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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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The month before, the German bank IKB Deutsche Industriebank had to be rescued because of its exposure to the collapsed US housing market, while almost simultaneously the big French bank BNP Paribas SA suspended withdrawals from three of its investment funds. Over time, the widening spiral of events included the implosion of Iceland's banking system, a housing crash in Spain, and a public-debt crisis in southern Europe that turned Greece into the iconic mendicant of the West.

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Yes, this was a global crisis. Risky actions happened in many nations. One lesson from it all is that if financial instability is often a global affair, then solutions must be global as well.

"AIG nearly brought down the US economy because it guaranteed the losses of a Mayfair Branch operating under a French bank license in London," Gary Gensler, the lead US regulator on derivatives, told a congressional hearing in July. Both Citigroup and Bear Stearns had investment activities set up in the loosely regulated Cayman Islands that got into trouble, he added.

The global nature of economic problems is hardly new. The Great Depression, to cite just one example, was a tragedy that jumped across borders, fueled by challenges with the gold standard, that era's mechanism for setting currency values.

With the lesson of global interconnectedness in mind, regulators are now working to try to coordinate rules to prevent future collapses. A key goal is to reduce the likelihood that big banks will endanger the world economy by taking advantage of weak regulation in some locales. Regulators in the US and European Union recently announced progress toward harmonizing the oversight of cross-border derivatives.

"I'm very pleased to see that we're watching as much harmonization ... of rulemaking" between the European Community and the US, says Dodd, who was the lead architect (along with Rep. Barney Frank of Massachusetts) of the Dodd-Frank financial reforms.

But the effort needs to keep broadening, Dodd and others say. "The next crisis, if it's not contained, not managed better, isn't going to just be a question of Europe and the United States," Dodd says. "It's going to be India, it's going to be Brazil, it's going to be China."

5. PAY ATTENTION TO THAT MAN BEHIND THE CURTAIN.

Bernanke may not be able to pull levers like the great and powerful Oz, but the crisis revealed that the organization he heads can pull off some serious monetary wizardry. The Fed was certainly powerful at times. People still debate whether it was great.

Bernanke's second four-year term ends in January. Amid the buzz of speculation about whom President Obama will pick to replace him, remember this: Bernanke's eight years will go down as a singular period in history that revealed both the Fed's power and limitations in new ways.

The central bank under Bernanke used its lending authority to revive frozen channels of credit. It ushered in the world of ZIRP – the zero interest rate policy – as the crisis deepened. It tried to turn words into money, using pledges to keep rates low for an extended period as a kind of psychological way to encourage consumers and businesses.

All this at a time when another big potential tool of economic revival – fiscal policy – was largely held hostage by a partisan rift between congressional Republicans and Obama.

Many economists applaud the Fed's efforts and say they were largely successful in ending the recession. But the economy's recovery has remained disappointingly slow, and the effectiveness of three rounds of "quantitative easing," in particular, is a matter of heated debate. Bernanke's successor will have to craft a delicate exit from this bond-buying program (intended to keep long-term interest rates low) without unnerving stock markets and stifling the recovery.

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