FT: The Insanity Lives On

In case you missed it, check out Gilian Tett’s intreresting recap of the state of the financial world five years after the meltdown.


Given the carnage that the Great Recession has left in its wake, one would expect that the financial work would be quite different half-a-decade later. Not, notes Tett, who points the following six features of the current financial landscape that cause  even an FT writer, not exactly a representative of OWS, to scratch her head:

1) “The big banks are bigger – not smaller. When Lehman collapsed, there was outrage over the fact that many western banks had become so enormous they were “too big to fail”, creating concentrations of risk. Reformers called for banks to be broken up, to make them smaller and create badly needed diversity.

“2) “The shadow banking world is taking over more activity, not less. When Lehman failed, regulators suddenly realised they had been ignoring the non-bank sphere, enabling egregious behaviour to flourish. Given that, you might have expected those shadows to shrink. But think again: it has expanded since 2008 from $59tn in size to $67tn, according to the Financial Stability Board.”

3) “The system depends more than ever on investor faith in central banks. One issue that caused the last credit bubble was excessive investor trust in the abilities of central bankers, both to keep inflation low and understand how financial innovation worked.”

4) “The rich have become richer. The Lehman Brothers crisis triggered a surge of popular anger against wealthy elites; hence the rise of the Tea Party, Occupy Wall Street and other protest groups. But that has not caused elites to lose wealth. On the contrary, one (largely unacknowledged) consequence of QE is that this has raised asset prices and thus benefited the asset-rich wealthy elite, widening inequalities.”

5) “Financiers have been prosecuted – but not for the credit bubble. After the Lehman collapse, politicians demanded banker prosecutions, and initially this seemed likely to occur.”

6): “Fannie and Freddie are alive and well. Back in 2008, it seemed self-evident that the rotten entities of Fannie Mae and Freddie Mac were overdue for reform…But five years later, Fannie and Freddie are more entrenched than ever, accounting for more than 90 per cent of the US mortgage market, up from 60 per cent before.”

The clichéd quote is that insanity is doing the same thing over and over and expecting different results. How much different then is regulators’ inability to make any meaningful reform of a system that almost shut down half the world’s economy five years ago and now seems, after a brief interlude, to be gearing up to do it again in the future?

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Carlos Alvarenga

Founder and CEO at KatalystNet and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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