Treasury Assistant Secretary for Domestic Finance Nellie Liang argued that reforms implemented after the mortgage crash more than a decade ago have reduced risks to the current financial system.
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“That’s not to say we’re not going to have regular losses in the business cycle if things slow down too much,” he said Monday in an interview with Bloomberg editors and reporters in Washington. But “those losses in themselves will not cause a crisis.”
That’s significant if you’re right. Problems in the financial system could turn what many economists forecast as a short, shallow recession next year into something much worse, as happened in the Great Financial Crisis of 2007-09, when unemployment rose to 10%.
‘Major shocks’
“We’ve had big shocks in the last year,” Liang said. “And we have seen deleveraging in the financial system.”
However, that has not led to the kind of financial turmoil seen in the US more than a decade ago and in the UK more recently, when the domestic bond market was thrown into chaos as it had to unravel leveraged trading of UK pension funds.
Liang said he had “some degree of confidence” that this time financial instability can be avoided.
“That is a sign of success” of the reforms implemented after the last crisis, he added.
In addition to strengthening the banks at the center of the financial system, the so-called Dodd-Frank reforms also helped ensure that the latest housing cycle did not feature the kind of loosening in credit standards seen in the early 2000s.
Liang said the focus of US regulators was now less on leverage and more on so-called liquidity mismatches, where financial institutions put money into assets that cannot be easily sold, while also promising their investors that they can get their cash back whenever they want.
Liang served from 2010 to 2017 as head of the Federal Reserve’s financial stability division, created after the housing bubble burst.
Source: Gestion
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