Hank Paulson, Ben Bernanke and Tim Geithner during the Brookings Institution discussion.
The so-called living wills that the largest banks have to submit every year would not work in a financial panic, said Timothy Geithner and Ben Bernanke on Wednesday.
Living wills are plans to unwind a failing bank without government aid.
These plans would only work if the financial sector was relatively stable, the two former policymakers said.
“If the rest of the system was broadly OK, I think the [living wills] would work,” Bernanke, the former Fed chairman, said.
Bernanke and Geithner, a Treasury secretary in the Obama administration and formerly president of the New York Fed, discussed sources of future financial instability and the lessons form the financial crisis with another former Treasury Secretary Henry Paulson at a Brookings Institution event.
Geithner called the effort to combat financial instability a “forever war.”
Paulson said despite the dysfunction in politics, he remained optimistic that Washington would be able to rescue the economy again if there was another crisis.
The three policymakers all expressed regret that the American public still has profound doubts over the steps taken to protect the financial system in 2008-2010.
Geithner said that, during the heat of the crisis, his wife would look at him across the breakfast table with “a mix of despair and doubt,” that was later mirrored by the general public.
“We didn’t persuade the country that what we were doing was necessary,” Bernanke said.
Paulson agreed, saying the American people remain convinced that the $700 billion bailout was, in essence, a “reward for the arsonist.”
“People don’t like banks and during financial crises they really don’t like banks,” Paulson said.
However, Bernanke said he didn’t agree with the conventional wisdom that the source of populism now seen in American politics began in the wake of the fall of Lehman Brothers, a pivot point in the crisis.
“People have been saying the country was going in the wrong direction for the past 40 years,” he said. Slow social mobility and rising inequality have their roots in the economy well before 2008, he said.
The three leaders again defended their decision to push Lehman Brothers to declare bankruptcy in September 2008.
“The Fed alone had no option to save [Lehman] by lending,” Geithner said.
Bernanke said the decision over lending to Lehman was never a “narrow legal judgement” but a broader question of whether it was feasible to save the broker-dealer.
Giving Lehman a loan would only have sustained the company for a few days, he said.