10 Years Later, Is Another Financial Collapse Inevitable?

September 12, 2018

By Michael Teich

A lack of leadership in Washington and untamed technological innovation on Wall Street could spark the next financial crisis, said journalist and author Diana Henriques.

"I've never seen Washington in such disarray," she said Wednesday in an interview on Cheddar. "The people that saved us in 2008 look like Mount Rushmore compared to the situation in Washington now."

Henriques is primarily concerned that investors and politicians have failed to learn from 2008. One example stands out.

"We are repealing the wrong parts of Dodd-Frank," she said. "We're repealing the parts that involve consumer protection and stringent bank regulation, and we're leaving in place the parts that prohibit the very steps that pulled us back from the brink in 2008."

President Trump has been vocal about his desire to roll back Dodd-Frank, which was enacted in 2010 as a measure to prevent another market crash. At a White House event with small business leaders in January, he said, "We're going to be doing a big number" on the legislation. In May, Congress voted to reduce the rules for small and medium-sized banks.

Computerized trading and the mob-like behavior of investors in today's system is also a troubling sign, Henriques said.

"We're looking at indexing and algorithm trading. That looks to me like a herd investor ー trillions of dollars moving into the same direction at the same time. We've got some novel new financial instruments that still haven't been tested, and we don't know how they'll turn out. "

And try as it might, Wall Street can't overcome its difficulties without Washington.

"Wall Street in a crisis cannot save itself. It will rely on Washington for a rescue," Henriques said.

A tiny little software flaw "can crash the system today," she said, which adds to the complexities of regulation.

"The machinery in the marketplace doesn't get enough regulatory attention, doesn't get enough media attention. The market machinery has to work, and I worry it won't."

This week marks 10 years since the financial crisis. During the "Great Recession," which spanned from late 2007 through mid 2009, roughly 8.7 million jobs were lost. The Dow cratered to intraday low of 6,469.95 on March 6, 2009, well below the pre-crisis high of 14,198.10 on October 11, 2007.

Now, the stock market is in the midst of the longest bull market ever. The Dow closed Wednesday just below 26,000.

For full interview click here.