Top former regulators, Greenspan biographer decry erosion of regulation 10 years after financial crisis

As the tenth anniversary approaches of the failure of a huge Wall Street investment bank – considered by many the advent of the financial crisis – participants and observers of that event are speaking out about the dangers of ignoring or repealing regulations adopted in the wake of the crisis.

Three former key regulatory leaders of the actions taken after Lehman Brothers failed on Sept. 15, 2008, (the day the investment bank filed for bankruptcy), in a joint column Friday in the New York Times wrote that reforms of financial regulation have helped make the system more resilient, making a crisis less likely to occur.

“Our main concern is that these defenses will erode over time and risk-taking will emerge in corners of the financial system that are less constrained by regulation,” wrote former Treasury Secretary Henry M. (“Hank”) Paulson Jr., Federal Reserve Board Chairman Ben S. Bernanke, and New York Federal Reserve Board Chairman (and former Treasury Secretary) Timothy F. (“Tim”) Geithner.

They warned that Congress has taken away, in post-crisis reforms, a number of tools used by federal banking agencies. “Among these changes, the FDIC (Federal Deposit Insurance Corp.) can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed’s emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds. These powers were critical in stopping the 2008 panic,” the three wrote.

The former regulators noted that the country needs to ensure that future generations of “financial firefighters” have emergency powers needed to prevent the next fire from becoming a conflagration.

“We must also resist calls to eliminate safeguards as the memory of the crisis fades,” they wrote. “For those working to keep our financial system resilient, the enemy is forgetting.”

(Paulson, Bernanke and Geithner are scheduled to participate in a 90-minute, live webcast session Wednesday, sponsored by the Brookings Institution at 10 a.m. ET, titled “10 Years After the Global Financial Crisis.” Registration is required.)

On Monday, a biographer of former Federal Reserve Board Chairman Alan Greenspan wrote in the Washington Post that essential regulations meant to combat a financial crisis “are stymied by fractured government machinery and rapacious lobbies.”

“Even today, the financial system has multiple overseers answerable to multiple congressional committees, because all this multiplying produces extra opportunities for lawmakers to extract campaign contributions,” wrote Sebastian Mallaby, who two years ago published a Greenspan biography.

Mallaby said he contributed Monday’s column after having immersed himself in the life of Greenspan through the biography, which gave him his own perspective. He said when the biography was first published, he was concerned that the common understanding of the crisis was wrong. “Now, as we gaze back after a full decade, the mistake looks dangerous,” he wrote.

“The important lesson of the crisis is not that markets are fallible, which every thoughtful person knew already. It is that essential regulations – the sort that the supposedly anti-regulation Greenspan actually favored – are stymied by fractured government machinery and rapacious lobbies,” he wrote.

Mallaby asserted that “vast government subsidies still encourage Americans to take big mortgages; Fannie Mae and Freddie Mac still operate, despite endless talk of breaking them up.”

He added that although post-2008 regulations have ensured that banks are better capitalized, “the lobbyists are pushing back.”

“Merely a decade after the Lehman bankruptcy brought the world economy to its knees, the Trump administration is listening to them,” he stated.

The dangerous myth we still believe about the Lehman Brothers bust (Washington Post)

What We Need to Fight the Next Financial Crisis (New York Times)

10 Years After the Global Financial Crisis (Brookings)