Speaking of not learning lessons, take a look at this post by Jeffrey Dorfman at Forbes on our lack of meaningful reforms after the financial crisis of 2007-2008:
All the features of the mortgage market that contributed to the mortgage crisis still exist. No new regulations put in place since the recent recession have done anything to prevent a recurrence of a financial crisis. The incentives for mortgage originators still favor volume over systemic risk management. Borrowers are getting deeper into debt again after paring back following the recession.
This is not a case of those who don’t know history being doomed to repeat it. Virtually everyone in the financial industry remembers what happened and understands at least many of the causes. Yet, we still may repeat the last housing crisis because we are currently busy duplicating all the conditions necessary for another mortgage market meltdown. If we don’t change paths soon, we will pay a price for failing to learn the lessons of the recent financial crisis.
I disagree with his interpretation of Dodd-Frank. I don’t believe that Dodd-Frank was intended to reform anything. I think it was intended to demonstrate to the voters that the Congress was doing something. However, to paraphrase Upton Sinclair, never underestimate the ability of people to avoid reform when their livelihoods depend on not reforming.
I would hope that in reaction to the next financial crisis and there will be a next financial crisis we have the good sense to let the big banks fail. The consequences can hardly be worse or last longer than what we actually did. And a good bit of those consequences will fall on those whose imprudence caused the problem in the first place rather than on those who couldn’t have done anything to stop it.
I thought that requiring banks have a liquidation plan set up ahead of time was a good idea. Also, are you really sure that the consequences could not be worse or last longer? The Great Depression suggests a different story. Our safety nets are better, but better enough to handle that kind of catastrophe? So much more of our national wealth and income is tied up in the financial sector than was the case 30 years ago.
Steve
Very Panglossian of you.
Have you ever helped a big company put together that or a comparable plan? I have. They don’t have to be workable. They just have to be in place. It is kabuki.
You’re not sure that the consequences would be worse and last longer, either. There’s been plenty of testimony from bank regulators that we could have managed the collapse of the big banks and other countries have managed to unwind financial crises without bailing out their big banks.
Here’s what we do know. Despite the laws that were in place no bank executive was punished for the conduct of their banks. No large bank went out of business. The financial crisis was largely a consequence of the bad behavior of the big banks. The big banks are bigger than ever. The big banks are still misbehaving.
It’s also a reasonable inference that moral hazard actually operates.
Why not split the difference between us? Make the big banks subject to moral hazard (Dodd-Frank didn’t do that) and put more stringent regulations in place?
“The big banks are still misbehaving.â€
As are borrowers. Also – see corporate debt.
I’m not sure what regulations would really work. Perhaps dramatically higher reserves on 7-8-9 rated loans. But the banks could price that. The temptation of borrowers to simply purchase an option on assets appears too seductive.
I still in the same place I was 10 years ago: the standard model. Let banks equity get wiped out like in a traditional restructuring, then the most junior debt and so forth. Board and executive behavior will follow accordingly and quickly.
“There’s been plenty of testimony from bank regulators that we could have managed the collapse of the big banks”
Whoa! That I do not remember. The system froze just letting a couple of big banks go, and they weren’t the biggest ones. I cannot think of one large international bank that failed. The largest ever was Washington Mutual (or IndyMac depending upon your source). I remember lots of testimony that we did not know how to wind down a big international, and there was nothing set up up to do so. My money would be on those regulators who made that claim being the same ones who did not want Frank-Dodd and thought what they did leading to and during the banking crisis was appropriate.
https://www.investopedia.com/slide-show/top-bank-failures/
Steve