Our economy is robust but we need to remember that capitalism is inherently unstable and undergoes cycles of boom and bust.

In 2008, our financial institutions were overleveraged and held too many toxic assets. The problem became acute because they relied on short-term financing to provide the liquidity they needed. Our subprime-mortgage problem morphed into a global meltdown.

Let me recite just a few disturbing points from that time:

  • Stock market values declined by $9.8 trillion.
  • Global growth dropped 4 percent from the second quarter of 2008 through the first quarter of 2009, according to Moody’s Analytics.
  • Unemployment peaked at 10 percent by June 2009.
  • Trillions of dollars were needed to guarantee money-market funds and commercial paper.
  • Hundreds of banks and several major insurance companies required bailout funds.
  • The government placed Fannie Mae and Freddie Mac under conservatorship.
  • Millions of homeowners lost their homes to foreclosure.
  • On Sept. 15, 2008, Lehman Brothers failed primarily because the government would not provide financial subsidies to encourage other institutions to acquire it. Lehman’s failure led to a global liquidity collapse.

We were fortunate that Federal Reserve Chairman Ben Bernanke, Secretary of the Treasury Henry Paulson and his successor as secretary of the Treasury, Tim Geithner, worked extremely well with Presidents George Bush and Barack Obama to create innovative financial strategies to mitigate the recession. In addition, Congress passed legislation on a bi-partisan basis, such as the $700 billion Troubled Asset Recovery Program, which enabled the Treasury to funnel billions of dollars to beleaguered banks, and the $827 billion American Recovery and Reinvestment Act of 2009, which provided fiscal stimulus.

The U.S. economy has recovered nicely since 2008. Housing prices and the stock market have reached all-time highs. Our unemployment rate is 3.9 percent, the lowest rate since 2000.

In discussing the financial crisis, Paulson, Bernanke and Geithner acknowledged that helping Wall Street was extremely unpopular. But they argued that the importance of Wall Street to our economy required such actions.

The public remains livid about the size of bonuses paid to financial executives in the wake of the crisis. Further exacerbating tensions is that, while the banks got billions of dollars, little was done to directly help homeowners.

And instead of limiting the size of banks or breaking them up, our country’s biggest banks are now larger than they were before the crisis. J.P Morgan Chase now has $2.5 trillion in assets compared to $1.5 trillion in 2007. Bank of America has grown to $2.3 trillion from $1.7 trillion in 2007. Wells Fargo now has $2 trillion, more than double its size a decade ago.

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to overhaul the financial services industry. Dodd-Frank established the Financial Stability Oversight Council, which recommended stricter capital ratios, cut the amount of leverage bank’s could take on, reviewed complex financial derivatives and gave the government the power to break up financial firms.

While we have better tools to deal with the financial crisis than in 2008, we must be prepared for another one and recognize the inherent danger of “fighting the last war.”

The trouble is that credit is inherently unstable, prone to expand excessively and to inflate bubbles in asset prices. Over time, bubbles collapse, causing a cascade of defaults throughout the economy. The late Hyman Minsky recognized capitalism as a financial system in which millions of balance sheets and cash flows were intertwined in a highly complex way.

During my working career, I experienced the Arab Oil Embargo, Stagflation — short-term interest rates exceeding 20 percent and unemployment above 10 percent; and the 2000 technology bust.

Looking at my handy crystal ball, I worry that fiscal irresponsibility is our Achilles heel. Without a change in course, the federal budget deficit will exceed $30 trillion in a few years. I predict that either the federal government will be unable to finance its debt or its financial needs will crowd out those of private borrowers.

Originally published in the Sarasota Herald-Tribune