The financial crisis of 2008 was a watershed moment for the global economy, and the lessons learned from that crisis were profound. Governments, regulators, and financial institutions around the world took steps to address the root causes of the crisis and to prevent a similar event from occurring again. However, in the years that followed, many of these lessons were forgotten or ignored, leading to a resurgence of risky behaviour in the financial sector.
The Buck Stops
One of the key lessons of the financial crisis was the importance of transparency and accountability in the financial sector. The collapse of Bear Stearns, IndyMac, and Lehman Brothers all highlighted the dangers of complex and opaque financial instruments, as well as the risks associated with excessive leverage. In the wake of the crisis, governments and regulators around the world took steps to increase transparency in the financial sector, including implementing new disclosure requirements for financial institutions and increasing oversight of complex financial instruments.
However, in the years that followed, many of these reforms were weakened or watered down. Financial institutions continued to engage in risky behaviour, and regulators were slow to respond. One example of this is the repeal of the Glass-Steagall Act in 1999, which separated commercial banking and investment banking activities. This repeal was seen by many as a contributing factor to the financial crisis, but efforts to reinstate similar regulations have been met with resistance in the years since the crisis.
Managing Risk Management
Another key lesson of the financial crisis was the importance of risk management and stress testing in the financial sector. The collapse of Bear Stearns, IndyMac, and Lehman Brothers all highlighted the risks associated with excessive leverage and the need for financial institutions to have robust risk management systems in place. In the wake of the crisis, many financial institutions implemented new risk management and stress testing procedures to better manage their exposure to risk.
However, in the years that followed, many financial institutions became complacent and began to relax their risk management procedures. This complacency was seen in the run-up to the COVID-19 pandemic, where many financial institutions were caught off guard by the sudden and severe economic shock. The pandemic highlighted the need for financial institutions to maintain robust risk management systems, even during periods of relative stability.
Big Government
A third key lesson of the financial crisis was the importance of government intervention in times of crisis. The decision not to bail out Lehman Brothers was highly controversial and has been the subject of much debate. In the wake of the crisis, many governments around the world took steps to provide support to their financial sectors, including the Troubled Asset Relief Program (TARP) in the United States.
However, in the years that followed, many financial institutions began to resist government intervention, arguing that it was unnecessary and interfered with the free market. This resistance was seen in the wake of the COVID-19 pandemic, where some financial institutions were hesitant to accept government support, even as the global economy teetered on the brink of collapse.