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Reforms have strengthened the financial system. Banks have strengthened their balance sheets. Regulators are now looking at financial institutions once a year to make sure they can withstand a slowdown.
Yet, a decade after the financial crisis, there is no reason to know if the next disaster will happen, according to three regulators that helped the country through the crisis.
"It's a war forever," said Timothy Geithner, former chairman of the New York Fed and secretary of the Obama administration at a roundtable on the financial crisis at the Brookings Institution on Wednesday.
"There is no way to anticipate the full range of factors that can lead to system failure. It's good to worry about all the potential sources of shock." but you must be humble and skeptical about the ability of people to identify diffuse these things, "he said.
The collapse of the investment bank Lehman Brothers, 10 years ago, set off a panic that went through Wall Street and forced an unprecedented bailout of the financial system. Millions of Americans lost their homes following foreclosures during the Great Recession, and the unemployment rate reached 10%.
Financial crises rarely hit the same country twice in a person's life, and for now, the old regulators say that if the next crisis is more likely to start outside the United States, the country could still be affected.
But such painful episodes can be hard to predict, said Hank Paulson, former treasury secretary under President George W. Bush.
Even still, economic calamities demand similar solutions: capital injections, government support and rapid reaction by regulators.
"The memory disappears from what you are supposed to do," said Geithner. "And we try to preserve the body of knowledge about what works and what does not work."
Speaking on the same panel, Ben Bernanke, the chairman of the Federal Reserve during the crisis, said regulators during the Great Recession "reacted aggressively and controlled it fairly quickly."
"Obviously, we did not succeed, because we did not convince the country, in general, what we were doing was necessary, even if we believed it firmly," he said.
Necessary tools
This warning is a growing concern of former officials who fought the latest crisis regulators will not have the tools to stop another panic.
Bernanke, Paulson and Geithner, all architects of government response in 2008, echoed this sentiment in a New York Times editorial.
While the Congress has since introduced significant reforms under the Dodd-Frank Act, it has also eliminated the necessary tools used by the Fed, the Treasury and the Federal Deposit Insurance Corp.
These changes included the FDIC's prohibition of providing emergency assistance as it had done during the crisis, limiting the Fed's emergency lending powers and ending the emergency. Treasury's ability to support money market funds.
"This is a consistent choice," Geithner said of the changes brought by Congress to the regulators toolbox.
According to him, the risk is that the economy is on the verge of collapse before the Congress is ready to provide tools that regulators need to cope with panic.
"We choose to run a system that creates a risk in the future," said Geithner. "Things have to get really bad before there's freedom to act, I think it's a choice that no serious country is doing in the world today, and I do not do not think it's a good choice for our country. "
"Risk of panic"
Still, the 2010 Dodd-Frank Act brought other tools that regulators could use to safely untie a failing institution. And Bernanke said such measures approved by the Congress would be judged in the event of a new crisis.
But while Bernanke and Geithner said they could work on a limited basis with only one company on the brink of failure, it would have done little to solve the problem Lehman was facing.
"Even the craziest dreams of the architects of this authority [said] it was not designed to save us from the risk of panic, "said Geithner.
For the time being, all three have stressed the importance of ensuring that the economy is as strong as possible to face future threats, including stagnant wages, rising income inequality and soaring wages. budget deficit.
"The best defense against a financial crisis is a strong economy," said Paulson.
CNNMoney (Washington) First published on September 12, 2018: 7:08 PM ET
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