• About Us
  • Who Are We
  • Work With Us
Wednesday, February 8, 2023
No Result
View All Result
NEWSLETTER
The Globe Post
39 °f
New York
44 ° Fri
46 ° Sat
40 ° Sun
41 ° Mon
No Result
View All Result
The Globe Post
No Result
View All Result
Home National

Lessons Not Learned: US Financial System Still at Risk 10 Years After Crash

Bryan Bowman by Bryan Bowman
09/12/18
in National
Christine Lagarde

IMF chief Christine Lagarde. Photo: Cristobal Bouroncle, AFP

10
SHARES
Share on FacebookShare on Twitter

Ten years ago this week, on September 15, 2008, the U.S. financial titan Lehman Brothers filed for bankruptcy, triggering a massive fallout that would become known as the Great Recession.

The ramifications were global and long-reaching. Nearly six million people in the United States lost their jobs in the wake of the crisis. Retirement savings vanished. The unemployment rate doubled, maxing out at almost 10 percent. A study from the federal reserve suggests that the average American will lose $70,000 over their lifetime as a result of the crash.

Today, the stock market is booming. The Nasdaq and S&P 500 hit record highs this year while the unemployment rate has reached historic lows. But is the international financial system really any safer now than it was a decade ago?

Despite its strength on paper, experts say the U.S. system remains dangerously vulnerable to future crashes.

Reflecting on the state of the international financial system, Christine Lagarde, managing director of the International Monetary Fund, published an ominous warning last week as we approach the anniversary of Lehman Brothers’ collapse.

“The system is safer, but not safe enough,” Lagarde said.

Risk Taking

Lagarde described a culture on Wall Street that continues to tolerate risky behavior in the name of quick profits.

“One other important area that has not changed much — the area of culture, values, and ethics,” she said. “The financial sector still puts profit now over long-range prudence, short-termism over sustainability.”

Mo Chaudhury, a professor of finance at McGill University, told The Globe Post he shares Lagarde’s concerns.

“What is good for Wall Street and banks is not always good for the general citizenship,” Chaudhury said, explaining that major financial executives are primarily incentivized to promote the interests of their shareholders, even if it means engaging in aggressive and risky trading practices.

Executives claim that their internal risk models are significantly improved since 2008, but Chaudhury said they remain inherently flawed.

“The financial sector still puts profit now over long-range prudence, short-termism over sustainability.”

“The models, after all, are based on assumptions,” he said. “By nature, industry people are reluctant to factor in the most conservative scenario or the most stressful scenario.”

Raising the stakes is the fact that banks continue to grow in size and complexity. Lagarde lamented that there remain banks that are “too-big-to-fail,” making good public sector regulation all the more necessary to prevent another disaster.

Deregulation

In May, Congress repealed parts of the Dodd-Frank Act, a massive Wall Street regulation bill passed after the 2008 collapse aimed at protecting the public from future crises.

Such deregulation, Lagarde said, is dangerous.

“Perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”

Big Bank lobbyists have successfully chipped away at financial regulations, even when Democrats controlled the Senate and White House. Like in 2014, when @Citi slipped an amendment into a spending bill that reversed a key Dodd-Frank provision. #EndCorruptionNow pic.twitter.com/OBopKacax7

— Elizabeth Warren (@SenWarren) August 20, 2018

Lawmakers who supported the repeal have insisted that the changes only affect small and mid-sized banks.

Karen Kunz, a professor of public administration at West Virginia University, said those claims are true but warned that future deregulation efforts are inevitable as financial lobbyists continue to exert pressure on Washington.

Kunz, who is a co-author of “When the Levees Break: Re-visioning Regulation of the Securities Markets,” said that Dodd-Frank was not an adequate solution in itself anyway, calling it “patchwork” and arguing that much broader, systemic reforms are necessary.

“Every time there’s a problem … Congress sort of just comes skipping along afterwards and says, ‘oh, we should do something about this,’” Kunz said. “It’s like closing the barn door after the horses are gone … there’s no forward thinking.”

Regulatory Capture

The power that the financial sector exerts in government is a significant obstacle to regulating the industry in the public interest, Chaudhury and Kunz said.

“[Politicians], in principle, should not owe anything to business. Their primary allegiance should be to the people who elected them,” Chaudhury said. “The problem is, it’s become so expensive to run campaigns that … elected representatives far and wide are falling prey to these lobbying efforts …  and become beholden to the special interests.”

Regulatory capture is a concept in political economy that occurs when a government regulatory agency becomes influenced by the interest groups it’s tasked with regulating.

According to Kunz, regulatory capture has been a persistent issue in regulating the financial sector throughout history.

“When you open up the dictionary, you find J.P. Morgan’s picture there,” he said.

“elected representatives far and wide are falling prey to these lobbying efforts …  and become beholden to the special interests.”

A current example of the issue that Chaudhury cited is the “watering down” of the Consumer Financial Protection Bureau under the Donald Trump administration.

The CFPB was created in the aftermath of the Great Recession and is charged with protecting the American people from predatory behavior from banks.

