INDIANAPOLIS | Former U.S. Sen. Evan Bayh, D-Ind., sees the recent financial crisis as a tale of greed, fear, dreams, hopes and panic, calling it a story as old as time and destined to repeat itself absent changes to the incentives that drive American business and government.
"There is the ultimate challenge for policymakers: we're always looking in the rear-view mirror trying to prevent the last crisis, rather than looking forward and thinking about what's the next crisis," Bayh said.
The former Indiana governor spoke Friday during the “Law and the Financial Crisis” symposium at Indiana University's McKinney School of Law and revealed what he learned sitting on the U.S. Senate banking committee as the housing market collapsed and financial liquidity seized up in 2008.
Bayh said he was called to the Capitol late one night following the collapse of Lehman Brothers to meet with Federal Reserve Chairman Ben Bernanke, who told the committee that within 72 hours there would be "a complete meltdown" of the global economy that would put millions of people out of work and rival the Great Depression.
"There was dead silence in the room as we looked at each other and finally someone said, 'Well, we can't have that.'"
As result, Bayh said the federal government threw out the textbook and enacted the Troubled Asset Relief Program, economic stimulus and other stop-gap measures intended to halt a looming global depression.
"Crisis being the mother of invention. Something had to be done, and so it was, literally being made up as we were going along," Bayh said.
He admitted that the trial-and-error process of responding to the crisis inevitably meant mistakes were made. But overall a few mistakes are better than destroying the lives of millions of people and thousands of businesses who did nothing to cause the collapse, he said.
Bayh partially blamed the financial crisis on U.S. government policies promoting home ownership that in turn encouraged banks to loosen their lending standards.
But he also said banks wrongly incentivized their employees to make risky loans because the banks could re-sell or re-package them and pass the risk onto a, sometimes unwitting, third-party.
Those combined actions by government and business, coupled with the interconnectedness of global financial markets, produced a crisis that nearly spun out-of-control, he said.
Bayh now worries that federal regulators, once bitten, are keeping too tight a leash on economic risk and are potentially stunting the growth of the U.S. economy.
At the same time, he said going too fast, too soon could produce runaway inflation, which politicians may like because it reduces the cost of paying back the national debt, but also would destroy the savings of most Americans.