Kevin Warsh on The Test of Real Financial Reform

 

Since the world’s developed economies nearly collapsed in 2008-2009,  the United States and Europe have taken different paths on their way back to prosperity, with mixed results. As growth and stability slowly return, we talked to a group of financial leaders in business, policy, academia and media about the systemic risks that remain, how they view the effectiveness of reforms and the trajectory of growth on both continents. This is part two of our series. Watch part one here.

 

At a speech in May, Richmond Federal Reserve President Jeffrey Lacker said that the Federal Reserve and federal regulators have not adequately addressed the problem of banks that are still considered too big to fail.   His remarks made headlines, but he is not alone in his view.

Kevin Warsh was on the Federal Reserve Board of Governors during the crisis, and during the bank bailouts. He still has concerns that, more than six years after the financial crisis began, the question over what to do in the case of systemic shock  remains largely unanswered.  Many people believe a systemic shock couldn’t happen today, according to Warsh.

“Investors should remember the shock of 2008-2009, and I would hope that would be a concern that stays with them. But the idea that we are somehow out of the woods, the idea that somehow the government is now well positioned to ensure that bad things don’t happen again, is not a proposition I would want to stand by.”

The test of real reform, he says, is if there’s a shock, would Washington have to bail out the banks again?

“In all candor it’s not obvious… that we’d have much of a choice.”

Watch Warsh’s full response in the above video.

See more: Mohamed El-Erian on the U.S. and EU response to global shocks

Evan Peterson is director of corporate marketing at CME Group and managing editor of OpenMarkets.

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