Bernanke, Geithner & Paulson Warn: "We've Forgotten The Lessons Of The Financial Crisis"

Late last month, the Fed declared that six of the country's biggest banks needed to scale back their plans for returning cash to shareholders to strengthen their capital buffers, a striking reminder that banks shouldn't be overeager to put the legacy of the financial crisis behind them. Perhaps this is why, during a private round table discussion last week that Timothy Geithner, Henry Paulson and Ben Bernanke, three officials who helped combat (and many would argue also helped cause) the financial crisis warned that the lessons of the financial crisis are already being forgotten, according to the Associated Press,

Paulson, who was Treasury Secretary when Lehman Brothers filed for bankruptcy in September 2008, said that as banks scramble to return money to their investors, "it's important that people focus on the lessons" of the crisis. "We are not sure people remember everything they need to remember."

GEithner

The roundtable took place ahead of a meeting in September at the Brookings Institution (former Fed Chair Bernanke's current employer) where officials from the Fed, Treasury and other federal agencies will discuss how the US can prepare for the next crisis. The meeting appears to be a counterbalance to the Trump administration's "deregulatory zeal" as lawmakers and leaders of federal agencies work to undo or sideline some aspects of the Dodd-Frank Wall Street reform bill. Though all three men agreed that the reversal implemented so far by the Trump administration had been "sensible."

Still, while the safeguards implemented by the law will help the banking system fend off smaller crises, an extreme crisis could pose an existential threat.

"We’ve got better defenses against the more mild, typical sets of shocks that happen to economies and financial systems but in the extreme crisis probably less degree of freedom, more constraints than would be ideal," former Treasury Secretary and New York Federal Reserve Bank President Geithner said.

Bernanke and Paulson complained that, if another serious crisis were to break out, Congress hasn't allowed the FDIC and the Treasury's Exchange Stabilization Fund enough flexibility to respond adequately, per Bloomberg

"There is some concern there," said former Fed Chairman Bernanke, who is now a distinguished fellow at the Brookings Institution in Washington, though he also noted that regulators are now more attuned to potential systemic risks.

And that's extremely important, because there's nothing more dangerous than failing to act, Paulson said.

"If we don’t act, that is the most certain fiscal or economic crisis we will have," said Paulson, who chairs his own institute in Chicago. "It will slowly strangle us."

Bernanke also took a few minutes to defend his handling of the crisis, while warning about the social ructions that often result from economic downturns.

The resulting economic discontent, fed by widening financial inequality, contributed to Trump's presidential victory. Similarly weak recoveries fueled populist backlashes in other nations, too.

"Financial crises, particularly big ones, do tend to get followed by a population reaction; that was certainly the case in the 1930s," Bernanke said, alluding to the rise of Hitler in Germany and other fascist movements.

[...]

The three agreed that one of their mistakes during the crisis was failing to adequately explain publicly why billions in bailout dollars were being provided to the big banks, whose executives were able to keep their huge bonuses even though they ran the institutions that caused the crisis.

The three asserted that they had no choice but to use taxpayer money to stabilize the financial institutions — money that was eventually repaid — because the only alternative would have been to allow the entire banking system to collapse, with far graver consequences for the country.

"The public was angry; they wanted to see us, if not punish the banks, (then) put limits on bonuses," Paulson said. "I was totally ineffective at having the American people understand that what we were doing was for them and not for Wall Street."

Geithner, who was the head of the New York Fed during the crisis and later served as Treasury Secretary under Obama, said that one of the most enduring lessons from the crisis was that preventative measures (like, say, the Glass-Steagall Act) are absolutely vital. Yet, it doesn't appear that the federal government has learned this lesson.

"We let the financial system outgrow the protections we put in place in the Great Depressions and...made the system very fragile and vulnerable to panic," Geithner said. "One of the most powerful lessons from this crisis should be that you want to work very hard to make sure that your defenses are robust."

While the government has tightened its oversight of the banking system, a ballooning budget deficit has caused public debt to swell. And soon, the Trump tax cuts will pile on even more debt. On the Fed side, interest rates remain low, limiting the central bank's ability to respond if a crisis were to break out tomorrow. Meanwhile, "elevated valuation pressures" (in everything from equities to home valuations) and extreme levels of consumer debt provide myriad risks for the economy.

With all of this in mind, it doesn't seem like the banking system has "forgotten" the lessons of the financial crisis. It's more like they were never learned in the first place.

