Most retrospectives describe a multitude of factors coming together but the crisis can really be summarized in two key points:  1) Policy complacency allowed the creation of a housing bubble supported by a reckless mortgage market, and 2) the impact of the bubble’s deflation was multiplied by a fragile liquidity structure that had built up in the financial system, almost without being recognized.

In Washington, you can find just as many people who say there is too much left undone to regulate the financial system as you can those who feel Dodd-Frank overreached. Both arguments have credibility but the effect of a few key changes simply cannot be ignored by either group. Dodd-Frank created a framework for monitoring systemic risk by establishing the Financial Stability Oversight Council and Office of Financial Research. This arrangement is not ideal—the fragmented U.S. financial regulatory structure already had too much room for turf wars and for problems to fall through the regulatory cracks—but it does provide a mandate for systemic risk oversight for the first time, and that’s a good thing. The Oversight Council can be effective in this role if and when it identifies problems, although further strengthening of its powers will be needed as it identifies emerging stability threats.

Critics of the Federal Reserve and the government’s support of large financial institutions will not like to read this, but maintaining the Fed’s capacity to act as a lender of last resort alongside a strengthened regulatory system going forward is one of the most important things we can do. Dodd-Frank made the use of the Fed’s ability to provide emergency support more cumbersome, and it introduces a limitation on Fed independence by bringing the Secretary of the Treasury into any use of emergency lending authority. Calls for further restrictions on the Fed as a lender-of-last resort are dangerous and ought to be turned back.

We cannot expect regulation alone to provide a safe system. It is impossible to empower a financial system to innovate and meet the needs of a dynamic economy without some risk of a systemic liquidity collapse. Just as a city with the best building code still needs a fire department, a financial system with the best regulation will still need a lender of last resort from time to time. The Fed played this role on an unprecedented scale five years ago and immensely reduced the damage. It did so by providing support where there was good assurance of repayment and a cost to those receiving support that reduced moral hazard.

Strong oversight and regulation of markets to ensure liquidity conditions are important. They are important to market participants, policymakers and American taxpayers. But we will only know how the system works and what unforeseen systemic risks may lie ahead when the new rules are tested under stress.  Regulation will likely fall short of the ideal as evidenced by the continuing - difficulty in getting rules in place to implement Dodd-Frank.  That’s why preserving the Fed’s ability to serve as a lender of last resort is critical to our ability to withstand the next financial crisis. When it comes to investing in a stronger financial system, preserving the power of the Federal Reserve to serve as a lender of last resort is perhaps the highest return on investment we can make.

Shafer is the author of Five Years Later: Lessons from the Financial Crisis, a report by the McGraw Hill Financial Global Institute ( He currently is a consultant for Standard & Poor’s Ratings Services, part of McGraw Hill Financial. He worked at Citigroup and previously served as Assistant Secretary and Under Secretary of the U.S. Treasury for International Affairs.