In a book called Firefighting – The Financial Crisis and its Lessons written by Ben S Bernanke, Timothy F Geithner and Henry S Paulson published by Penguin Books, NY, 2019. The book offers lessons from a crisis. The 3 authors were the lead news daily in 2008 through 2010 as the financial industry went through losses, destabilization, recession and recovery. The 3 people had to come up with a variety of tools to fight the fires and to allow for recovery. In all industries including finance, regulations are there for the last crisis not the current one. If the crisis is worse this time, the regulations are less effective because all industry change from the last crisis. Finance is always a little different because much of finance is about confidence. Banks lend money, they have to have a level of confidence the counterparty will repay. When the confidence falls, investors run will their money to something safer. When money goes to something safer, it effects regulatory levels.

Not surprisingly, the 3 authors noted the system is more complex than ever and when they tried to do something, they quickly realized the tools in the toolbox were not sufficient for the job and needed to persuade politicians to give them better tools.

None of us, nor any of our accomplished colleagues, had ever lived through a crisis like this. Despite Ben’s expertise on the Great Depression, Hank’s feel for financial markets and Tim’s experience with crisis abroad, none of us were ever sure what would work, what would backfire, or how much stress the system would be able to handle. There was no standard playbook we could consult for guidance, no professional consensus about best practices. We had to feel our way through the fog, sometimes changing tactics, sometimes changing our minds, with enormous uncertainty about the outcomes.

Although it could well have been worse, the crisis was still extraordinary damaging both for the US and the world. Millions of Americans lost their jobs, their businesses, their savings and their homes. One crucial lesson of 2008 is that financial crisis can be devasting even when the response is relative aggressive and benefits from the formidable financial strength and credibility of the US. The best strategy for a financial crisis is not to have one. And the best way to limit the damage is make sure crisis managers have the tools they need to fight before things go too bad.

Financial crisis will never be entirely preventable, because they are products of human emotions and perceptions. as well as the inevitable lapses of human regulators and policymakers. Finance depends on confidence and confidence is always fragile. While it is vital to try to rein in excessive leverage and risk taking on Wall Street, that leverage and risk taking is generally a reflection of excess optimism in society as a whole. Mania and panic both seem to be contagious.

The US was not prepared for the crisis in 2008, but a decade later is it better prepared? We believe yes and no. There are better safeguards in place to avoid a panic in the first place. But the emergency authorities for government officials to respond are in many ways weaker than they were in 2007. The government’s ability to respond to a collapse in economic demand with monetary and fiscal stimulus has also been significantly depleted.

The authors outline what needs to be done and could be done, but with a divided government where do you think the two parties would co-operate?

The book has charts from pages 135 to 212 that are interesting to look at.

Linking to dividend paying stocks, all stocks go up and down or fluctuate, but some less than others. In times of optimism, you want to play offense, but when things are tough, defense is the name of the game. There are always conflicting emotions to investing, but receiving dividends is something to look forward to. In the book, Firefighting, very few people thought the economy would go into crisis or what were the signs? when should you play defense? Often times if a dividend paying stock cuts its dividend, then you know you need to move to alternatives, but did you miss the signs? too optimistic? what are the alternatives to move to?

There are more questions than answers, till the next time – to raising questions.