File Photo: A protestor holds a slogan outside the historic Federal Hall where U.S. President Barack Obama is speaking in the heart of Wall Street in New York Sept. 14, 2009. Obama, marking a year since Lehman Brothers collapsed, urged financial firms not to fight regulatory reform and urged Congress to pass his proposals by the end of the year. (Xinhua/Liu Xin)
by Xinhua writers Xu Feng, Yang Shilong
NEW YORK, Sept. 17 (Xinhua) -- This month marks the 10th anniversary of the bankruptcy of investment bank Lehman Brothers, a landmark at the height of the 2008 financial crisis considered to be one of the severest since the 1930s Great Depression.
The financial crisis tanked the U.S. economy, caused a global economic downturn and shattered public trust in the banking system.
Ten years later, questions such as whether the U.S. financial sector is truly out of the woods and whether the world's economies can coordinate an effective global response should another financial calamity strike amid rising protectionism, still linger on.
SAFER BANKING
The most immediate cause of the 2008 financial crisis was the bursting of the U.S. housing bubble inflated by banks' reckless lending, sometimes without even requiring a down payment, in an overheated housing market. When housing prices started to head south, defaults and foreclosures occurred, causing great losses. Soon the foreclosure crisis expanded to other parts of the economy.
The 2008 financial crisis catapulted the U.S. economy into a deep recession. The Federal Reserve said the median net worth of families plunged by 39 percent in the three years through 2010. Nearly 9 million jobs were lost during 2008 and 2009, about 6 percent of its workforce.
Hundreds of billions of U.S. dollars of bailouts were injected into biggest banks, and quantitative easing was introduced to enable the central bank to buy securities from the market, thus adding ample liquidity to the capital markets. These measures helped contain the crisis and largely restored financial stability.
To check the banks' excessive risk-taking and tightly monitor lending, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010. The financial overhaul rules out government bailouts of big banks in the future, and protects consumers from risky loans, e.g. toxic mortgages, and abusive financial services.
Erick W. Rengifo, professor of economics at Fordham University, believes that the United States is generally in a better place, at least in the banking sector amid stricter regulations.
Yet Rengifo told Xinhua that the "too big to fail" problem has not disappeared as the banking behemoths have become even bigger than pre-crisis levels, posing a threat to the entire economy if they fall.
Eight years after its introduction, the first steps have been taken in Dodd-Frank rollback. In May, President Donald Trump signed into law key changes which include loosening mortgage regulations and fewer regulations for thousands of mid-size banks -- banks with less than 250 billion U.S. dollars in assets.
Faris Saah, senior lecturer at Harvard University and managing partner of consulting firm Quansoo Partners, told Xinhua that what with the regulatory overreach of the Dodd-Frank Act enacted right after the 2008 crisis when panic was the prevailing mood, some improvements may be needed, to ensure it continues to play its oversight role and undo the shackles of rules that are too rigid and stifle growth.
"However, wholesale repealing of the Dodd-Frank Act would be ill-advised," Saah said, noting the importance of long-term financial stability.
POTENTIAL PROBLEMS
Today, the United States seems to have gotten its second wind. The economy expanded by 4.1 percent in the second quarter of the year, the first time in four years that growth broke the 4-percent mark. Unemployment remained at 3.9 percent, near an 18-year low. Wages in August grew at the fastest rate in nine years.
Economists and observers, however, advise caution. Ray Dalio, founder of the world's largest hedge fund Bridgewater Associates, told CNBC in a recent interview that he foresees a "dollar crisis" in two years when the U.S. currency will depreciate by as much as 30 percent resulting from the Federal Reserve's need to print more money to make up for the deficit, pay pensions and meet health care obligations.
"It will be more severe in terms of the social, political problems. And it will be more difficult to handle. It won't be the same in terms of the big-bang debt crisis," Dalio said.
Rengifo cited the shadow banking and soaring student loan debt as threats. Non-bank lenders have stepped in when banks are constrained by Dodd Frank rules. While shadow banking can provide valuable liquidity to support growth, leaving it unregulated and growing at a rapid pace invites trouble.
The student loan debt, which has ballooned to a size of about 1.5 trillion dollars against the backdrop of state budget cuts on universities, is second only to the 9-trillion-dollar mortgage debt.
"Expensive tuition and student lown debt will force the young generation to delay buying homes and other investments, which would have a ripple effect on the economy," he said.
Rengifo's concerns on the drag of student loan debt on consumers are shared by Saah, but Saah downplays its threat as the main lender is the federal government.
Other future threats lurk. Andrew Ross Sorkin, author of the bestseller Too Big to Fail, said he fears a "cyber crisis," as cyber attacks may erase everything overnight.
EFFORTS QUESTIONED
The world weathered the 2008 financial crisis relatively quickly thanks in great part to the coordinated efforts from world governments and central banks. These include the government capital injections, interest rate cuts, and unprecedented expansionary fiscal and monetary policies.
With rising protectionism, the increasingly apparent lack of enthusiasm by the United States for multilateralism -- evident in the U.S. withdrawal of a bevy of world bodies such as UNESCO, the UN Human Rights Council and a threat to pull out of the WTO -- and the Trump administration's penchant for the use of tariffs as a tool for foreign policy, observers doubt whether we can count on another global response if another grave financial crisis hits.
"There should be stronger cooperation among the countries," said Saah. "United, we stand; divided, we fall."