This time, policymakers were more interested in what Wall Street planned to do correctly in the event of a future financial or geopolitical crisis than what went wrong. (Yes, bank executives would leave China if Taiwan was invaded.)
I couldn’t help but be reminded of the well-known picture of dejected chiefs of systemically important financial institutions on the Hill following the 2008 crisis as I watched the heads of several major US banks — JPMorgan Chase, Bank of America, and Citigroup — being grilled in front of Congress last week.
The fact that there is still a lot of danger in the market system even 15 years after the Great Financial Crisis is highlighted by everything. It just comes from different sources.
This contributes to the 2008 legacy on its own. Because so much quantitative easing was necessary to mask the financial crisis, the Treasury market grew faster than buyers’ capacity for holding T-bills or desire to do so. The typical suspects, Asian countries, are wanting to sell rather than buy Treasuries at a time when the Federal Reserve is aggressively trying to sell T-bills as part of quantitative tightening, as a result of deglobalization and the US-China decoupling.
The major banks, who have long served as the primary broker-dealers in the Treasury market, claim that the post-2008 capital requirements have prevented them from performing that role as effectively as they formerly did. (Banks had hoped that the exclusions to some capital buffers during the pandemic would be made permanent.)
As demonstrated by the October 2014 flash crash, the repo market pressures in September 2019, and the Covid-related disruptions in March 2020, the ultimate “secure” market has actually proven to be extremely unstable under strain.
Without changes, the size of the Treasury market will exceed dealers’ ability to safely intermediate the market on their own balance sheets, leading to more frequent episodes of market illiquidity that will cast doubt on the US Treasury securities’ status as a safe haven, according to a recent Brookings Institution report on the subject.
Consumer advocacy organisations like Americans for Financial Reform are pushing for central clearing of Treasury securities and increased transparency in pre-trading data, which would help the $24 trillion US Treasury market, the largest and most complex market in the world, become less fragmented and better regulated. It should come as no surprise that banks are fighting against increased regulation as well as capital requirements that, in their opinion, have made it more difficult for them to hold additional Treasury securities.
This brings up a key, still unresolved topic surrounding the Great Financial Crisis: Why are banks so unique? Yes, compared to before 2008, the big US banks are much safer and better capitalised.
But why do they object to capital requirements in the single digits when companies in every other sector have multiples of that?
Simply wanting to take greater risks and earn more money accounts for some of it. But within that is a more nuanced and valid complaint: that banks are having to compete against less regulated market actors like principal trading firms (also known as high frequency funds) that have entered the T-bill market, as well as fintech firms and private equity tycoons that have emerged as significant players in industries like lending and housing.
That suggests that the system has yet another issue. Similar to before 2008, financial “innovation” continues to outpace regulation by a wide margin. The ability of private equity to acquire single-family homes, multi-family buildings, and even mobile home parks in ways that giant banks would not have been able to in the wake of the crisis has been well documented as having been extremely advantageous.
Since then, private equity has expanded into the healthcare industry (ominously, they want to simplify nursing homes), and it is even eyeing some of the family-owned manufacturing companies that are the crown jewels of the US industrial sector. When the huge funds are finished robbing these successful, neighborhood-based enterprises of their assets and piling debt on top of them, I fear to contemplate what they will resemble.
Stronger regulations for private funds, more fee disclosure, and metrics have all been advocated by the SEC. The Treasury Department is currently looking through suggestions made by the general public for preventing a flash fall in T-bill prices. In fact, there is a movement to regulate regional banks more strictly because they are becoming more important to the financial system. All of this is justified.
However, it also highlights the most important query that remained unanswered in the wake of 2008: Whom is the financial system intended to benefit? Main Street or Wall Street? I would say that the latter is true, but there isn’t a single panacea to remedy a system that has strayed so far from the efficient conversion of savings into investments.
We still have a market system that all too frequently serves itself more than the real economy, as everything from an increasingly volatile T-bill market to a home lending market now controlled by shadow banks to the financialization of commodities has shown us.