The fall of 2008 saw the biggest financial crisis in decades come to light over the course of just a few months. Stocks collapsed. Banks failed. Now, five years later, how have these events shaped the economy, financial regulation, and consumer confidence?
Expert Kogod professors Jeffrey Harris, the Gary D. Cohn Goldman Sachs Chair in Finance, and Robin Lumsdaine, the Crown Prince of Bahrain Chair in International Finance, answered these questions at a recent event marking the fifth anniversary of the passage of the Troubled Assets Relief Program (TARP). From 2007-2010, Harris acted as chief economist at the U.S. Commodities Futures Trading Commission. Lumsdaine served as an associate director in the Federal Reserve's Division of Banking Supervision and Regulation before joining Kogod in 2008.
Robert Sicina, an executive-in-residence and a former leader at American Express, moderated the discussion between Harris and Lumsdaine.
Sicina: Many average Americans were blindsided by the events of the fall of 2008. Were there warning signs for those in the know that the crisis was coming?
Lumsdaine: I would say there was some forewarning, yes. Bear Stearns collapsed in March of 2008, so there were already some hints of a downturn. The thing about banking oversight, though, is that regulators's ability to oversee the banks is only as good as the information they're getting. While I wouldn't say regulators were caught unaware, they had no real way to predict how events would unfold.
Harris: I think the real surprise, to everyone, was just how connected banks like Lehman Brothers were. Assets that [investors] saw as AAA government rated bonds really had these major banks standing behind them. No one was prepared for the complexity of these big firms.
Sicina: In your opinion, what were some of the best and worst moves [taken by the government] during the crisis?
Lumsdaine: At the time, Congress stalling on the passage of TARP. We really were on the precipice, and people were terrified. I know the delay was a result of wanting a better understanding of why $700 billion versus $600 billion versus $800 billion [in relief funds was best], but at the time the world just needed to know that the situation was under control and $700 billion was a large enough amount to provide that confidence. In a crisis, reputation is everything, and the extra five days [that the passage was delayed] had the global financial system near the brink of collapse.
Harris: There are some people who say that TARP in its entirety was a bad idea. As for me, I'm a firm believer in the robustness of the U.S. economy. Yes, banks and investment firms and the economy are all more interconnected, now more than ever, and that allows disaster to spread faster, but on the whole, we're stronger and more resilient than ever. I think we probably could have watched a little longer to see how things would play out or maybe even have provided less in bailouts.
Sicina: Those are all pretty negative answers; did you see any positive result come from the crisis?
Lumsdaine: I think we definitely learned some good lessons. For example, there is now a greater recognition of the importance of risk management. Risk managers are now enjoying their heyday, in firms of all sizes. And beyond the focus on what is legal, there's also an increased emphasis on ethics. A lot of the practices leading up to the crisis were technically legal but not really ethical. Now we're seeing a greater emphasis on ethical behavior
Harris: I would agree that we've definitely seen an increased focus on risk management. Before the crisis, I remember hearing a banker say that risk management was more "art than science" but I think we're starting to change that. Yes, there are still people taking risky positions, but, on the whole, more firms, and definitely government agencies, are making good risk management a priority.
Sicina: So does this mean we've seen the end of the "too big to fail" era? Are our banks now safe?
Lumsdaine: We can never say any system is completely safe. The day we do that is the day we welcome another crisis. But I would like to think that we can be cautiously optimistic that safeguards are in place.
Harris: I would agree, there is absolutely still the risk that big banks can fail. We have fewer banks than ever and those we do have are bigger than ever. But at the same time, we have more oversight and regulation than ever before. We're watching more closely for signs of disaster at earlier stages and I think that is a good thing.