Last year, a new and obscure government agency tried that experiment, in thought anyway. The car was the U.S. financial system, and regulators were in the driver’s seat. The point was to assess the dashboard at their disposal. The agency looked at 11 of the best gauges economists have developed to measure the likelihood that the financial system is headed for another crash. And it found them, taken together, to be as useful as a speedometer — “which does not predict crashes but is still a useful risk indicator.”
What that exercise tells us is how little the government knows even today about what could trigger the next big financial wreck.
Five years after a Wall Street crisis ran the U.S. economy into a rock face, regulators are barreling ahead without a clear idea of where the risks lurk in the financial system — or even how much risk there is.
It’s Richard Berner’s job to fix that.
Berner is the newly installed director of the Office of Financial Research, the first federal agency devoted to quantifying threats to financial stability. In other words, he’s trying to build a dashboard that sees around corners, in the dark.
You’ve probably never heard of that office or of the economist running it. So it might hearten you to learn that seeing around corners is Berner’s specialty.
‘I think we’re in recession’
In November 2007, Berner walked into the office of David Greenlaw, a colleague at the investment bank Morgan Stanley. Berner was the firm’s chief economist, Greenlaw was one of his deputies, and together, they compiled the economic forecasts that Morgan Stanley sent its clients to guide their investment decisions. Usually the two men thought so similarly on economic matters that they barely needed to discuss them. This time, they were in for a long chat.
“I think we’re in recession,” Berner announced.
Berner had spotted real trouble long before most leading economists. In late October, Federal Reserve officials had called growth “solid” and said the strains in financial markets were letting up. They were predicting growth for the following year. So were the Congressional Budget Office and the academic and business economists in the renowned Blue Chip forecasting survey.
What Berner saw, and others missed, were lending standards tightening across the country, businesses pulling back on big investments and global growth slowing down. He saw warning signs flashing in the financial system, which he thought would cause big problems for the economy. Sitting in Greenlaw’s office, “I tried to make my logic as compelling and convincing as possible,” Berner said. Eventually, Greenlaw came around.