Financial institutions don’t cause financial crises, governments do, according to Hank Paulson, a central member of the U.S. government during the most recent crisis.
Paulson, the Treasury Secretary during the Bush-era meltdown and one of the architects of the bank bailout that followed it, explained his theory on what causes financial meltdowns in an interview with The New York Times’ Andrew Ross Sorkin.
“I believe the root cause of every financial crisis, the root cause, is flawed government policies,” Paulson said.
Paulson, also a former Goldman Sachs CEO, has expressed this sentiment before, telling CNBC last year that the credit crisis was caused by “flawed” government policies that goosed the housing market and pushed Americans to borrow too much and not save enough.
Some have pointed to policy decisions like that of former Federal Reserve Chairman Alan Greenspan to keep interest rates low during the housing boom for creating the conditions for the crisis. Greenspan, for one, said in the wake of the financial crisis that he "made a mistake" when he assumed that banks responding to their own self-interest would be enough to protect shareholders.
Others like Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation during the crisis, argue that the main cause of the meltdown was Wall Street greed.
Now, in the wake of the economic collapse, some, including Sen. Elizabeth Warren (D-Mass.), say lawmakers aren’t doing enough to regulate banks and prevent a crisis from happening again. Others note that though lawmakers have made an effort to address financial deregulation through the Dodd-Frank law, they could be doing more to make sure the reforms are fully implemented.
For his part, Paulson told Sorkin that now there’s now too many regulators overseeing the financial industry, which could mean too many cooks in the kitchen if a crisis happens again.