This legislation has only given the broad outlines of the new regulatory framework and will be a work in progress for the foreseeable future. Thus, it seems an appropriate time to discuss the design of effective financial regulations.
There are several considerations in this regard. First, Wall Street is wrong to fight tougher regulations. An innovative financial system is generally positive in the longer term, but the asymmetric nature of the macroeconomic costs and benefits in the under- and misregulated financial system of the past two decades has clearly shown that in the short and medium term, the benefits of a uncontrolled financial system can be outweighed by the costs of significantly higher leverage and vulnerability to financial shocks.
