Updated, March 22: To listen to the interview highlights, click on the audio players at the bottom of the page.
The three men who helped shepherd the U.S. through the 2008 Great Recession are worried that the country and Congress have not learned the right lessons from the last financial crisis — and may not have the tools to weather the next one.
In a joint interview with Marketplace on March 13, former Treasury Secretary Henry Paulson, former president of the New York Federal Reserve and former Treasury Secretary Timothy Geithner, and former Federal Reserve Chair Ben Bernanke stressed that while the financial system is stronger now than it was before the 2008 financial crisis, that could change if certain regulations are rolled back.
“I think the reforms were, on the whole, quite constructive,” Bernanke said. “The banking system is stronger. Oversight is better. The tools are mostly better, although some of the tools we used during the crisis were taken away. So it's not an unambiguous improvement, but overall I think the system is stronger.”
But he also warned that “the enemy is forgetting that as time passes and the memory of this gets further in the rear-view mirror, you know, then you'll start hearing from Congress and from the banks: ‘You know, well, this is going to constrain lending. We should really start undoing all of these things as soon as possible.’”
The day after this interview took place, Senate voted to weaken banking regulations passed in the wake of the financial crisis in a 67-to-31 vote. Under the legislation, known as Dodd-Frank, banks with $50 billion or more in assets are considered systemically important and, as a result, are subject to stricter regulations. Banks and their supporters in the government insist that this has an adverse impact on the economy and businesses as it restricts lending and strains smaller banks. The Senate bill will raise the threshold for those regulations to $250 billion in assets, but House Republicans, who have passed their own bill, insist the Senate bill is too moderate and should be viewed as starting point for negotiations.
Using emergency authority from Congress, the Treasury Department was able to put the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) under government conservatorship. Congress also later passed the Troubled Asset Relief Program — the $700 billion bailout package for banks.The three former officials stressed that at the beginning of the crisis, they did not have appropriate tools and authorities to deal with problems at hand. One of the reasons the 2008 recession hit the U.S. so hard was because the system had outgrown the protections that had been put in place after the Great Depression. As a result, said Geithner, the U.S. found itself facing a crisis with “a very fragile, dangerous system,” and the regulators had to appeal to the U.S. Congress for unprecedented powers.
“On the one hand, we all look back and we say, ‘Well, the system worked’ in one sense, in that we got the emergency legislation we needed in Fannie or Freddie before there was disaster,” Paulson said, adding that TARP “was the last consequential bipartisan legislation that came from Congress. And it was done in 16 days.”
“But it took an emergency to get them to act,” Paulson continued. “And so that just shows you the dangerous situation a system is in when, if the regulators don't have the tools they need to work with and have to go to Congress to get them, what the cost to the economy could ultimately be.”
“It's not the best way to run a country, run a financial system, which is to require politicians to decide in the moment that they need a stronger fire station because the politics for the politicians are just terrible in this context and the risk is that they'll be late,” Geithner added. “And because they are late, the country will be left with much more damage than is necessary in that context.”
According to Geithner, the economic challenge that we face today is not lack of ideas or solutions but getting those solutions “through a deeply damaged, dysfunctional political system.”
“The great strength of our country [is] that in the crisis we were able to craft a relatively nonpartisan strategy to try to protect the country from much worse damage,” he said.
|Read the full transcript of our interview|
|Could the 2008 financial crisis happen again?|
|Did the government meddle too much during the financial crisis?|
Paulson agreed that solutions to economic issues are going to have to be bipartisan. The trio served across two administrations. Paulson and Bernanke were appointed by President George W. Bush, while Geithner was appointed by President Barack Obama.
One of the main reasons that they have been so vocal about their experiences is to help people put themselves in their shoes. Paulson said he still remembers much of the criticism, including being told that TARP had lower approval numbers than torture. American people wanted to see banks punished and held accountable, Geithner acknowledges.
All three agree that letting the banks fail would have had a ripple effect on the U.S. economy.
“The reforms we put in place are hugely important in making the system more stable, more resilient,” Geithner said. “But you should take advantage of a moment when in many ways, many other aspects of the economy are doing relatively well, to make sure you think about the the crisis next time.”
They stressed that the next financial crisis is inevitable. The question is not if, but when.
“I'm not that fatalistic. I don't think the big ones necessarily have to happen all that often, but when they do happen, you want to be prepared,” Bernanke said. “You want to have the tools and you want to have a system which is strong enough to withstand the kinds of shocks which normally occur.”
Listen to part 1 of our interview below (aired on March 19):
Listen to part 2 of our interview below (aired March 20):
Listen to part 3 of our interview below (aired March 21):
Listen to part 4 of our interview below (aired March 22):