Whatever views people hold about politics and economics, the popular momentum seems to favor some variant of financial reform.

At the heart of the matter lies a widespread belief among many Americans that we deserved to have a recession in 2008 as the collective price to be paid for all the excesses that built up in a seven-year economic expansion. But few believe that we deserved the jarring decline in business activity that brought the global economy within inches of a major depression in which we could have seen 20% unemployment. Indeed, many Americans don't believe the financial crisis had to happen or that it required trillions in bailout funding.

So it's understandable that the impetus for financial reform is powerful. When an articulate advocate for the free enterprise system like former GE CEO Jack Welch says the entire capitalist system went off the rails in 2008, people listen.

Most economists thought they'd never see anything in their lifetimes like the last two years. It's hardly the first time they were wrong.

But did the entire capitalist system jump the guardrails in late 2007 and 2008 or was it just the global financial system? I'd argue it was the latter.
The non-financial sector of the economy may have grown comfortable and complacent as it usually does at the end of a long expansion, but it didn't exhibit the frothy insanity that the housing and financial markets did. Cocktail waitresses and croupiers in Las Vegas may have been buying five condos with virtually nothing down, but most Americans were not.

The focus is where it should be-on a financial services sector that swelled to an outsized position relative to the rest of the economy that it is supposed to serve. When an economy's growth starts being driven by derivatives of derivatives and a society's brightest scientific minds all are lured to Wall Street because technology businesses can't compete with quant desks for talent, something is out of alignment.

Still, it's hard not to wonder if the cure will be worse than the disease-in many ways. Do the powers of the Federal Reserve really need to be expanded? It already has a huge, sprawling mandate.

Many people long for the days of Glass-Steagall, when banks just took deposits and made loans. The present world where banks have morphed into black boxes that look more like hedge funds than lending institutions may not be acceptable, but how realistic is it to ban them from doing any derivatives?

Politicians may want to return to the Father Knows Best world of the 1950s, but the genie was out of the bottle decades ago. And it may be news to the folks on Capitol Hill, but institutions actually can use derivatives to control and limit their risk.

Finally, most Americans dislike the concept of too big to fail, but are the changes under consideration setting up a world where some financial concerns become too big to save?

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