Crisis Reveals a Long List of America’s Weaknesses

Crises reveal underlying weaknesses in social and economic systems. Although disruptive, they provide opportunities to shore up those systems. The 2008-09 financial crisis revealed weak points in banks, the financial system and the mortgage market, all of which now are more robust than they were. The coronavirus crisis similarly is revealing weaknesses in different areas of society. Part of our job in navigating our way through this crisis is to make them stronger, creating the foundation for a more resilient world in the future.

When thinking about a crisis, our focus should be on what underlying fragilities existed that allowed the crisis to happen in the first place. With the financial crisis, several weak points were exposed. Banks took on too much leverage to juice profits and shareholder returns. Thin capital buffers worked out well in booming markets because it meant banks were able to make greater profits on a lower equity base. Once the economy slumped, though, those capital buffers proved to be insufficient to absorb huge credit losses, putting the whole financial system and broader economy at risk.