitable. Rescuing financial institutions was crucial but never going to be popular. The public would never appreciate the tough decisions that were made about how best to deploy limited resources—how much for homeowners, how much for auto companies, how much for banks and so on. Some of the anger is justified because so few people were held responsible for this economic calamity… A lot of us want Old Testament justice. And some of the skepticism stems from the klutzy communications from the principals, who never managed to explain clearly what they were doing. Whatever the cause, though, the crisis left a legacy of public distrust not only of Wall Street but also of Washington—and that has lasted a whole lot longer than the Great Recession did.
And, five. A lot has been done to make the financial system more resilient to reduce the risk of a financial crisis as bad as the last one. The banks are better capitalized. Regulation has been tightened. But the job is not finished and the pressure now is to weaken, not complete, post-crisis shoring up of fin reg. As the managing director of the IMF, Christine Lagarde, put it the other day: “The system is safer, but not safe enough.”