But the post-Lehman goal — of a global scheme that would immunize the financial system from another large-scale shock — remains incomplete. Big banks, insurers and other financial giants remain intact and arguably “too big too fail.” Tools to guard against dangerous bubbles in the value of property or other assets are not yet in place. There is no agreement on how countries should coordinate the failure of a globally important financial company. Implementation of basic banking rules in major nations has fallen behind schedule.
Finishing the job “is going to take many years,” International Monetary Fund chief economist Olivier Blanchard said last week. “It is conceptually very difficult, politically very difficult.”
In their effort to overhaul the global system, regulators have been confronted by a number of head winds. The world’s economy has been unexpectedly slow to recover, making governments leery of doing anything that might make banks cautious to loan and invest. The financial industry has pushed back hard, warning that aggressive regulation might undermine growth. And regulators are simply limited in their understanding of how modern finance can be made safe while still supporting economic activity.
The result: Some of the proposals once considered core to a safe, post-Lehman system have been delayed and weakened, and others have been played down, at least for now, as too politically complex. In other cases, the world is heading toward a patchwork. Some major European nations, including Germany and France, are preparing to impose a tax on every financial transaction, while Britain and the United States have rejected the idea. There is a growing divergence, as well, over how involved banks should be in securities trading and investing.
“The global economy is such a complex animal, there is a lot of structural work to be done. We are discovering that there is still a fault line here, a fault line there,” said World Bank chief economist Kaushik Basu. “As this gets mitigated, there will be a period of difficulty and danger.”
The complexities are such that even basic questions remain in dispute among the international bankers, regulators and political officials involved in the process.
In the wake of the 2008 Lehman collapse, there was a seeming groundswell behind the idea that no institution should be “too big to fail” — so important to the economy that taxpayers would have no choice but to provide a bailout if the company faltered. That is what proved to be the case with Lehman and what prompted the United States to rescue American International Group, the insurance giant known as AIG.