(Still) Fighting the Financial Crisis of 2008: Ten Years Later

Abstract

Set in the spring of 2018, the US Congress contemplated changes to the Dodd-Frank Act in an effort to improve financial regulation in the United States. The case offers details on the slow recovery from the financial crisis of 2008, on protest and political movements that ensued, on the Dodd-Frank Act of 2010, and on 14 proposals for new financial regulation. As of 2018, Senator Elizabeth Warren and Representative Jeb Hensarling offer differing regulatory agendas for the financial services industry in the United States.

Excerpt

UVA-F-1838

Jul. 27, 2018

(Still) Fighting the Financial Crisis of 2008: Ten Years Later

A decade after the financial crisis of 2008, Senator Elizabeth Warren and Representative Jeb Hensarling led continuing debates over the adequacy of laws and regulations to prevent or mitigate future financial crises. Senator Warren advocated tighter regulation; Representative Hensarling argued that regulations were ineffective, costly, and had retarded the recovery of the economy from the crisis of 2008. By 2018, the ongoing political ferment around financial crises revealed that anger about the crisis of 2008 had not yet subsided. Over a dozen new remedies commanded the consideration of public leaders. What problems were these proposals trying to fix? And from the vantage point of a decade later, which remedies seemed appropriate? Why? More generally, should the aim of regulation be to reduce the risk of future crises to zero?

In 2010, Congress passed the Dodd-Frank Act (see Exhibit1) that imposed special stress tests and capital requirements on “significantly important financial institutions” (SIFIs), limited the ability of the US Federal Reserve (Fed) to respond as a lender of last resort, and created the Consumer Financial Protection Bureau to regulate new financial products. In signing the act, President Barack Obama said, “These reforms represent the strongest consumer financial protections in history…because of this law, the American people will never again be asked to foot the bill for Wall Street's mistakes.”

In 2011, a commission chartered by Congress issued a report on the crisis that sparked controversy and recriminations about the causes of and responsibility for the crisis. In 2008, 2010, and 2012, the Fed pursued programs of “quantitative easing” (QE), massive asset purchases aimed at driving interest rates to historically low levels and stimulating the economy. Protests and new political movements met these and other government actions with hostility—and culminated in an especially polarizing presidential campaign in 2016.

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Keywords: financial crisis, subprime crisis, Federal Reserve, Lehman Brothers, Bear Stearns, contagion, public policy, regulation, reform, relief