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5 lessons of the Great Recession

Five years after the worst crisis since the 1930s, America has devised safeguards and changed the rules of Wall Street. But could the country really avoid another financial collapse?

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Finally, in March, the stock market hit bottom and – though investors didn't know it at the time – a devastating bear market began to recede. The crisis slowly eased.

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Many critics, notably conservatives, thought the Fed and Treasury had spun out of control alongside financial markets. But few finance experts think the economy would be in a better place today without those institutions opening their checkbooks to invest and spend when others wouldn't. Given all that, it's notable that the Dodd-Frank law, if anything, makes it harder for the government to act in the lender role.

The law makes emergency lending by the Fed subject to Treasury secretary approval. The Federal Deposit Insurance Corporation can offer emergency guarantees on bank debts, but this power is conditional on a chain of approval that includes Congress as well as the Treasury. Citing this shift at the FDIC, the former Obama official says that although Dodd-Frank is in general a big step forward, it leaves the nation with a "somewhat diminished firefighting capacity" for a severe crisis.

Still, the "lender of last resort" role will persist.

3. INSTEAD OF BAILOUTS, NEXT TIME PREPARE FOR CORPORATE FUNERALS.

Perhaps the most controversial element of the whole crisis was the bailouts – not the broad efforts to prop up the financial system but the targeted support that went to tottering companies, from Fannie Mae to General Motors.

In these two cases, the rescues helped keep home loans flowing and people on the assembly line in an auto industry suffering more than most businesses. But the bailouts also fanned outrage. Many Americans wondered why, for instance, some of the same people who got insurance giant AIG into trouble were receiving large bonuses while the firm was on the federal dole.

Even people who rolled out these support plans weren't always sanguine about them. Bernanke has said that using Fed resources to save AIG made him angry. Mr. Kohn recalls seeing the Fed chairman on that day look "troubled."

Are some firms literally too big, or too interconnected with others, to be allowed to fail?

Whatever the political and practical answers to that question, under the Dodd-Frank Act it won't be legal for the government to craft firm-specific rescue deals in the future. Instead there's something called "orderly liquidation authority." Top executives would lose their jobs. The firm's investors would be the first to absorb losses. The FDIC would act as a kind of bankruptcy judge, as it already does for failing commercial banks.

In practice, none of these firms that the government calls "systemically important" are going to vanish in a hurry. Their size and complexity would prevent it. But the law tries to map a way for a firm like Lehman Brothers to fail in a controlled way, without sparking wider chaos. "Dodd-Frank ... comes as close as possible to a traditional bankruptcy while acknowledging that the wind-down of a financial institution has to be managed carefully to protect the public," Paulson writes in a new prologue for the latest printing of his book, "On the Brink."

To safeguard the wider system, he notes that the law gives regulators "emergency authorities to avert a disorderly wind-down, including the ability to issue guarantees and make capital injections."

Some critics say such powers will result in backdoor bailouts of politically powerful firms. But even then, the law calls for the financial industry, not taxpayers, to cover any FDIC costs.

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