Comments

MasterPo HopefulCynical Thu, 07/19/2018 - 09:11 Permalink

Bernanke, Geithner & Paulson Warn: "We've Forgotten The Lessons Of The Financial Crisis Which We Created"

(Fixed it)

"We are not sure people remember everything they need to remember."

(Yes boys, we remember "everything", which is why you are all headed to Gitmo. Enjoy your last moments of freedom - SCUMBAGS!)

In reply to by HopefulCynical

Knave Dave MasterPo Thu, 07/19/2018 - 12:06 Permalink

It is only because they made us look into that flashy light thing that wipes out our memories so that we do not remember our alien contact with them.

If only Paulson had been able to do a better job of convincing us all that he bailed out the banksters AND made sure they kept their bonuses ... all for us! Wow! It was for us that they kept their bonuses! That was a shovel-load of shit down my throat. "Here, chew on this. It's good for you. We do it all for you! Wait until next time when we do it all again ... just for you!"

In reply to by MasterPo

Prosource HopefulCynical Thu, 07/19/2018 - 11:54 Permalink

Yeah,

1. We caused the first crisis

2. The only way out was to bail us out with billions

3. We will inflate and debase with QE, including coordination with the ECB and BOJ, by printing billions a month and fleecing and indebting and enslaving the world all the while.

4. But be warned, there will be another crisis with more fleecing and shearing, err.. - our magnanimous bailouts required - (of course for your own good and because you needed rescue)..

5. Bend over, smile, and LOUDLY say - so everyone can hear now - THANK YOU SIRS !! And, MORE PLEASE !!

6. And another thing.. You had BETTER not say we didn't warn you either.. Because then we would have to do something again, except then it won't be all gentle, like last time.

7. Now [re] assume the position.

In reply to by HopefulCynical

monad Last of the Mi… Thu, 07/19/2018 - 08:31 Permalink

Consider the timing. These deep state clowns were dragged out to provide propaganda cover for their desperate clown friends. Timmay? The only people he has credibility with is chicom gangsters he made billionaires by looting us, stealing 9000 American homes, bankrupting our children and locking us out of our own institutions of governance, education and decent medical care.

In reply to by Last of the Mi…

Endgame Napoleon Last of the Mi… Thu, 07/19/2018 - 12:32 Permalink

Where is the connection between the need to rescue banks to avoid a total collapse of the economy and paying out massive, double-digit-multi-million-dollar bonuses to the people at the top of those failed organizations? What the public sees is cronies, sticking together to protect their own too-big-to-fail compensation packages. 

But there is a lot of that at the bottom of the wage scale, too, where these things pay more than hard work, daily and all-attendance, sales generation and account-retention numbers: crony cliques and other bad behavior.

Having sex, reproducing far more than you can afford in a single-breadwinner household and staying eligible for wage-boosting welfare programs by working part time pays much, much more than hard work due to 1) Uncle Sam’s favoritism and 2) the above-firing crony-mom job network. Moms can be as absentee as they choose in their “voted best for moms” jobs, where “the women we have working here “have somethin’ comin’ in.”

Per-capita income in many states is $20k or below, whereas the refundable child tax credit for maximum womb productivity is $6,431, close to 1/3rd of yearly take-home pay for non-welfare-eligible non womb producers and single parents with kids over 18, even though the citizen and noncitizen parents who get that tax credit likewise qualify for layers of welfare, which covers their major monthly household bills. 

Bonuses are not the main issue; the main issue is the lack of anything but negligible wage growth for most US citizens for....40 years, in addition to mostly insubstantial, fly-by-night, temp, part-time and churn jobs, often staffed by people with unearned income unrelated to the job that covers their main household bills. 

  1. spousal income,
  2. child support that covers rent,
  3. layers of pay-per-birth welfare that covers rent, groceries and electricity, in addition to monthly cash assistance and up to $6,431 in refundable child tax credits, given to single moms and legal / illegal aliens with US-born instant-citizen kids in single-breadwinner households when they stay under the income limits for welfare programs by working part time for low, traceable earnings, thereby driving wages down for non-welfare-eligible citizens. 

The income-inequality issue that affects far more Americans than the ludicrous bonuses at the tippy top is the issue of dual-high-earner and above-firing parents, hoarding the few decent-paying jobs. Crony parents keep two jobs with breadwinner wages and insurance benefits, made possible by a $260-billion tax exclusion for their employers, under fewer roofs. Dual-high-earner parents have halved the size of the college-educated middle class, while letting others do the work of raising their kids: $9-per/hour daycare workers, $9-per-hour NannyCam-surveilled babysitters or elderly grandparents who are classified as “retired.”

