No longer in the headlines, the financial crisis that decimated investors starting five years ago and continues to stalk economic recovery is an important backdrop to next month's presidential election. More correctly, the issue is what government can or should do to limit the chance of a similar occurrence.
Gary Stern, who served 24 years as the president of the Federal Reserve Bank of Minneapolis, will share his ideas during a lecture and discussion Wednesday at Misericordia University.
As one of 12 Fed presidents, Stern had a front-row seat for this and previous financial meltdowns. One thing he's found consistent is that bank creditors and investors haven't paid a high enough price to deter them from taking on high risk. So he's not among those calling for giant banks to be broken up as a primary fix.
Instead, You have to convince uninsured creditors that next time around they will actually lose some funds if a bailout is needed to protect the nation from chaos.
The people who say ‘let's break them up' aren't adding much value, Stern said, because they haven't said what should be removed from what.
Stern, the co-author of Too Big To Fail: The Hazards of Bank Bailouts, also is skeptical of calls to return to the pre-1999 Glass-Steagall days in which deposit institutions were legally separated from investment banks. Of the institutions in the heart in the 2008 crisis, none of them were in commercial banking at all, he said.
He's equally dismissive of big banks' contention that restrictions would stifle economic growth because mega-corporations would be unable to get the capital they need to expand. Big firms have lots of choices and lots of options, he said.
It's generally been conceded that the crisis occurred because both government and private interests ignored their responsibilities. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire, the report of a federal inquiry stated.
Stern thinks the response, particularly the regulatory reforms in the Dodd-Frank act, have the potential to greatly lessen the risk of another crisis. But he says regulations alone won't do the job.
The regulators aren't up to it by themselves, he said. The key is reinvigorating market discipline by placing risk on the creditors, who will demand accountability from the TBTF firms that have come to believe they'll be rescued no matter what.
Under Dodd-Frank, the regulators have the ability and the responsibility to do the right thing, Stern said. Will they?
That's a 64-billion-dollar question, isn't it. The other is, will they be allowed to? According to the crisis report, the financial industry spent $2.7 billion on lobbying in the decade before 2008 and individuals and PACs made more than $1 billion in campaign contributions. That's made it difficult to get presidents and congresses of both parties to clamp down on abuses.
Remember, Glass-Steagall was repealed during the Clinton administration, which also chose to tread lightly on the exotic financial derivatives whose collapse contributed greatly to the crisis.
Taking responsibility for one's actions has been one theme of the presidential election; I agree with Stern that it's time to apply that principle at all levels of American life.
Former Minneapolis Federal Reserve President Gary Stern will speak at Misericordia University at 5:30 p.m. on Tuesday. Admission is free and open to the public.
Ron Bartizek, Times Leader business editor, may be reached at [email protected] or 570-970-7157.