15 years post Lehman - What has changed?

As we "celebrate" the fifteenth anniversary of the Lehman failure, it may be good to look at what may have changed since that time. This is not exhaustive, nor does it try and tell a complete narrative, but I make some observations that jumps out at me. 

• The too-big-to-fail issue has not been addressed. Banks are more concentrated than before the Great Recession. Are they less risky, hard to say. There is clearly more regulation, but the linkages and points of potential risk still exist with the largest institutions.

• The systemically important label is being broadened to include more non-bank institutions, yet it is not clear that this will help the financial system. As regulation increases, no structures are developed to avoid regulation. More debt and leverage are managed through private markets as opposed to regulated banks. Banks risks may be less, yet debt risks are not lower.

• Monitoring has gotten better through the Financial Stability Oversight Council but it is unclear the goals of this monitoring other than getting more information. Regulators are watching but that is different than acting. The bank failures in 2023 is a perfect point. The information was available, but action was lacking.

• The debt problems still exist.  Debt excess has switched from households to governments although Treasuries are viewed as safe assets. 

• The Treasury market is less safe given the size of dealers relative to the Treasury debt outstanding. The Fed is the biggest player in the Treasury market, so it tries behavior. 

• The Fed has less flexibility and has generally overreached after crises. The lender of last resort is now a long-term lender for all situations.

• The Fed has created the foundation for a new financial crisis. By holding rates low for too long, and now taking rates to 5.5% they have created a problem for debt holders.  Markets are processing and adjusting to the new rate market, but that means that losses will have to be taken. Firms and households will have to pay more for debt. This is still working through the financial markets.

• Excesses in policy lead to market distorts which then need new policies to stop the resulting pain. It is a treadmill that cannot be easily left.  

• In the heat of the moment action was taken to not support Lehman. It may have been the right action. It could be argued as the wrong action. However, we do know that the subsequent actions are still being felt throughout the economy.