AUDIE CORNISH, HOST:
More than a decade ago, the United States lapsed into a severe recession, and it was accompanied by a big crash in the financial markets. Big banks had to be bailed out by the government. After that happened, Congress passed laws aimed at preventing another meltdown. Now the U.S. economy is showing signs of weakness, and we wondered if the financial system is strong enough to withstand another slowdown - or even a recession.
Well, we've got NPR's Jim Zarroli on the line to consider this with us.
Welcome back, Jim.
JIM ZARROLI, BYLINE: Hi.
CORNISH: So first question out of the gate - is the financial system better prepared for a downturn this time around?
ZARROLI: You know, it definitely is in some ways. After the subprime mortgage crisis, there was this big push to regulate the financial system and the investment banks and the mortgage lenders and insurance companies that control so much of the money that flows around the world. For instance, Congress passed laws that require banks to keep a bigger capital cushion. The idea is that would protect them if there's a downturn and people start defaulting on their loans. That was part of the Dodd-Frank financial overhaul law. But now the Trump administration has made no secret of the fact that it thinks these regulators went too far and that some of the rules need to be eased. And they've had some success.
CORNISH: Give us an example.
ZARROLI: Well, one example is the Volcker Rule. And remember a lot of banks were trading stocks and bonds and taking huge risks before the financial crisis. It was like a casino. The Volcker Rule put a stop to that. It said banks can't trade with their own money which is guaranteed by the federal government. They can't take those kinds of huge risks anymore. And after the Volcker Rule took effect, this kind of trading just, you know, fell off a cliff.
Now, just this week, the Trump administration put out a new version of the rule. The new rule won't apply to as many banks as the old one did. So in effect, the administration is watering down the Volcker Rule. I spoke with Carter Dougherty of the group Americans for Financial Reform. And he says, you know, there's been a fair amount of this. I asked him whether he - this kind of tinkering would necessarily lead to another financial crisis.
CARTER DOUGHERTY: No, and I would not make that case. Can you argue persuasively that they will make the next recession more painful than it should be? That is absolutely the case.
CORNISH: All right. There are potential danger spots in the economy that we aren't paying enough to - paying enough attention to at this point. Right? I mean, is that what we're hearing?
ZARROLI: Yeah. I think - you know, for instance, one area that is potentially risky is business lending. I mean, companies are borrowing huge amounts of money. They have been for a while. They take out enormous levels of debt so they can acquire companies - other companies. You know, the former Fed chair, Janet Yellen, said last October, if there is a downturn in the economy, a lot of firms will go bankrupt. She said it would probably worsen a downturn. And then here was the current Fed chair, Jerome Powell, giving a speech last May.
(SOUNDBITE OF ARCHIVED RECORDING)
JEROME POWELL: Business debt is at near-record levels, and recent issuance has been concentrated in the riskiest segments. As a result, some businesses may come under severe financial strain if the economy deteriorates.
ZARROLI: And now, this - he said this isn't like the subprime mortgage crisis. It doesn't present the same kind of risk because business lending is just a much smaller part of the economy.
CORNISH: We just heard Powell say, though, that business debt is at near-record levels. I mean, why do businesses need to borrow so much?
ZARROLI: Well, you know, one reason is they're using it to buy back a lot of their own stock, which causes their share price to go up, makes shareholders happy. But all this borrowing is a problem because you don't normally expect businesses to cut down on their debt when times are good and they're doing well. And now the opposite is happening. And so if the economy keeps slowing, this is a big potential pitfall.
CORNISH: That's NPR's Jim Zarroli.
Jim, thanks for explaining it.
ZARROLI: You're welcome. Transcript provided by NPR, Copyright NPR.