Glen Hodgson is senior vice-president and chief economist of the Conference Board of Canada.
A popular line during the 2008-09 financial crisis was that "you never want a serious crisis to go to waste." This clever quip made the point that a crisis presents a unique opportunity for action; governments would be able to enact fundamental structural reforms that would strengthen the long-term sustainability and growth capacity of their economies.
But seven years after the investment bank Lehman Brothers imploded and triggered the financial crisis, the 2008 crisis has been largely wasted. Structural changes have been limited and modest at best. We have not taken advantage of this once-in-a-lifetime opportunity to implement measures that could prevent the next financial and economic crisis. The Conference Board wrote the only Canadian book on the causes, policy responses and lessons from the crisis, and with it we are well positioned to assess what was learned and where we collectively acted, or where we failed to learn and neglected to act.
Let's examine immediate crisis management and longer-term measures separately. After the crisis erupted and spread in the fall of 2008, it took policy makers a few weeks to grasp its magnitude – but initial policy action was quite deliberate and rapid. Nearly all major governments –democratic and authoritarian – recognized that exceptional macro-economic policy intervention was needed to shore up confidence in the global financial system and to restart economic growth.
Interest rates were cut sharply by central banks in late 2008 and early 2009, including those of the Bank of Canada. Significant fiscal stimulus was added soon afterward, resulting in a boost to global demand and large fiscal deficits almost everywhere. In Canada, both the federal and provincial governments undertook significant fiscal action through infrastructure investment and targeted spending and tax initiatives. Measures were also taken to unlock frozen capital-market segments and to strengthen the capital base of various financial institutions. Due to this extraordinary policy intervention, growth re-emerged fairly quickly – by the middle of 2009 for Canada and the U.S.
But a look at the success of long-term measures paints a different picture. It's hard to conclude that policy makers globally took advantage of the crisis to make fundamental changes to policy and regulation. Where has the ball been dropped? We continue to see excessive reliance on monetary policy almost everywhere. With short-term interest rates near zero, monetary policy cannot pull the economy out of the doldrums, let alone provide support in another downturn.
Governments have dithered in developing fiscal plans and pathways to underpin long-term growth. Canada is a rare exception, with public debt ratios stabilizing and even declining for the federal government and some provinces. Few other G20 governments have introduced a medium-term plan to improve their debt-to-GDP ratios. As a result, they do not have the capacity to inject massive fiscal stimulus if needed again in the future.
Moreover, macro-economic policy co-ordination has weakened since the crisis period and structural reform to labour and financial markets has been limited. Short-term domestic objectives have become the focus in many countries. In Europe, for example, Germany provided exceptional financing to heavily-indebted euro-zone partners (in exchange for significant fiscal tightening). Yet, few measures were taken to strengthen German aggregate demand, which could have aided the recovery in other euro-zone countries, or to make European labour markets more flexible and adaptable.
The most striking area of inadequate reform has been in financial institutions and markets, which, of course, were the epicentre of the financial crisis. Some U.S. institutions have paid heavy fines for their fraudulent behaviour in creating high-risk mortgages and related asset-backed securities, but there have been few, if any, individual convictions.
Improvements to regulatory oversight are incomplete. The U.S. Dodd-Frank Act was supposed to prevent another financial crisis from happening, but it's generally viewed as ineffective legislation. The Volcker Rule was intended to restrict large U.S banks from making risky investments from their own accounts, but it has been watered down and didn't fully come into effect until July, 2015.
Thus, there are still many large integrated financial institutions and corporate entities that remain "too big to fail' and pose a systemic risk. Taxpayers and their governments remain on the hook for future large-scale corporate bailouts, since there has been no fundamental rethinking of how to scale down large businesses with complex supply chains – or how to wind down failed corporations without destabilizing the wider financial system.
In short, after an effective initial response in 2008-09, there has been limited additional policy action on deeper reforms. Businesses are again looking after their own specific interests, quarter by quarter, and policy makers the world over have neglected to address and manage systemic risks.
We are hardly any more ready today for a crisis than we were in September of 2008.