Another downturn or recession might hit us in the next few years, as a natural consequence of the business cycle, but we're unlikely to have another Great Recession or major crisis. At least in the U.S. And here's why.
The Treasury Department released a whole bunch of very nice charts last week that summarize in glorious visual detail the government's response to the crisis. My personal favorite is above.
What put the "crisis" in financial crisis was actually the "financial" part: the nation's "too big to fail" banks all had to be bolstered with taxpayer bailouts (some reportedly against their will). A couple of investment banks went down. A couple more had to seek emergency deals and call in favors through the backdoor — and stop being true investment banks, but rather "bank holding companies" so that they could get more money from the Federal Reserve.
In other words, it was the banks, stupid. The banks that stupidly took on WAY too much risk.
The price of being rescued is represented in the chart. Banks now have two enhanced ways to weather a crisis: higher capital reserves, at least 10 percent; and a reduced reliance on short-term funding. Combined, these two things function like armor, or if you prefer nautical metaphors, a double-hull. U.S. banks can now absorb more abuse before they start to sink.
Bankers don't necessarily like either of these developments. Higher capital reserves mean less money to lend and leverage. Curtailed short-term funding means that banks need to reinforce their own liquidity. Both are a drag on potential profits. But they're what the banking system needs to stay out of future trouble.