Tett’s article is worthy of extended excerpts: “What are these surprises? Start with the issue of debt. Ten years ago, investors and financial institutions re-learnt the hard way that excess leverage can be dangerous. So it seemed natural to think that debt would decline, as chastened lenders and borrowers ran scared. Not so. The American mortgage market did experience deleveraging. So did the bank and hedge fund sectors. But overall global debt has surged: last year it was 217% of gross domestic product, nearly 40 percentage points higher – not lower – than 2007.”
Late last month, the Fed declared that six of the country’s biggest banks needed to scale back their plans for returning cash to shareholders to strengthen their capital buffers, a striking reminder that banks shouldn’t be overeager to put the legacy of the financial crisis behind them. Perhaps this is why, during a private round table discussion last week that Timothy Geithner, Henry Paulson and Ben Bernanke, three officials who helped combat (and many would argue also helped cause) the financial crisis warned that the lessons of the financial crisis are already being forgotten, according to the Associated Press,
Paulson, who was Treasury Secretary when Lehman Brothers filed for bankruptcy in September 2008, said that as banks scramble to return money to their investors, “it’s important that people focus on the lessons” of the crisis. “We are not sure people remember everything they need to remember.”
The roundtable took place ahead of a meeting in September at the Brookings Institution (former Fed Chair Bernanke’s current employer) where officials from the Fed, Treasury and other federal agencies will discuss how the US can prepare for the next crisis. The meeting appears to be a counterbalance to the Trump administration’s “deregulatory zeal” as lawmakers and leaders of federal agencies work to undo or sideline some aspects of the Dodd-Frank Wall Street reform bill. Though all three men agreed that the reversal implemented so far by the Trump administration had been “sensible.”
Still, while the safeguards implemented by the law will help the banking system fend off smaller crises, an extreme crisis could pose an existential threat.
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Sliding down the steep slope of the cursed year. [PT]
DJIA, typical pattern in the course of a decade since 1897. Years ending in 7 did tend to be marked by large setbacks on average.
LONDON – Former US President Ronald Reagan once quipped that, “The nine most terrifying words in the English language are: I’m from the government and I’m here to help.” Put another way, policymakers often respond to problems in ways that cause more problems.
Consider the response to the 2008 financial crisis. After almost a decade of unconventional monetary policies by developed countries’ central banks, all 35 OECD economies are now enjoying synchronized growth, and financial markets are in the midst of the second-longest bull market in history. With the S&P 500 having risen 250% since March 2009, it is tempting to declare unprecedented monetary policies such as quantitative easing (QE) and ultra-low interest rates a great success.
But there are three reasons for doubt. First, income inequality has widened dramatically during this period. While negative real (inflation-adjusted) interest rates and QE have hurt savers by repressing cash and government-bond holdings, they have broadly boosted the prices of stocks and other risky financial assets, which are most commonly held by the wealthy. When there is no yield in traditional fixed-income investments such as government bonds, even the most conservative pension funds have little choice but to pile into risk assets, driving prices even higher and further widening the wealth divide.
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