Five Years in Limbo
The US financial system may be more stable than it was five years ago, but that is a low bar – it was teetering on the edge of a precipice. Those in government and the financial sector who congratulate themselves on banks’ return to profitability and mild regulatory improvements should focus on what still needs to be done.
NEW YORK – When the US investment bank Lehman Brothers collapsed in 2008, triggering the worst global financial crisis since the Great Depression, a broad consensus about what caused the crisis seemed to emerge. A bloated and dysfunctional financial system had misallocated capital and, rather than managing risk, had actually created it. Financial deregulation – together with easy money – had contributed to excessive risk-taking. Monetary policy would be relatively ineffective in reviving the economy, even if still-easier money might prevent the financial system’s total collapse. Thus, greater reliance on fiscal policy – increased government spending – would be necessary.
NEW YORK – When the US investment bank Lehman Brothers collapsed in 2008, triggering the worst global financial crisis since the Great Depression, a broad consensus about what caused the crisis seemed to emerge. A bloated and dysfunctional financial system had misallocated capital and, rather than managing risk, had actually created it. Financial deregulation – together with easy money – had contributed to excessive risk-taking. Monetary policy would be relatively ineffective in reviving the economy, even if still-easier money might prevent the financial system’s total collapse. Thus, greater reliance on fiscal policy – increased government spending – would be necessary.