I grew up in macroeconomics. that was my first love, in intellectual terms. My first book (Statistics and the German State 1900-1945: The Making of Modern Economic Knowledge) was about the development of macroeconomics back in the early 20th century, and how we arrived at numbers like GDP, GNP, current account, how we put in place the metrics of macroeconomic knowledge.
The 2008 crisis immediately struck me as historically important in shifting the way we need to think about and analyze economic crises going forward.
Unlike 1929, the risk in this case wasn’t in the markets. It was in the banks. It was in the balance sheets of very, very large banks that there was a buildup of very serious risks. Then came the recognition of the widely reverberating risks of bankruptcy. How to respond? You can cap the size of banks and address “too big to fail” in an aggressive restructuring of the banking system, for instance the so-called Swedish model, where you nationalize failing banks and then restructure them and privatize them.
If you’re not going down that route, then the entire game going forward is on bank regulation. And that is an incredibly complex technical field in which you may need, as [JPMorgan CEO] Jamie Dimon once said, a psychiatrist and a lawyer. I’d add an economist to that, and probably a political scientist.
There are so many questions to consider. How much liquidity to require? How are international banks managing currency mismatches on their balance sheet. Are their liabilities and assets in the same currency? If not, what are they doing about the risks involved in that? In the case of global operations, where is their capital in relation to their balance sheets? Are they a European operation with a huge US franchise, but no capital in the US?
Then come the questions of how we interpret what we’ve decided to do and how we enforce it – an ongoing game, one that has shifted with the Trump presidency to a much more pro-business mode.
As I wrote in the book, the election of 2016 seems to me to be much more directly overshadowed by ’08 than was Romney versus Obama in ’12.
I think there are three things that the Obama administration could have done which might have shifted this. One is they could have pushed harder, more spectacularly, with more resolve for support for homeowners. Two, they could’ve found legal means to aggressively pursue some of the senior bankers. And they could’ve done a much larger stimulus, a much larger work creation program in 2009.
If they had done or been seen to be attempting those things, I think they might very well have persuaded more of the Democratic Party’s constituency that this was a party worth voting for, even if the next candidate was Hillary Clinton, not Obama. And that very well may have shifted the outcome of the 2016 election.
Still, there’s every reason to think that there’s been a substantial adjustment in the leadership of Wall Street. I don’t think anyone in that Wall Street leadership group walked away from the crisis rubbing their hands, going, “We had a crisis and the taxpayer bailed us out and we made all these profits. What canny businessmen we are.”
The mood is that this was a near-fatal disaster and there is a pretty serious determination among most senior bankers to avoid anything like that ever happening again. Because it’s humiliating. It’s risky. Nobody wants to be Lehman Brothers, game over.
Kevin Helliker, Editor in Chief of the Brunswick Review, is a Pulitzer Prize-winning journalist. Previously he worked for 27 years at The Wall Street Journal.
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