Six years after the collapse of Lehman Brothers, the lessons of the financial crisis already may be fading from collective memory.
Just this month:
• Congress acted to loosen the regulation of the high-risk investments that ignited the 2008 crisis.
• Housing regulators cut minimum down payments on home loans.
• The Institute of International Finance declared it “worrisome” that global indebtedness, as a share of world economic output, has reached record levels.
All this comes as subprime auto loans for financially stretched buyers are surging. And the so-called too-big-to-fail banks that needed a taxpayer bailout in 2008 now loom even larger than before the crisis: America’s five biggest banks account for 44 percent of bank assets, up from 38 percent in 2007, according to SNL Financial.
The trend toward pre-crisis lending practices worries analysts who favored far-reaching reforms to safeguard the system.
“We’re on a very dangerous trajectory,” said Simon Johnson, professor of global economics at the Massachusetts Institute of Technology.
By all accounts, the system isn’t as vulnerable as it was before the crisis. The Treasury Department’s Office of Financial Research, set up after the crisis to monitor risks, said “threats to financial stability are moderate.”
U.S. banks have increased their capital defenses against loan losses by over 27 percent since 2007.
Still, watchdogs fear the risks are accumulating. Recent developments have compounded the worries:
Risky bets: Congress voted this month to weaken a rule intended to reduce risks to taxpayers. Under the 2010 Dodd-Frank financial regulation bill, banks had to separate their federally insured banks from their riskiest trading operations — the ones that deal in derivatives.
Derivatives are used by farmers and companies to hedge financial risks. But they also let traders speculate on bonds, currencies and commodities such as oil. The Dodd-Frank provision was meant to limit the risk that banks would use federally insured deposits to gamble on derivatives.
But at the behest of bank lobbyists, the House slipped into a must-pass spending bill a repeal of the divide between traditional banks and derivatives trading. Banks say the move will preserve their ability to help farmers and businesses hedge against risks.
Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., called the repeal “illogical.” The 2008 crisis, he said, exposed “the economic consequences of conducting derivatives trading in taxpayer-insured banks.”
Lower down payments: Mortgage giants Fannie Mae and Freddie Mac issued guidelines allowing Americans to buy homes with down payments as low as 3 percent, down from the current 5 percent minimum. This is meant to make houses more affordable for low-income families and first-time buyers.
“It is dubious housing policy to encourage moderate-income people to take out mortgages on which they are likely to default,” said Dean Baker, co-director of the liberal Center for Economic and Policy Research.
Rising global debt: The Institute of International Finance, an industry research group, warned last week that global debt, excluding debt held by banks, had reached a record 244 percent of worldwide economic output.
Companies in emerging markets such as China and India have been issuing bonds in record amounts, many of which must be repaid in U.S. dollars. If interest rates and the U.S. currency rise — and the dollar has surged over 10 percent against major currencies since the end of June — those companies may struggle to meet payments or refinance their debt.
Risky auto lending: U.S. regulators are warning about slipping credit standards for auto loans. The rating agency Standard & Poor’s expects lenders to make $21 billion of subprime auto loans this year, up from $20 billion this year and $18 billion in 2013. S&P analysts concluded this year that “caution is warranted.”
