It's not imminent but the US needs a "better prepared firehouse with better equipped firefighters" else the first responders to the next economic crisis, the fire that will "eventually" come, will react with even fewer and weaker tools, say three financial wizards who helped contain the fallout of the 2008 global meltdown - an event whose worldwide implications are being felt even now.
"The next time a financial fire breaks out, America may well wish it had a better prepared firehouse with better equipped firefighters. One reason the (2008) crisis was so damaging was that the government lacked the tools needed to attack it with overwhelming force from the start. We fear that unless Washington makes significant changes, the first responders of the future will start with fewer and even weaker tools," Ben Bernanke, Timothy F. Geither and Henry M. Paulson Jr. write in "Firefighting - The Financial Crisis And Its Lessons" (Profile Books/Hatchette).
And, just as the trio did, the future responders will "have to lobby politicians to upgrade the fire department while the fire is already burning," they write.
Bernanke was Chairman of the US Federal Reserve from 2005 to 2014. Geithner, a former President of the Federal Reserve Bank of New York, was from 2009 to 2013, the 75th Secretary of the Treasury for President Barack Obama's first term. Paulson was, from 2006 to 2009, the 74th Secretary of the Treasury under President George W. Bush.
"We want America to be ready for the fire next time, to borrow a phrase from (novelist, playwright and activist) James Baldwin, because eventually the fire will come. That's why we think it's so important to try to understand the last crisis - how it started, how it spread, why it burnt so hot how we and our colleagues struggled to fight it, what worked and what didn't.
"We're afraid that a nation that doesn't understand the lessons of this meltdown might be doomed to endure someting even worse," the authors warn.
What then, are these lessons?
For starters, prediction and prevention "because the best way to minimize the damage from a financial crisis is not to have one", the authors say.
Since most crises follow a similar pattern, it's possible to try to identify warning signs like excessive leverage in the financial system, "especially when it's too dependent on short-term financing, particularly in corners of the system with weak fire codes and limited access to the firehouse", the authors say.
Noting that financial systems are inherently fragile and financial risks tend to migrate around regulatory obstacles, like a river flowing around rocks, the authors state: "There's no sure way to avoid a panic becuse there's no sure way to avoid overconfidence or confusion. Human beings are human, which is why we think it makes sense to think about crises the way Buddhists think about death: with uncertainty about the timing and circumstances, but certainty that it will happen eventually."
The book concludes with the authors hoping that "now that the sun is shining, Washington will use this opportunity to fix its economic roof before the next hard rain. This would begin with a new commitment to fiscal responsibility, because the current dessert-over-vegetables approach of slashing taxes while boosting spending in good times will make it impossible to provide fiscal stimulus in bad times".
At the same time, the current mix of constraints on the emergency policy spread is dangerous for the US - and, considering the global importance of the US financial system and the dollar, are dangerous for the whole world.
The stakes are so huge "that doing even a little better could have tremendous benefits in terms of improved well-being. There's no time like the present to start".
The book's in a rather unique format: 129 pages of text in five concise chapters beginning with "Dry Tinder" (the root of the crisis) and the conclusion, "The Fire Next Time", followed by 73 pages of charts. It's much like being able to carry a powerpoint presentation in your jacket pocket without the need for a computer to access it.
It's a handy guide that should constantly stay within your sight - because, as has often been said, those who ignore history are destined to repeat it.
(Vishnu Makhijani can be reached at email@example.com
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