Former prime minister Gordon Brown issued a warning recently.



“We are in danger of sleepwalking into a future crisis,” Brown said when asked to assess the risks of a repeat of 2008. “There is going to have to be a severe awakening to the escalation of risks, but we are in a leaderless world.”

...“We have dealt with the small things but not the big things,” he said.

Anyone can issue a warning of danger, but his last sentence really cuts to the chase.

We've made significant, but small gestures, and haven't touched the things that would actually reform the system.



“The penalties for wrong-doing have not been increased sufficiently. The fear that bankers will be imprisoned for bad behaviour is not there. There has not been a strong enough message sent out that government won’t rescue institutions that haven’t put their houses in order.”

Put another way, there is extreme moral hazard in the system. If bankers can commit fraud without fear of punishment AND will get bailed out after they crash the economy, then no modest set of regulations will ever be enough.

Instead of being punished, bankers got $12 Billion richer. Thus proving that crime pays.

Another example of moral hazard is the fact that "too-big-to-fail" is a thing.

No sane system would ever have a "too-big-to-fail" anything.

Too-big-to-fail leads directly to too-big-to-jail.

The National Association of Federally-Insured Credit Unions released a report a few weeks back calling for the return of Glass-Steagall.

This would be real reform, but it's probably too late. It would have to have been passed years ago to be enacted before the next crash.

Some things have changed in a decade. Some things haven't.

Another thing that hasn't changed is that Lehman Brothers still exists, and continues to win court cases.

As for things that have changed, Dodd-Frank was passed.



A safer banking system. Thanks to strengthened capital buffers, more responsible approaches to balance sheets and better liquidity management, the banks no longer present a major systemic risk in most advanced countries, and especially the U.S. That doesn’t mean every country and every bank is safe; but the system as whole is no longer the Achilles’ heel of market-based economies.

...

Smarter international cooperation. The crisis highlighted the importance of better approaches not just to crisis management, but also to prevention. At the top of the “to-do list” are steps such as improved harmonization of strengthened regulation and supervision, more timely and comprehensive information-sharing, and greater focus on the challenges of monitoring internationally active banks. Individual countries have been able to draw on a wider set of insights in bolstering both their macro- and micro-prudential efforts.

But there are significant caveats to this assessment.

Let's start with capital buffers.



Back in the early 1900s, before deposit insurance and other taxpayer backstops, banks typically had about $20 in equity for each $100 in assets — a capital ratio of 20 percent. Today, the weighted average tangible common equity ratio at the six largest U.S. banks is 7.7 percent. That’s more than twice what they had on the eve of the crisis in 2007, but down from 8.3 percent in December 2015, when the post-crisis drive for financial reform started to wane.

By any reasonable measure, this isn’t enough. In the darkest days of the last crisis, forecasts of total losses on U.S. loans and securities reached 10 percent. To present little risk of needing to be bailed out, banks should have maybe twice that amount in equity. That’s roughly what economists at the Federal Reserve Bank of Minneapolis concluded last year.

Then there is that timely and comprehensive information-sharing.



Regulators didn’t have enough information, and what they did have they didn’t share with each other. When the mortgage market went south, nearly everyone in government was caught off guard by how little they knew regarding the tenuous strands holding the financial markets together. One aspect of the 2010 Dodd-Frank reform law is aimed at addressing this shortcoming: the creation of the Office of Financial Research (OFR), an important body that is far from a household name.

...

The OFR has done some good work, including standardizing global data to more easily spot and assess risk. But it’s been dealt blow after blow from Republicans, which has limited its effectiveness. For instance, the Trump administration has cut its budget by 25% and laid off some 40 employees. Trump has nominated Dino Falaschetti to be the office’s director; Falaschetti previously worked under House Financial Services Committee Chairman Jeb Hensarling, who has sought to eliminate the OFR altogether. Even before Trump’s presidency, Republicans in Congress evinced no love for the office’s work, characterizing it as just another worthless bureaucracy and driving down the office’s morale.

I can't stress enough that these are the successes!

The GOP has taken a meat-axe to the rest of Dodd-Frank.



For instance, on a bipartisan basis in May, Congress approved a measure that raises the level at which banks are subject to stiffer regulation, from $50 billion in assets to $250 billion....Lehman Brothers, remember, was not the biggest of the big when its bankruptcy occurred, so allowing the definition of “big” to creep ever upward is dangerous. A second deregulation bill passed the House in July with a big bipartisan majority. It would do further damage by exempting some non-banks — such as insurance companies or money managers — from assessments meant to determine whether a firm can survive a national economic calamity without being bailed out. This is a key change with potentially catastrophic consequences: just because companies aren’t banks doesn’t mean they can’t take down the financial system. AIG, for example, was an insurance company that was so entangled with Wall Street that it received a bailout in 2008, despite not being a bank.

Countrywide, AIG and Lehman would be exempt from much of Dodd-Frank today.

Let's not forget Elizabeth Warren's baby.



Then there’s the Trump administration’s undermining of the Consumer Financial Protection Bureau, an agency that is one of the most concrete tools to protect regular Americans from being ripped off by financial institutions — which they were before the crisis. Though far from perfect, the bureau has won important victories for consumers by taking on deceptive credit card company practices, standardizing mortgage forms and cracking down on predatory lending at for-profit colleges – securing consumers billions in refunds from ill-gotten corporate gains. Trump then took office, and appointed Mick Mulvaney to run the bureau, who doesn’t believe it should exist and is acting like it. He’s pulled back from investigations, ended promising cases and even changed the bureau’s name. He seems to want to prevent the agency from doing its job at all, though it’s the only regulator solely tasked with the welfare of consumers rather than that of financial institutions.

An often forgotten part of Dodd-Frank was a mandate for existing regulators, like the SEC, to do more to protect retail investors. So guess what?



In the years since then, instead of enacting more rigorous requirements for the nation’s 629,032 stockbrokers, the agency has proposed a code that isn’t much stricter than the rules we already have. The S.E.C. has also chosen to do nothing with the authority it received with Dodd-Frank to unshackle investors from contracts that prevent them from taking brokers to court when things go off the rails. The agency’s official actions and failures to act are not the only problem. Last month, Hester Peirce, an S.E.C. commissioner appointed by President Trump, threw out a bombshell, signaling that she would support requests from companies looking to block shareholders from bringing class-action lawsuits.

Now there are significant things that have changed, such as virtually the entire mortgage market is backed by the taxpayer now.

Plus global central banks are loaded with unprecedented levels of debt.

But otherwise nothing much has changed.