|by Kevin McCoy, USA TODAY|
Fear gripped the
Aftershocks of the worst financial crisis since the Great Depression still reverberate in today's fragile recovery. The national psyche remains uneasy, worrying: Could it happen again?
"The next crisis is going to involve not just
There was no time for financial and government leaders to think five years ahead during the dark days of 2008. Often they were forced to battle on multiple fronts — the threatened failure of
It was the financial version of around-the-clock triage, with trillions of dollars at risk, and the future of the national and global financial system in the balance, said former Treasury secretary
The quickening drumbeat of failures shook even some rescue leaders.
"What if the system collapses?" Paulson asked his wife, Wendy, in a phone call as efforts to save Lehman failed. "Everybody is looking to me, and I don't have the answer. I am really scared."
"None of us knew how bad it would be, but we knew it would be very bad," Paulson added in a USA TODAY interview, recalling how, after months of non-stop containment efforts "there just was a moment there when I was seized with fear."
Among the many emergency measures used by rescue leaders, Paulson said three proved most crucial in quelling the near-panic and restoring financial stability:
• Executing a federal takeover of
• Guaranteeing money market mutual funds, the then-$3.5 trillion industry many Americans rely on for retirement and businesses use for short-term funding. Halting the investor run took an unprecedented federal guarantee of the industry. It came after the
• Establishing the Troubled Asset Relief Program, which enabled Treasury to move quickly in restoring confidence in the nation's banks by purchasing equity securities in hundreds of banks and recapitalizing the financial system. Originally budgeted at
Noting that the government's takeovers of Fannie and Freddie and TARP were controversial and required congressional approval, Paulson said, "Nothing could be worse than going up there and saying, 'Hey, we need it, we're powerless without it,' and then not getting it."
Ultimately, the approvals emerged from two weeks of high-stress
LONG-TERM FINANCIAL CURE?
In the view of
But in the five years since, as President
While predicting that a crisis as major as the 2008 implosion was "far less likely, Hirschmann warned, "That doesn't mean there won't be failures."
"The question is, have we created a better system to detect problems early, to look at the risks in the broader system? I think the jury's still out on that," he said.
Paulson, too, has pointed to potential threats, including the as-yet-unchanged structures of Fannie and Freddie. He said placing them under government control was a temporary "timeout" that provided breathing space to replace the current system in which the two housing-finance giants dominate the home mortgage market and leave taxpayers shouldering the cost of failures and shareholders reaping the benefits of success.
Permanent change is crucial, said Paulson, because "today the government basically is backstopping, one way or the other, about 90% of all new mortgages. I look at it and say we're sowing the seeds of another major problem" because government subsidies to Fannie and Freddie are setting the terms of home loans, rather than "the private market and the discipline that it brings."
Paulson also urged broad reform of the money market industry. The
"There are a lot of uncertainties. We've never tried this before," said Bair, who now chairs the
Bair and Paulson also warned of continued reliance on short-term funding such as repurchase agreements, a system in which banks sell securities to buyers for cash and agree to repurchase them later at the same price, plus interest. The bulk of those funds are lent overnight and can be pulled on short notice — as happened during the financial crisis — potentially endangering banks' balance sheets.
While calling the Dodd-Frank Wall Street Reform and Consumer Act "a huge step forward," Paulson urged an overhaul of federal financial regulatory agencies and their sometimes overlapping responsibilities. The existing structure leads to some dysfunctional competition and lack of clarity for businesses, he said.
"We need a financial system that extends credit, that makes sure that there's confidence, that small businesses can get loans … that people can get mortgages," Hirschmann said. "The problem with having this alphabet soup of regulators is nobody's in charge of looking at all the pieces and making sure they work together."
Echoing concerns raised by Paulson, Dodd and others, Hirschmann also cited a relative absence of coordination with efforts to improve financial regulation in other countries. "Some of the solutions require a global approach. And that's proving much harder" to achieve, he said.
Raising the prospect of international financial threats, Bair said some emerging markets have grown quickly because they had higher interest rates that drew U.S. investment. Now that domestic interest rates are more favorable, "the money comes back," she said, raising potential challenges both abroad and at home.
"We don't really know where the tentacles of this have gone," Bair said.
Additionally, some financial experts argue regulators have become too lenient as memories of the financial crisis fade and efforts to spur business and job growth increase in response to what
Bair criticized an August decision in which federal regulators proposed easing a Dodd-Frank provision that would require lenders to maintain a financial stake in mortgages they securitize. The provision was aimed at blocking some subprime and other risky mortgage loans that worsened the financial crisis.
"The intellectual pendulum or the regulatory pendulum has swung way over toward promoting growth," said
The largest U.S. banks more generally have been the focus of renewed calls for reform from government watchdogs and others who say the institutions are so complex and interconnected they pose a continuing financial system risk.
Dodd-Frank hasn't changed that too-big-to-fail situation, said
"Why are we allowing these institutions to be so indebted?" asked Admati, co-author ofThe Bankers' New Clothes. "Why, if we could put speed limits, wouldn't we put speed limits? Why don't we prevent the distress and the default?"
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