A debate is in progress as to whether the world economic downturn that began in 2008 and ended in 2016 was of greater severity than the Great Depression, which was triggered by the 1929 collapse of the US stock market. There may be a dispute as to whether the former was more severe than the latter, but there is no dispute as to the loss, misery and dislocation that the 2008-2016 downturn brought to the economies, people and institutions all around the world. Economies and people were badly battered, and the institutions that were most severely hit did not recover.
The immediate cause of the 2008-2016 downturn was the collapse of the sub-prime securities—the market for securities backed by sub-prime mortgages market—but its deeper cause was the liberality that characterized the regulation of the US securities industry. The market collapse occurred when investors came to realize that what they were being placed on the market—and what they had been buying—was pretty much garbage tied with neat ribbons and passed off as securities.
Anxious to avert trouble for the securities industry, the regulatory agencies concerned—the Securities and Exchange Commission (SEC), the Department of Treasury and ultimately, the Federal Reserve Board (Fed)—tried to get the US Congress to toughen the laws governing the design and issuance of securities. Expectedly, Wall Street fiercely opposed the regulatory agencies’ push for tougher regulation and instructed their lobbyists in Congress to vigorously advance the regulation-versus-progress argument. The lobbyists were told to argue that America’s economic interest would be better served if the US securities industry were not closely regulated and, instead, were allowed to go about its business with as little regulation as possible.
In the wake of the 2008 meltdown—millions of people around the world dispossessed of their homes and thrown out of work, Lehman Brothers and other formerly respected financial institutions shuttered and massive economic dislocation caused to many countries – the US Congress took the regulation side of the regulation-versus-progress argument and passed the Dodd-Frank Act. Co-authored by Sen. Christopher Dodd and Rep. Barney Frank, the Act was intended to rein in Wall Street’s buccaneering spirit and to curb its appetite for deals of the creative kind. After reviewing the record and undertaking extensive consultations with the academic experts and the stakeholders—including the securities industry itself—the legislators proceeded to lay down regulations that were tougher with regard to limits, definitions and qualifications.
The Dodd-Frank Act and similarly intentioned policy changes were intended to ensure the non-recurrence of arguably the worst downturn in the history of the modern world economy. US legislators believe that they did a good job of preventing a recurrence. But can the 2008-2016 downturn happen again?
Any study or analysis work that suggested an affirmative answer would be disturbing to the highest degree. But Yes was the answer put forward by a recent documentary on the 2008-2016 events made by one of the leading international television networks.
And why was a recurrence of the downturn possible, nay likely? The TV network’s answer was simple: Because the personalities within the US government who were the principal first responders to the crisis had themselves been major players in the US securities industry. Surnames such as Geither, Paulson and Rubin—all of whom held the position of Secretary of the Treasury under the Bush II and Obama administrations—were presented by the documentary’s makers to support their theory that recurrence of the 2008-2016 downturn was possible. Now that they are out of the government, these personalities and their lower-level Treasury subordinates are back with their confreres in Wall Street. Possibly helping hatch creative securities deals with potential for doing renewed harm to unwary investors and to the economy? The documentary makers suggested that investment bankers are as greedy as tigers and that they will never change their stripes.
A chilling documentary. An even more chilling possibility.