Taking stock on 10th anniversary of Lehman Brothers’ collapse

NEW YORK — 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 most severe since the 1930s Great Depression.

The financial crisis tanked the US economy, caused a global economic downturn and shattered public trust in the banking system.

Ten years later, questions such as whether the US 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.

The most immediate cause of the 2008 financial crisis was the bursting of the US 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 US 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 the American workforce.

Hundreds of billions of dollars of bailouts were injected into the 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. Those measures helped contain the crisis and largely restored financial stability.

To check the banks’ excessive risk-taking and to tightly monitor lending, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010. The financial overhaul ruled 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 fail.

Eight years after its introduction, the first steps have been taken toward a Dodd-Frank rollback. In May, US President Donald Trump signed into law key changes that include loosening mortgage regulations and having fewer regulations for thousands of midsize banks — banks with less than $250 billion in assets.

Faris Saah, senior lecturer at Harvard University and managing partner of consulting firm Quansoo Partners, told Xinhua that with the regulatory overreach of the Dodd-Frank Act enacted after the 2008 crisis when panic was prevailing, some improvements may be needed to ensure it continues to play its oversight role and unwinds 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.

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 US 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 healthcare obligations.

“It will be more severe in terms of the social, political problems. And it will be more difficult to handle,” 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.

Student loan debt, which has ballooned to about $1.5 trillion against the backdrop of state budget cuts on universities, is second only to the $9 trillion mortgage debt.

“Expensive tuition and student loan 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 that threat because 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 cyberattacks may erase everything overnight.

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 US withdrawal from a bevy of world bodies such as UNESCO and the UN Human Rights Council, and a threat to pull out of the WTO — along with the Trump administration’s penchant to use tariffs as a foreign policy tool, observers doubt whether a global response can be counted on if another grave financial crisis hits.

“There should be stronger cooperation among the countries,” said Saah. “United, we stand; divided, we fall.”