16th September 2023 – (New York) This September marks 15 years since the collapse of Lehman Brothers, the catastrophic event that triggered the 2008 global financial crisis. While policymakers worldwide have sought to strengthen oversight and regulation since then, glaring flaws remain in the US financial system. As memories fade, we risk sleepwalking into the next crisis unless fundamental gaps are addressed.

Most visibly, capital and liquidity requirements for major banks have been enhanced under successive Basel accords. This “fortress balance sheet” approach aims to ensure institutions can withstand market shocks. Regulators also now conduct stress tests and have powers to wind down failing banks.

While welcome steps, these reforms narrowly targeted the risky behaviours of too-big-to-fail banks that caused the 2008 meltdown. Broader weaknesses festering across the financial landscape remain unresolved.

Take the decrepit state of U.S. housing finance and mortgage-backed securities. Government-sponsored giants Fannie Mae and Freddie Mac still dominate this vast market, with over US$5 trillion of mortgage exposure. Yet they legally remain in limbo, operating under government conservatorship since 2008. Attempts to overhaul their status have gone nowhere, leaving an uncertainty that could spread systemic contagion.

The non-bank sector also lurks ominously in the shadows. Growing segments like private equity and hedge funds face little oversight compared to banks. The implosions of Archegos Capital and Celsius Network recently highlighted gaps outside the banking perimeter. Expect calls to regulate this “shadow banking” system if crisis strikes again.

Most fundamentally, financial supervision itself remains under-resourced and constrained. Policies lavish attention on beefing up regulation and capital buffers. Far less priority goes to funding the supervisory agencies and workers tasked with day-to-day monitoring.

Recent disasters underscore this imbalance. Before Credit Suisse and Silicon Valley Bank failed, warning signs flashed. However, supervisors lacked the capacity for proactive intervention. Outgunned by armies of bank legal and compliance staff, they struggle to preempt problems.

Without greater independence and stature for supervisory agencies, technical fixes can only achieve so much. Supervisors require insulation from industry lobbying and political pressure to make tough, unpopular decisions promoting financial stability.

Underlying these deficiencies lies an unwillingness to confront how excessive monetary stimulus fosters financial instability. The “Greenspan put” relied on aggressive rate cuts to push up asset prices and counter downturns. Today’s prevailing mindset, 15 years after Lehman, remains to quickly boost markets and avoid recessions with easy money.

While recessions inevitably occur in business cycles, excessive easing sows the seeds for future crises. It pushes investors into riskier assets, loosens lending standards, and facilitates dangerous debt buildups. Yet central banks feel compelled, to quote former Fed chair Ben Bernanke, to “get those animal spirits going” with stimulus.

This asymmetric policy of aggressive easing but timid tightening means finance enters each cycle on a more precarious footing. The progressive backdrop of higher debt and asset prices fans bigger booms and busts. The Fed’s botched response to high inflation this year has already wrought havoc in global markets.

What lessons should U.S. govenrment learn 15 years after the cataclysm of Lehman? Tighter bank capital rules and liquidity buffers help manage risks but are insufficient alone. The real imperative is to curb the buildup of financial excesses that precede crises. This requires restraint on monetary stimulus during good times paired with tolerance for occasional modest recessions. It means expanding the regulatory perimeter to non-banks while also boosting supervisor capabilities and independence. And it necessitates ensuring market discipline via better accounting, disclosure and governance.

Absent these deeper reforms, the seeds of the next crisis will keep spreading. Each downturn cleared with aggressive rate cuts allows risks to multiply further. While policymakers talk of “fixing the roof while the sun shines”, they remain hooked on easy stimulus and regulation-lite.

If this continues, U.S. government risks stumbling into another cataclysm on the scale of 2008, if not larger. On the 15-year anniversary of Lehman, with dangers brewing again, the unfinished business of financial reform deserves renewed focus before it’s too late.