The 2008 financial crisis cost every American $70,000, according to the San Francisco Federal Reserve. An entire generation’s lifetime earnings will be lower because of it. Trillions of dollars in wealth were destroyed.
And yet, we seemingly learned nothing from it — which means it could happen again, and sooner than you think.
The 2010 Dodd-Frank financial reform law was supposed to prevent a repeat catastrophe from occurring by bolstering consumer protection, bringing banks’ shady transactions under regulatory scrutiny, and providing a way to take apart big, failing banks instead of bailing them out, among other measures. But Congress and the Trump administration are weakening what didn’t go far enough in the first place.
For instance, on a bipartisan basis in May, Congress approved a measure that raises the level at which banks are subject to stiffer regulation, from $50 billion in assets to $250 billion. It was presented by members of Congress as a way to provide relief to community banks, but it actually allows for less attention on major regional players such as Sun Trust or BB&T, and will encourage other banks to grow up to the $250 billion barrier. Lehman Brothers, remember, was not the biggest of the big when its bankruptcy occurred, so allowing the definition of “big” to creep ever upward is dangerous.
A second deregulation bill passed the House in July with a big bipartisan majority. It would do further damage by exempting some non-banks — such as insurance companies or money managers — from assessments meant to determine whether a firm can survive a national economic calamity without being bailed out. This is a key change with potentially catastrophic consequences: just because companies aren’t banks doesn’t mean they can’t take down the financial system. AIG, for example, was an insurance company that was so entangled with Wall Street that it received a bailout in 2008, despite not being a bank. The Senate could likely muster up a healthy number of votes for this bill too, and Majority Leader Mitch McConnell has pledged to vote on it before the midterm elections.
Then there’s the Trump administration’s undermining of the Consumer Financial Protection Bureau, an agency that is one of the most concrete tools to protect regular Americans from being ripped off by financial institutions — which they were before the crisis. Though far from perfect, the bureau has won important victories for consumers by taking on deceptive credit card company practices, standardizing mortgage forms and cracking down on predatory lending at for-profit colleges – securing consumers billions in refunds from ill-gotten corporate gains.
Trump then took office, and appointed Mick Mulvaney to run the bureau, who doesn’t believe it should exist and is acting like it. He’s pulled back from investigations, ended promising cases and even changed the bureau’s name. He seems to want to prevent the agency from doing its job at all, though it’s the only regulator solely tasked with the welfare of consumers rather than that of financial institutions.
The same thing is occurring at the Office of Financial Research, a team within the Treasury Department charged with collecting and standardizing the sort of data regulators didn’t have in the buildup to the 2008 crisis, which could have helped them spot the mess in mortgage markets sooner. Trump’s appointee to head the office used to be on the staff of Rep. Jeb Hensarling, R-Texas, who wanted the office abolished altogether. Like Mulvaney, there’s little reason to think he would work to fulfill the office’s mission.
A further big flaw in Dodd-Frank is that it left much of the nuts and bolts up to the discretion of regulators, rather than creating hard and fast rules for them to implement. Now, given the general anti-regulatory mindset that the Trump team brought to federal agencies, all sorts of key regulations are having exemptions baked in — including rules that would have reined in some of Wall Street’s riskiest trading practices — when they’re being written at all.
This all matters because it is unclear whether the financial system is actually any safer than it was when Lehman Brothers hit the skids. The biggest banks are still big — and in some cases bigger — than they were in 2007, and they’re again making money hand over fist. They also aren’t any less prone to making boneheaded mistakes or scamming consumers, because doing so enables them to make loads of money, as they did before the crisis. The misdeeds of Wells Fargo alone can fill entire articles.
And since no bank executives were punished for their roles in fomenting the meltdown, they’ve evinced no concern about getting back to their same tricks.
Meanwhile, much of the regulatory infrastructure of Dodd-Frank that does exist is untested. For instance, the law gives regulators the power to close and dismantle a failing financial behemoth without resorting to the sort of ad hoc bailouts to which Congress and the Bush administration turned. Will that new power work? Will regulators even have the fortitude to try it? No one really knows, and the matter won’t be settled until a new crisis hits.
It’s difficult to avoid the conclusion that big financial institutions and decisionmakers in Washington are hoping that the financial crisis is far enough in the past that the public will ignore how the regulations designed to prevent another are being rolled back or moderated. Before the crisis, there was bipartisan agreement that Wall Street should be given freer rein to operate; now there is again, in deed if not in words.
The saying goes that those who forget history are doomed to repeat it. A decade is far too soon to forget how dark the days of the financial crisis really were.