This month marks the fifth anniversary of the collapse of Lehman Brothers, a disaster that catalyzed the onset of the worst economic downturn since the 1930s. Excessively speculative and under-capitalized bets by "too big to fail" banks led to stultification of the credit and housing markets and the consequent global recession. That recession negatively impacted virtually every person and every business with any meaningful connection to the economy. According to the Federal Reserve, the average American family's net worth dropped almost 40% between 2007 and 2010 (from $126,400 to $77,300).
Of course, by now the country is well out of the recession. The Standard & Poor’s 500 and Dow Jones industrial average have recently reached all-time highs. The headline unemployment rate, at 7.3%, is at its best level since December 2008. Still, as the troubles of 2008 begin to fade in the country’s rearview mirror, one wonders if we are losing sight of what lies ahead.
In fact, a number of indicators suggest that the country may be priming itself for another major recession.
First, a recent study of IRS statistics has revealed that income inequality between the richest 1% and the rest of the country is at the worst level in a century. Aside from being fundamentally unfair, this condition seriously undermines the nation’s long-term productive capacity.
Second, the Federal Reserve just announced that it would continue its bond-buying programs, which raises the very real possibility of rampant inflation. This too would disproportionately harm the poorest among us, as inflation is known to exacerbate basic living costs ahead of others. Third, mergers and acquisitions in the financial sector have continued such that the largest banks are now bigger than ever. Expansion of bank size also means an increase in risk concentration, which sets the stage for a repeat performance of 2008.
Despite these and other troubling economic developments, it remains unclear whether the government can be relied upon to avert a future crisis. It has had a mixed report card in responding to the last one. On the one hand, many have argued that the Federal Reserve and the Treasury deftly diffused capital in an effort to jumpstart the economic system, thereby alleviating what could have been a much worse crisis. And the Dodd-Frank Act contains many commendable features in the areas of consumer protection, bank regulation, derivatives oversight and systemic risk reduction.
Even so, with each step forward, it appears the government has taken at least a half-step back.
Key provisions of Dodd-Frank contain numerous exemptions that undermine the law’s vitality. For instance, Congress converted Paul Volcker’s two-page memorandum on curbing proprietary trading by government-backstopped banks into the convoluted Volcker Rule, which is riddled like Swiss cheese with dozens of loopholes and exclusions. Attempts to institute more efficient bank laws, such as Sen. Elizabeth Warren’s (D-Mass.) new Glass-Steagall Act or Sens. Sherrod Brown’s (D-Ohio) and David Vitter’s (R-La.) TBTF Act, have been doomed to failure by pro-banking legislators.
Government agencies like the Fed, Securities and Exchange Commission, and Office of the Comptroller of the Currency have likewise been of limited effectiveness in implementing a strong regulatory response to the crisis. The Dodd-Frank Act was passed over three years ago, and the regulators have already missed 60% of their rulemaking deadlines. They have also buckled to intense deregulatory lobbying on several key regulations. For example, the financial industry, through groups like SIFMA and the Chamber of Commerce, has spent millions of dollars in efforts to undermine Commodity Futures Trading Commission Chairman Gary Gensler’s laudable efforts to institute meaningful derivatives reform both domestically and in the international markets. As a result, the CFTC has watered down a number of key provisions in its regulations, such as the number of quotes required by swap executions facilities.
The judicial system is also unlikely to play a very significant role in averting another crisis. Federal law contains a five-year statute of limitations on fraud enforcement actions brought by the government. The SEC’s attempt to expand on the scope of this limitations period was rebuffed earlier this year by the Supreme Court. As a consequence, many of the perpetrators of financial fraud in the run-up to the 2008 crisis remain unpunished, and have been incentivized to concoct new schemes going forward. Meanwhile, financial lobbyists have also had considerable success in litigating against inconvenient financial regulations, such as an SEC rule that required energy companies to publicize payments to foreign governments, which was overturned in July of this year.
This month also marks the second anniversary of Occupy Wall Street, the civic movement that has protested the bank excesses and regulatory capitulations that produced the crisis. Two years into the movement, many activists wonder, "Has anything really changed on Wall Street?" The largest banks still derive the majority of their profits from trading activities, and not traditional banking activities that finance individuals and grow businesses on Main Street. Troubling economic conditions persist and the governmental response to the past crisis has sometimes bordered on fecklessness. The economy is recovering steadily, but are we entering another Gilded Age?
Akshat Tewary is an attorney practicing in New Jersey, a FINRA arbitrator and a co-founding member of Occupy the SEC, a subgroup of the Occupy Wall Street movement.