Looking back at City A.M.'s front pages from 10 years ago makes for fascinating reading. The headline on 9 August 2007, for example, read as follows: “[Mervyn] King upbeat on sub-prime loan crisis”.
Rather embarrassingly for the former Bank of England governor, it quotes him arguing that the US crisis “was not a threat” to the world’s financial system.
In fairness to Sir Mervyn, he went on to add that it was impossible to judge how tight credit conditions would become. And moreover, he was hardly the only prominent financial figure to miss the impending threat to financial stability and economic growth throughout the western world.
“Overall the banking system is in good shape,” said Sheila Bair of the Federal Deposit Insurance Corporation, also on 9 August 2007. “They’re very well-capitalised, well diversified,” she told CNBC. “We’ll be just fine on this”.
On the same day, then-Federal Reserve official Gary Stern said of the subprime squeeze: “If you put it into context of scale, it’s not that great.”
The quotations can still be found on Reuters, which also cited Cantor Fitzgerald boss Howard Lutnick describing the market’s movements that day as “an overreaction”.
Hindsight is a wonderful thing, of course, and even now economists are not united in their analysis of the crunch and subsequent crash.
We can observe the state the subprime market was in. We can remember excessive leverage throughout the financial system and parts of the broader economy. And we can identify some terrible individual decisions made by certain senior bankers. But there is no simple and overarching consensus on precisely what governments, regulators or finance bosses themselves did wrong, or how to stop it happening again.
At this point 10 years ago, few people realised the extent of the impending disaster. Instead of scoffing at unfortunate quotations such as those above, we should treat them as a warning against hubris, a reminder that we are just as unlikely now to foresee the next downturn, the next crunch, the next bubble to burst.
Ultimately, we must recognise the limits of prudential regulators. They cannot and should not try to mollycoddle all elements of the financial sector in an attempt to prevent any future shocks. To the contrary, one of the primary tasks of post-crisis regulation must be to break “too big to fail” once and for all, and facilitate a dynamic financial market where companies innovate, compete, and are allowed to succeed and fail without a taxpayer-backed safety net.
The task at hand for regulators is unenviable, but if we can look back in another 10 years and say we destroyed the moral hazard behind "too big to fail", then at least one of the right lessons will have been learned.