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Henry Paulson believes that a financial crisis could happen again

Henry PaulsonFormer U.S. Treasury Secretary Henry Paulson believes that the factors that contributed to the onset of the financial crisis five years ago still exist, and a repeat of the scenario is quite possible.

Speaking at an event in New York with bankers and economists, Henry Paulson said that, in his opinion, it is likely that a financial crisis could occur again, according to Bloomberg.

Former Secretary of the Treasury under President George W. Bush, Paulson had a key role in efforts to save the financial system after the collapse of Lehman Brothers on 15 September 2008. Paulson was accused at the time that he focused too much on the needs of Wall Street at the expense of the common people.

Asked if he’d change anything in his approach, the former secretary replied that “almost every mistake was a communications issue,” adding that he’s sorry that people do not understand that what he did “wasn’t for Wall Street; it was for them.”

Paulson identified three reasons that make him believe that another financial crisis is very much possible:

– Fannie Mae and Freddie Mac, the mortgage giants that the Bush administration was forced to nationalize are still in government hands. And, because they prove to be very profitable for the moment, it is politically difficult to reduce their importance. 90 percent of mortgage loans are guaranteed by the government.

– Banking problems have not been solved. More efforts should be made to improve the current form of securitized loans and greater transparency is needed in the mutual fund market .

– There are too many financial regulators (five) who tend to engage in a “dysfunctional” competition and “that is a big problem,” said Paulson.

Another problem identified by Paulson is that the Treasury and Federal Reserve have their hands tied by Congress, so they can’t properly manage a possible second crisis. In 2008, under his leadership, the Treasury has used the exchange stabilization fund to guarantee the assets of money market mutual funds. If it would have not taken this measure, the financial system would have been crippled. Today the Treasury is no longer allowed to take that measure.

Asked who President Obama should appoint to lead the Federal Reserve, Paulson avoided a concrete answer: “If he wants my advice, he’ll ask me. So far he hasn’t, strangely enough.”

[Update: changed the headline to reflect Hank Paulson’s position that a financial crisis could happen again]

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