The Shape of Financial Re-Regulation

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There is more agreement that too little regulation helped contribute to the financial crisis than consensus about what kind of regulation is needed in the future. We do not need an industrial policy that substitutes for the invisible hand, nationalization, or a new ocean of paperwork. We need instead prohibitions on activities by essential institutions that have plainly proven harmful. The needed rules include: tight restrictions on leverage of all sorts, limitations on the use of overly complex derivatives and similar instruments, assurances of cyclical robustness that can not be undermined by short-sighted compensation policies, prohibitions of predatory sales practices in financial products, a tightening of disclosure and transparency standards, and, probably, outright limits on scale in financial institutions. Had a common-sense set of limitations been in place all along, our economy would have manageably absorbed a real estate downturn and millions of American families would have been spared harm.