Five years after the financial fall

The Sunday Shows were all doing a rewind on the financial crisis and the banking meltdown today, being the five year “anniversary” of the crisis. (At least if you measure it from the day that Lehman Brothers imploded.) The big question on everybody’s lips seems to be less concerned with how well the “recovery” has been going, and much more with asking, could it happen again? Michael Hiltzik at the LA Times finds two people with very different answers.

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You can conclude that we’ve pretty much eradicated the risk of another such crisis. That’s the bankers’ viewpoint. Here’s how Morgan Stanley Chief Executive James Gorman put it in an interview with Charlie Rose earlier this month: “The probability of it happening again in our lifetime is as close to zero as I could imagine.”

So… I guess everything’s fine and dandy, then. But you’d be forgiven if you find asking the head of Morgan Stanley this question a bit sketchy, given that he probably has something of a vested interest in supporting the system. The article also digs up one author with a rather different point of view.

Could it happen again? You bet it can, says Anat Admati, a professor of finance and economics at Stanford and co-author of “The Bankers’ New Clothes,” a book published in February that details the shortcomings of banking regulation today. That’s because big banks are still too deeply hooked on borrowing and on making deals in shadow markets that are almost impossible for regulators to track.

“Fundamentally not that much has changed,” she says. “There’s still a lot of risk in the opaque markets that we don’t see, still a lot of leverage that we only discover when it’s too late.”

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The argument then devolves back into another entrenched debate over Dodd-Frank and the entire approach to government regulation of the banking industry and the risk posed to the nation, if not the world. And that’s something that we’re going to be wrestling with in the upcoming mid-term elections and for many cycles to come after that. Many fiscal conservatives will rightly argue that banking is, at least to some degree, no different than any other industry, and that governmental interference is no solution. First, it distorts the real value and inherent checks and balances of the market. And second, it opens the door to corruption and mischief on a massive scale as Washington engages in the practice of picking winners and losers around the globe. Far better, we have argued, to allow the banks to fail if they perform that badly. The ones who invest wisely and minimize their risks will survive and, in fact, flourish.

But the counterargument is that the banks that fail aren’t going under the waves alone. They have their fingers into every aspect of society around the globe, and when they fall they take a lot of people down with them who might not have had any interest or direct relationship with them. The people pointing this out rush to assert that this is precisely why enhanced government regulation is needed to act as a bulwark against collateral damage to Main Street when Wall Street’s inherent evil brings about their next inevitable downfall.

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Are we any better off than we were five years ago? Well… somewhat. That depends who you ask, whether they have a job and how their standard of living is doing compared to 2007. I would say there’s a lot more people who are either doing worse or at least a lot “less better” than they might have without the collapse than those who are truly flourishing. But is more bank regulation the answer? Given the government’s proficiency at regulating everything else they get their tentacles into, that’s a pretty tough sale to make.

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Victor Joecks 12:30 PM | December 14, 2024
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