FIREFIGHTERS OF LAST CRISIS SEE SMOLDERING DANGER

BY GINA CHON

The firefighters of the last financial crisis are pointing out smoldering dangers that could exacerbate the next one. Ten years after Lehman Brothers failed, former U.S. officials Ben Bernanke, Tim Geithner and Hank Paulson agree that it is near impossible to predict the triggers for the next economic calamity. That makes defenses, such as a robust economy and strong institutions, all the more important.

At a Brookings Institution event on Wednesday, the trio recalled things they could have done better. Future policymakers will make mistakes of their own but can at least ensure the economy is resilient when the shock hits.

That is why Paulson, a former Treasury secretary, worries about the rising U.S. budget deficit, which he called a debt bomb. The shortfall is estimated to hit $1.1 trillion in 2019, which equates to about 5 percent of GDP. And as Bernanke, who used to be the chairman of the Federal Reserve, pointed out, the share of GDP that is spent on debt interest-rate payments will end up rising. That spells difficult budget choices in the future.

Republican tax cuts passed last year also aggravate income inequality. After-tax incomes will increase most for the top 0.1 percent, according to a March study by the University of Pennsylvania’s Wharton School. Yet the share of total household income for the top 5 percent of earners in 2017 is only slightly smaller than the lowest three quintile income brackets combined, according to a survey released on Wednesday by the U.S. Census Bureau.

Geithner and Bernanke also noted the importance of civil servants who execute policy. The success of the unique credit facilities and backstops created by the Fed and Treasury during the crisis was a function of the creativity and expertise of the government employees implementing the programs.

Under the administration of President Donald Trump, thousands of bureaucrats have left government because of budget cuts and low morale. About 15,000 are estimated to have been culled from federal payrolls between fiscal years 2016 and 2018, according to the Congressional Research Service. Last month, Trump also canceled a 2.1 percent pay raise for federal workers.

The former officials have helped put together a handbook of lessons learned from 2008. But it’s up to current and future policymakers to ensure that inequality and a hollowed-out civil service don’t hamper the next generation of crisis firefighters.

First published Sept. 12, 2018

(Image: REUTERS/Joshua Roberts)