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The Unexamined Crisis

CHICAGO – Three years have now passed since the collapse of Lehman Brothers, which triggered the start of the most acute phase of the 2007-2008 financial crisis. Is the financial world a safer place today?

Within days after the 9/11 terrorist attacks in 2001, the US had erected new and enormous security measures at airports throughout the country. Within a month, the US military was on the ground in Afghanistan. Within three years the US had an official report on the causes of the events of 9/11; the well-resourced expert commission that produced it identified the weaknesses of America’s national-security agencies and provided recommendations for addressing them.

But what do we have three years after the financial crisis began? To be sure, America has the 2,000-page Dodd Frank Act to show for its efforts. Unfortunately, few of those pages address any problem suspected to have caused the financial crisis.

Bond investors’ heavy reliance on credit-rating agencies, which tend to be laxer with powerful issuers, has not been fixed. The shadow banking sector’s dependence on the official banking sector’s liquidity and guarantees, and thus ultimately on the government, has not even been touched. And limits on financial institutions’ leverage will change only in the next decade.