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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 Fed also emerged from the crisis with a bruised reputation. Its bank regulators hadn't intervened to slow the subprime lending surge. Its bailouts were unpopular. And many Americans viewed the central bank as an institution with little accountability, serving bankers more than the general public.

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Kohn says Bernanke's role as a leader during the crisis was pivotal. "As a student of the Great Depression, he was quite aware of the downside of not getting it right and stabilizing the situation. He pushed very hard on himself and the people around him" to find creative solutions, the former vice chairman says.

Bernanke's critics range from libertarians with an "end the Fed" mantra to moderates like Bair, who support at least some of his actions.

Bair, now a finance expert at the Pew Charitable Trusts, complains that Bernanke's policy of monetary easing has become "like a narcotics addiction now. We don't know how to function without it."

Still, to many economists, the zero rate remains the obvious thing to do in today's weak economy.


In the end, keeping a nation's financial system working well means more than just ensuring an adequate level of competition or putting regulatory bodies in positions of oversight. The years leading up to the crisis, after all, showed how competing financial firms can just follow each other off a cliff. And even a well-intentioned regulator can miss the danger signs.

Finance experts differ in the details of their prescriptions, but many say what's needed is a culture of caution that Dodd-Frank envisions but can't guarantee. It's a finance sector in which markets are disciplined because the pay of bankers is based on their ability to show prudence as well as short-term profits, because investors don't believe they have an insurance policy called "bailout," and because regulators foster vigilance – especially in good times.

The frontline defense against the next crisis is a 10-person body called the FSOC, the Financial Stability Oversight Council. The idea (part of Dodd-Frank) is to put top regulators, led by the Treasury secretary, in one room and with one mission – to take a wide-angle view of whether the financial system is safe.

Their meetings now have none of the crisis drama that overcame Dodd on that September day five years ago. But the economy's fragility persists, and the latest FSOC report points to a number of sources of uncertainty: conditions overseas, chronic federal deficits, and possible shifts in interest rates.

The banks dubbed "too big to fail" are even bigger now than they were in 2008, and they remain a formidable lobbying force in Washington. Bair, who served on the council before leaving the FDIC as her term expired, says her level of confidence that needed financial reforms are in place to prevent another financial collapse is only about 3 on a scale of 1 to 10. One reason for her caution is that many Dodd-Frank provisions haven't been fully implemented.

Despite the ongoing risks, though, a widely held view among finance experts is this: Thanks to Dodd-Frank and other responses since 2008, the nation is better positioned today. No one is expecting a crisis-free future, but with the right vigilance, the risk of a repeat can be mitigated, and the response to a future crisis can be more coherent. Ordinary Americans would enjoy a stronger economy as a result.


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