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Ten years after the fall of Lehman, corporate debt may be next bubble

Ten years after the financial crisis, the seeds are being sown for the next potential meltdown

By: EBR - Posted: Wednesday, October 03, 2018

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In an effort to prevent future government bailouts, Congress curbed the ability of the Fed, the Federal Deposit Insurance Corp. and the Treasury Department to provide emergency support to the financial system.
In an effort to prevent future government bailouts, Congress curbed the ability of the Fed, the Federal Deposit Insurance Corp. and the Treasury Department to provide emergency support to the financial system.

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by Hans Izaak Kriek*


Ten years after the financial crisis, the seeds are being sown for the next potential meltdown. 

This time, the tinder isn’t subprime mortgages but a mountain of risky corporate debt that looks eerily similar. 

UBS estimates there’s a record $ 4.3 trillion in 2010 – that could that could begin to see rising defaults if the healthy U.S. economy starts to wobble. 

Mark Zandi, chief economist of Moody’s Analytics said: “I view this as the most severe threat to the economy and financial system. 

The other day marks the 10th anniversary of Lehman Brothers’ bankruptcy filing, a seismic widely viewed as the trigger of the financial crisis as it rapidly caused investors to lose confidence in banks and the financial system.

Former Federal Reserve Chairman Ben Bernanke, former New York Fed President and Treasury Secretary Tim Geithner, and former Treasury Secretary Hank Paulson reflect on the responses they led to the 2007-09 global financial crisis and ensuing Great Recession. 

Here are highlights of their Wide-ranging remarks to the New York Times and CNBC.

Reflections of the financial crisis

Tim Geithner on the hardest moment of the financial crisis, asked to recall the worst moment of the crisis, he recalled sitting at breakfast with his wife as she read about what had been done the day before and seeing a mix of despair and doubt on her face. 

Ben Bernanke gives his bottom line on the government response to the financial crisis, he says in hindsight, the government’s response was late, but proved to be successful even though it remains unpopular.

Why didn’t they do things differently?

Hank Paulson says that the government couldn’t force banks to take taxpayer-funded capital in October 2008, so it had to make the terms attractive, which is why he didn’t put limits on bankers’ bonuses. 

Tim Geithner on whether there’s an opportunity to do any of the crisis response differently he says that if the U.S. government had waited until there was no option but to nationalize some big banks, it could have attached more strings. Acting earlier so the banks could remain in private hands was economically sound, but politically treacherous. 

Geithner on what the Fed can do observes that people think the Fed has more power than it actually does. He says there is “a lot of magical thinking about what central banks can do.”

Why didn’t they save Lehman Bank?

Ben Bernanke on the Lehman Brothers failure: “Lending to Lehman was not only beyond the Fed’s legal authority, but also wasn’t feasible. Tim Geithner recalls that some people were initially relieved when the authorities didn’t save Lehman, but he saw it as evidence that the crisis had outstripped the Fed’s power to contain it. 

They were unable to prevent Lehman from failing. Hank Paulson explains on communication during a crisis why he wasn’t more forthcoming the day Lehman failed. Had he acknowledged the limits of the government’s ability to intervene, Morgan Stanley would have collapsed immediately.

Bernanke admits Fed made mistakes combating crisis 10 years ago

Ben Bernanke acknowledged that policy makers made two critical errors fighting the financial crisis a decade ago: They failed to see it coming with such force then underestimated how much economic damage it would cause later.

“Nobody saw how widespread and devastating the crisis itself would be,” he said in a short reaction. Bernanke took issue with economists who contend that the housing-price bust -- and its impact on household wealth and consumer spending -- was the main driver of the deep downturn a decade ago. 

While that undoubtedly played a major role, particularly in sparking the crisis, Bernanke said the recession wouldn’t have been as bad as it was if investors hadn’t yanked money out of banks and other financial institutions.

“There was a run, a panic analogous to the 1930s, but in an electronic form rather than people lining up in the street,” he said in his reaction. “The availability of credit plummeted.”

Echoing comments made last week by former Treasury Secretary Timothy Geithner, Bernanke voiced concern that post-crisis reforms had left the Fed and other policy makers with fewer tools to combat the next crisis. 

In an effort to prevent future government bailouts, Congress curbed the ability of the Fed, the Federal Deposit Insurance Corp. and the Treasury Department to provide emergency support to the financial system.

While the reforms overall had significantly improved the system’s resilience to shocks by boosting bank capital and other measures, “policy makers need to have the appropriate tools to fight the next crisis,” Bernanke said in a reaction. 

“Banks and governments have learned little. Due to a relaxation of the rules for banks, the regulator has fewer opportunities to intervene if things go wrong,” he says.

*International political commentator and journalist for European Business Review and editor-in-chief of Kriek Media

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