Non-Lessons of the Financial Crisis

By James Kwak

As the fifth anniversary of the Lehman bankruptcy approaches, the Internet is filling up with reflections on the financial crisis and the ensuing years. My main feeling, as expressed in my latest Atlantic column, is amazement at how little we seem to have learned. Looking back, the period in late 2008 and early 2009, when it was obvious that the financial sector would have to change in important, structural ways, now seems like a naïve, youthful delusion. Sure, there are some new rules around the margins, but for the most part little has changed—not just in the financial sector itself, but more importantly in the political and ideological landscape that shapes regulatory policy.

Of course, this isn’t simply the product of collective amnesia. It’s the result of the fact that ideas are shaped by money and political power. And that’s where little has changed.

19 thoughts on “Non-Lessons of the Financial Crisis

  1. The shaping stuff does of course happen, but more importantly politicians surround themselves with people who say certain things, while people with money and with certain beliefs only give campaign donations to politicians on the assumption that they won’t anything that runs contrary to their interests.. There are lots of people with good ideas around, but the people who espouse those ideas just lack circulation and institutional access/power.. IMO the ‘purpose’ of these years is purely to provide anecdotes and data that can be used when the next downturn happens, as people generally don’t hold ‘stuff that happened further back than in the prior decade’ as proof of systemic corruption even when their eyes are opened.. They always require more recent examples of cravenness.

  2. I feel like we’re in an extended version of the period between 1929 and 1932, where everyone knows something’s wrong, and is just waiting for something to be done about it. Meantime, what happens when the other shoe drops? Because we aren’t done with financial crises.

  3. @Patrick. Right. I think we learned plenty about what needed to be done. I also think that the monied interests learned that it works and they doubled down to make sure it continues. I am not sure, @Foppe, that circulation and access are the problems. In the end, it is, as you mention, simply power. @The Raven, Yup. But — and I really don’t know the answer to this — were the monied interests as powerful in ’33 and beyond? Because when this does happen again, I find it hard to believe that the reaction will be any different. Too big to fail still exists and people still believe that the printing press, if anything, is underutilized.

    Monday, September 9, 2013
    Bill Black: Not with a Bang but a Whimper – the SEC Enforcement Team’s Propaganda Campaign
    By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posed from New Economic Perspectives.

  5. From naked capitalism:
    “Yves here. For the last four years, we’ve been highlighting research that has found that high levels of international capital flows are strongly associated with frequent and severe financial crises. Gaius describes how more economists are endorsing this idea, and how the proposed trade deals, the Trans-Pacific Partnership and the US-EU trade agreement, will only make matters worse.
    Read the Rest…

  6. But all this focuses only on what politics and regulation can and can’t do. A lot of the problem is investors themselves. They don’t realize how disadvantaged they are by asymmetric information — in particular by the confusion and misperceptions spawned by the financial industry about its products and services, and what their costs and benefits are to clients and customers. Investors need to get much more suspicious of — and reject — anything complicated or costly (or whose cost can’t be determined). That would trim the financial industry down to size.

  7. So true, James. And the President wonders why we don’t want to get on board with the latest crusade to “hold the perpetrators accountable” – bad things happen, we clamor for a sensible and appropriate response (such as having certain people be charged for the crimes they committed in the 2008 financial meltdown), and next to nothing gets done. We’ve woken up; now what will it look like when the American people actually do something about what we see? The next congressional election should be quite revealing…

  8. The IMF knows that the Fed is playing with fire in emerging markets
    By Ambrose Evans-Pritchard
    “Listen to the IMF’s Christine Lagarde very carefully. While the US Federal Reserve has as a parochial “closed economy” view – and made a series of grave blunders over the last six years as a result – her job is to look at the entire world, and she does not like what she sees.
    She warned over the weekend that Fed tapering could ricochet back into the US economy if handled carelessly.”

  9. I’m leery of entering a debate with the formidable Patrick Sullivan, but here goes … jk … he’s not formidable, and I’m really not at all leery. Anyway …

    Our popular media and economists seem incapable of moving beyond staring at time series and getting to what actually drives the evolution of key variables. Take, e.g., income distribution in the aftermath of the financial crisiis of 2008-09, from which, as James notes, we have not recovered.

    Take this little summary from politico this morning:

    “RICH GET RICHER IN RECOVERY – NYT’s Annie Lowrey: “An updated study by the prominent economists Emmanuel Saez and Thomas Piketty shows that the top 1 percent of earners took more than one-fifth of the country’s total income in 2012, one of the highest levels recorded. … The top 10 percent of earners took more than half of all income. That is the highest recorded level ever. The figures underscore that even after the recession the country remains in a kind of new Gilded Age, with income as concentrated as it was in the years that preceded the Great Depression, if not more so.

