Curbing Risk on Wall Street

The financial crisis of 2008 resulted from a series of misguided policies, failures of regulation, and missed signals. Unfortunately, much of the conversation about regulatory reform since has revolved around ideas that would only extend and exacerbate all three. Even worse, the actions taken in the aftermath of the crisis — and the remedies now being proposed — seem likely to further solidify the dangerous perception that some institutions are just too big to fail. That perception dulls competition and distorts the allocation of capital — favoring excessive risk-taking, and sowing the field for the next crisis. What we need instead is a means of curbing reckless risk-taking, and especially the incentives that drive it, while making sure not to unduly constrain economic activity, investment, and growth.

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