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Who’s Right on US Financial Reform?

To get financial regulation right, the US needs leaders with the experience and perseverance to identify the proper measures, push for their enactment, and implement them effectively. If voters are seduced by bumper-sticker slogans in November's presidential election, another financial crisis would become more likely, not less.

CAMBRIDGE – Eight years after triggering a crisis that nearly brought down the global financial system, the United States remains plagued by confusion about what reforms are needed to prevent it from happening again. As Americans prepare to choose their next president, a better understanding of the policy changes that would minimize the risk of future crises – and which politicians are most likely to implement them – is urgently needed.

What Americans are sure about is that they are angry with the financial sector. This is reflected in the success of recent Hollywood movies such as The Big Short (which has been rightly praised for making complex instruments like derivatives broadly understandable). And it is reflected in the current presidential campaign – most notably, in remarkable support for Senator Bernie Sanders’s leftist bid for the Democratic nomination.

At the center of Sanders’s campaign is a proposal to break up the big Wall Street banks into little pieces, thereby ensuring that no bank is so big that its failure would endanger the rest of the financial system. The appeal of that goal is understandable. But achieving it would require a massive sledgehammer.

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