Bernanke, Geithner and Paulson – as Federal Reserve chair, New York Fed president and Treasury secretary, respectively – played prominent roles in the US government’s response to the 2008 financial crisis. In their 2019 insiders’ report Firefighting, the three central actors are more honest than they could be about the time they toiled to save the global economy.
So, what did the regulators learn from 2008? What about the security of the US economy today – and thus the stability of the global financial system? Here’s the elevator pitch:
They learned that even an aggressive attempt at “financial firefighting” couldn’t fix the problem completely. But in the aftermath of the Great Recession, Congress enacted stronger regulations that make financial markets safer today than they were in the years leading up to 2008.
The reforms required banks to hold more capital and liquidity, and with less leverage and short-term financing. However, a political backlash has undermined some of the reforms and complicated future bailouts. The robust response to the 2008 crisis would be difficult to repeat in today’s political climate.
Some have criticized Washington, DC, for not breaking up the too-big-to-fail banks. However, JPMorgan’s rescue of Bear Stearns showed that big isn’t always bad. The world economy needed large institutions to step in and rescue smaller entities.
While the near-meltdown spurred important changes, it would be foolish to believe that those reforms have eliminated financial volatility. History proves that “failures of imagination and limitations of memory” inevitably lead to more crises in the future. Persistently low interest rates are another wildcard: The Fed has much less leeway today to cut rates to stimulate the economy.