In reply to by Last of the Mi…

Singelguy tribune Thu, 07/19/2018 - 05:05 Permalink

The gold standard would not make any difference. Just take a look at the euro. It is essentially the gold standard for all the members of the EU. The northern countries, especially Germany, benefited enormously, whereas countries like Greece and Italy, are harmed by it. Prior to joining the euro, their budget deficits were limited by the inflationary impacts of currency devaluation. Now, they have no control. Everything is decided by the ECB. 

A better solution is a balanced budget ammendment to the constitution. Government should not be allowed to borrow money. Period. 

In reply to by tribune

Tarzan Al Gophilia Thu, 07/19/2018 - 05:59 Permalink

"it's important that people focus on the lessons" of the crisis. "We are not sure people remember everything they need to remember."

Speaking of things to remember...

Here's a flash back to when my former Congressmen confronted Paulson, which explains why he's a Former congressmen. Likely the last time a Congressmen dared embarrass a Goldman acolyte in public.

And his question remains,

Mr Paulson, How Do You Have Any Credibility ?

 

In reply to by Al Gophilia

BennyBoy Singelguy Thu, 07/19/2018 - 07:39 Permalink

 

None of that will fix the debt based financial system we now have.

For money to exist in this system, debt must be created with interest owed. Money to pay the interest is not created. Which is why debt growth must be exponential and always has a well planned "crises" every 8-12 years.

Look at Federal Reserve Notes in your wallet. A Note is debt. No debt equals NO MONEY.

 

In reply to by Singelguy

Prosource Singelguy Thu, 07/19/2018 - 12:13 Permalink

What?

A government shouldn't be allowed to borrow money ?!?

Why, that's an outrage !!

But.. but... who will protect us from Russia Russia Russia, Marsha Marsha Marsha ?!?

And what about the children. And the old people. And all the brown people that have been discriminated against forever. And people just seeking asylum and a better life, and, and, ... their entitlements ?!?

Do you not even care ?!?

 

In reply to by Singelguy

Endgame Napoleon Singelguy Thu, 07/19/2018 - 13:01 Permalink

Isn’t the Euro just a common fiat currency? What? Is the Euro backed with gold? Isn’t the difference between Germany and other EU countries based less on supply-side factors?

Using a lot of East German labor, Germany kept its manufacturing in-house, rather than offshoring so much production to racially homogenous, cheap-labor meccas in Asia and Latin America. 

The German people also save a lot. Are their interest rates higher, encouraging them to save money in banks? Maybe, the German economy is less speculative, or maybe, Germans are just more disciplined by disposition or upbringing.

The Germans have a different mentality than Italians & Greeks. That is why it is not good to force disparate countries into the same box. It inevitably becomes unequal, with some countries using their strengths to exploit the weaknesses of other countries.

To spin it, all the beneficiaries of majorly unequal setups need are kumbaya platitudes about global togetherness until those do not work anymore since so many people are living on the economic edge.

The same thing is true with the US, China, Mexico and other unequal trading partners, albeit it is much, much, much, much worse when the wage differential between trading partners is so massive.  Then you have different mentalities AND huge disparities between the labor markets, causing Grand Canyon-sized distortions.

In reply to by Singelguy

Let it Go Bloodstock Thu, 07/19/2018 - 07:08 Permalink

These three are bastards all, however, the fact we have learned nothing is very obvious!

The thought those forgetting the lessons of the past are doomed to repeat it rapidly comes to mind when I look at the economy of the year 2018. While we constantly refer to the "2008 financial crisis" it has been chiefly forgotten and we have learned very little.

By this, I'm pointing to the true harsh reality and its details. The so-called great recession blamed by many on a crisis in housing is now so far in the rear-view that many people see it as merely a reset from which we have moved on. The article below is a stark reminder that we may have learned nothing.

 http://Often Mentioned 2008 Crisis Chiefly Forgotten.html

In reply to by Bloodstock

RubberJohnny Thu, 07/19/2018 - 04:19 Permalink

Those 3 financial big-shots who were steering the ship were completely unaffected by the financial crisis along with all of their well-heeled buddies.

Yeah sure.

Let's pump more money into the banks and everything will turn out fine just like the last time.

Just send any bills due to the middle class you pontificating narcissistic motherfuckers.