    “High stock prices, rising home values and surging corporate profits have buoyed the recovery-era incomes of the rich, with the incomes of the rest still weighed down by high unemployment and stagnant wages for many blue- and white-collar workers.’

    It’s been noted here and elsewhere how the gilded vested interests among the banking community (and used-to-be investment banking community) have taken control of the legislative and regulatory apparatus here in the U.S. Prior to the blow-up, it was Hank Paulson leading the way on “reforming” oversight of the used-to-be investment banks with his lobbying for what ultimately became the “Consolidated Supervised Entities (CSE) program, created in 2004 as a way for global investment bank conglomerates that lack a supervisor under law to voluntarily submit to regulation.” That characterization, btw, came from Chris Cox, when he announced — ex post — the “end” of the CSE program. See )

    Hank got to pick up the pieces of the failed effort at self-regulation as Treasury sect’y.

    In both instances, it required legislation to enact, then legislation to amend the authority for these various programs. Under the CSE program, the used-to-be investment banks, led by LEH, jacked their balance sheets up with massive leverage to “invest” in and distribute the most ungodly collection of financial drek ever conceived, which, it turns out, was nothing but a huge conduit for fraudulently originated and packaged mortgage-backed securities. And, they reported these atrocities to the SEC, but, sadly, no one at the SEC had any idea of what they were looking at or what was happening under the hood of these used-to-be investment banks.

    Only the most powerful and well-connected of these firms survived the financial firestorm brought on by their reckless disregard of anything but the accumulation and protection of their own wealth, thanks to the new legislation they wrote and had enacted at their behest, and thanks to their control over the U.S. Treasury and Federal Reserve System, which, together, engineered the greatest bailout of insolvent firms in the history of the world. This is not hyperbole; it is fact.

    It is no surprise that massive one-way bets made by those closest to the writing, enactment and enforcement of legislation have no consequence other than heads-I-win-tails-you-lose outcomes. It’s not that the institutions are too big to fail; it’s the folks running them who control the government who cannot fail. No matter what legislation they have enacted, they win. If it goes against them, they amend the law itself; if it works for them it keeps rolling on.

    These sideshow displays of angst from academics, politicians and the media are nothing more than that: A pre-programmed Greek chorus that is ready to start singing and chanting at the drop of a hat in order to support whatever legislation or regulation is required to ensure there is never a bad outcome to any banking activity.

    On this anniversary of 9/11 it is good to remember that these used-to-be investment banks have inflicted more harm on innocent civilians in American and the world than any terrorist organization could ever imagine. It also is worthwhile to remember the last time we got to this state, the entire world endured a firestorm occasioned by the rise of the Nazis and fascists in Europe and Asia.

  10. @Paddy who wroteth from on high:

    “….Derivatives are a better indicator of the soundness of loans than ratings agencies…..”

    Uh, there is no cohort of worker bees that will rent-feed that “derivative” that you are promoting.

    @Woych – I contributed to WWIII Kickstarter – did you? Per’s answer to funding “risky” went around the rules, just like the rules go around the real rules of physics…

  11. @Annie: I gave at the Office.
    Recovery for the Rich, Recession for the Rest
    Posted: 09/11/2013 10:40 pm

    “Five years after the financial crisis, it’s become increasingly apparent that the government didn’t rescue “the economy.” It rescued the wealthy, while doing far too little for everyone else.

    That didn’t happen by accident. Our government’s response was largely designed by – and for – the wealthiest among us, and it shows.”

  12. So lets recap our current situation in Canada:

    household debt – growing; housing situation – not resolved, prices dropping after hitting a peak in May 2012; immigration laws – more strict than before (lets blame immigrants yeah); employment – slight decline, stagnation of salaries.

    Banks? Happy and working, making money out of mortgages impossible to pay. Consequences are visible – people are moving to cheaper zones, trying to rent their condoes. Elderly people are still paying their mortgage, even if they stopped working already (report on this topic made by Bank of Montreal). Education – paid, student loans have higher interest now than back in 2008.

    I do not see light at the end of the tunel.

  13. @Woych – nope, “they” made it possible for the rich to become filthy rich thanks to the massive embezzlement of Middle Class taxes. That’s a CRIME.

    Here’s a pithy observation –
    tyshire1 | Sep 11, 2013 11:51 AM ET
    As long as the Federal Reserve System keeps writing bad checks to the U.S. government, Verizon’s biggest customer, the U.S. taxpayer, will bailout this pig before the collapse with even more funny money.

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