Trump appointed Mick Mulvaney, a former Congressman with close ties to the banking industry, to serve as its acting director. Since then, the agency has enforced far fewer cases than in previous years. In June, Mulvaney, who referred to the CFPB as “a joke” while in Congress, fired all 25 members of the group’s advisory board.

According to Chaudhury, Mulvaney’s appointment has resulted in “really the destruction of the [CFPB].”

But, as Kunz notes, the issue is much larger than the Trump administration and Mick Mulvaney.

“[Financial regulations] are not effective and they’re not meant to be,” she said. “You have this persistently volatile market because the entire structure requires that it be that. It’s set up to support a volatile market.”

For Chaudhury, the best hope of meaningfully changing the system comes from young people participating in politics. He said the fact that record numbers of young people, particularly young women, are winning elections is evidence that the internet is slowly changing the political landscape.

“These people, as of right now, have no allegiance to big money,” he said. “So, let’s see how, if that happens, the politics and political economy and the regulations change.”

Warren: ‘Corruption is a Form of Public Cancer and Washington’s Got it Bad’

Share10Tweet
Bryan Bowman

Bryan Bowman

Email Bryan at bryan.bowman@theglobepost.com or follow him on Twitter @TGPBryanBowman

Related Posts

Rescuers inspect the wreckage at the site of a Yeti Airlines plane crash in Pokhara, Nepal
World

At Least 67 Killed in Nepal Plane Crash

by Staff Writer
January 16, 2023
Wall Street
Business

Wall Street Ends Sharply Lower After Inflation Hit 30-Year High

by Staff Writer
November 10, 2021
didi
Business

Most Asian Markets Rise After Healthy US Jobs Report

by Staff Writer
July 5, 2021
President Joe Biden is set to unveil a multi-trillion-dollar recovery plan.
Business

Asian Markets Track US Losses, Biden Spending Plan in Focus

by Staff Writer
March 31, 2021
Sign on shop window warning of temporary closure due to COVID-19.
World

UK Enters Deepest Recession of Any Major Economy

by Delaney Murray
August 12, 2020
UN Predicts ‘Deep Recession’ in Latin America Due to Virus
Featured

UN Predicts ‘Deep Recession’ in Latin America Due to Virus

by Staff Writer
April 3, 2020
Next Post
Protesters in Morocco

More People Internally Displaced in Ethiopia than Syria in 2018 [Report]

Imran Khan

Pakistan's Military Sets Restrictions on Reporting Limiting Press Freedom [Report]

Recommended

An AFP journalist views an example of a "deepfake" video manipulated using artificial intelligence.

Deepfake ‘News Anchors’ in Pro-China Footage: Research

February 8, 2023
Syrian rescuers and civilians search for victims and survivors amid the rubble of a collapsed building, in the rebel-held northern countryside of Syria's Idlib province on the border with Turkey, early on February 6, 2023. Syrian rescuers (White Helmets) and civilians search for victims and survivors amid the rubble of a collapsed building

Quake Kills Over 1,200 Across Turkey, Syria

February 6, 2023
Protesters rally against the fatal police assault of Tyre Nichols, outside of the Coleman A. Young Municipal Center in Detroit, Michigan, on January 27, 2023

How Do Violent ‘Monsters’ Take Root?

February 3, 2023
A supporter of nurses' strike and NHS holds a placard

UK Faces Fresh Mass Strikes as Wage Talks Derail

February 1, 2023
Israeli security forces in Jerusalem

Palestinian Gunman Kills 7 in East Jerusalem Synagogue Attack

January 30, 2023
The Doomsday Clock reads 100 seconds to midnight, a decision made by The Bulletin of Atomic Scientists, during an announcement at the National Press Club in Washington, DC on January 23, 2020

‘Doomsday Clock’ Moves Closest Ever to Midnight

January 25, 2023

Opinion

Protesters rally against the fatal police assault of Tyre Nichols, outside of the Coleman A. Young Municipal Center in Detroit, Michigan, on January 27, 2023

How Do Violent ‘Monsters’ Take Root?

February 3, 2023
George Santos from the 3rd Congressional district of New York

George Santos for Speaker!

January 16, 2023
Commuters waiting for buses in Metro Manila. Philippines

Eight Billion and Counting…

November 29, 2022
Mahsa Amini protests

Imagining a Free Iran

October 24, 2022
Vladimir Putin

How 18th Century International Law Clarifies the Situation in Ukraine

September 29, 2022
Vladimir Putin

Falling for Putin

September 15, 2022
Facebook Twitter

Newsletter

Do you like our reporting?
SUBSCRIBE

About Us

The Globe Post

The Globe Post is part of Globe Post Media, a U.S. digital news organization that is publishing the world's best targeted news sites.

submit oped

© 2018 The Globe Post

No Result
View All Result
  • National
  • World
  • Business
  • Interviews
  • Lifestyle
  • Democracy at Risk
    • Media Freedom
  • Opinion
    • Editorials
    • Columns
    • Book Reviews
    • Stage
  • Submit Op-ed

© 2018 The Globe Post