A lesson learned should lead to meaningful changes by individuals and institutions. That has largely been the case in the decade since the financial crisis almost tipped the global economy into a prolonged depression that would have devastated livelihoods for at least a generation. But there are also consequential lessons that haven’t been sufficiently internalized; and some that were not foreseen at the time of the crisis but are now urgent and important.
Here’s a summary scorecard of post-crisis accomplishments, unfinished business and unintended consequences.
Accomplishments:
Slippages:
- Still-elusive inclusive growth. It took far too long for policy makers in advanced countries to realize that the great recession caused by the financial crisis had important structural and secular components. An excessively cyclical mindset initially impeded the design and implementation of the measures needed to generate high and inclusive growth. By the time mindsets evolved, the political window had narrowed. Even today, most advanced countries have yet to adopt measures to durably boost actual growth and stop the downward pressure on potential expansion.
- Misaligned internal incentives. Judging from headline-grabbing incidents of inappropriate behavior and processes in recent years, the sticks and carrots in place in some financial institutions need work. These institutions still contain pockets of improper risk-taking and other unsuitable conduct, as well as excessive short-termism in compensation payouts and managerial tolerance for actions that are too close to the line that separates permissible from non-permissible activities.
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A scarcity of “patient” balance sheets. Putting challenged and damaged securities in ring-fenced balance sheets was key to containing the huge financial disturbances. This involved reliance on large public balance sheets, though their use was increasingly met by social and political pushback. Concerns about distributional effects, including favoring corporate profits at the expense of wages, Wall Street at the expense of Main Street, and the rich at the expense of the poor, have added to what is now a reduced availability of these tools for use in future crises.
Unintended consequences:
Those of us who navigated the global financial crisis first-hand, managing assets and liabilities in the private sector during exceptional market turmoil, saw unprecedented unpredictability turn what had previously been unthinkable into reality with unsettling regularity. We readily recognize how much was done to prevent an awful situation from severely damaging current and future generations, and also the important steps taken to reduce the probability and severity of another global crisis.
But that does not mean all is well. Renewed efforts by both the public and private sectors are needed to deal with longstanding challenges that received inadequate attention in the aftermath of the crisis, and to understand and address some of the major unintended consequences of 10 years of crisis management and prevention. Fortunately, we know a lot more about both. The biggest challenge is to get the political process to address their importance when there is no actual or looming crisis in the advanced world to focus minds.