Permit Me a Moment of Populist Rage...

A recent report by Neil Barofsky, Inspector General for the Troubled Assets Relief Program (TARP), found that the government bailout of financial institutions has actually made a future economic crisis more likely. The main reason for this is that the megabanks which embroiled the US economy in the crisis now have no incentive to reduce the risk they take on, because they know the government will bail them out again. Indeed, in testimony before the Financial Crisis Inquiry Commission in mid-January, the executives of major financial institutions—Bank of America, JP Morgan Chase and Morgan Stanley—made clear their belief that, should any of them risk failure, the government would step in.

In short, while TARP was necessary, and while it did provide the funds necessary to keep credit moving in the financial markets, the government has still done nothing to change the banking practices that created the crisis in the first place. That some financial institutions are considered “too big to fail” is a frightening—and absurd—fact.

The government must take steps to regulate particularly risky practices—such as credit-default swaps, derivatives trading (a practice so complicated, I'm still trying to figure out how it works), mortgage-backed securities, and short selling—and to break up the nation's largest banks, lest the taxpayers be forced to bear the brunt of more Wall Street irresponsibility. The government also ought to improve oversight of the financial system, such as implementing minimum capital requirements for banks that take on certain risks. There is no sense in the government waiting for a crisis in order to intervene; if it was justified intervening in autumn 2008 to prevent a complete fiscal meltdown, it is surely justified now, in order to proactively prevent such a catastrophe.

The recent reforms proposed by President Obama and Congress are a good step toward achieving this goal. Based on the substance of his reforms, it is apparent that the President has finally thrown his weight behind chief economic adviser Paul Volcker, who, since the inception of the crisis, has advocated for these and other reforms of the financial system. Volcker is a reformer, not a radical; he recognizes the importance of having robust financial institutions in today's complex, global economy. The goal of his reforms are not to exact vengeance on the banks, but to make sure they do business more responsibly. Should they not conduct themselves responsibly—should they take on risks which they cannot support—their downfall ought not to threaten the nation’s financial security.

It is this practical, proactive and realistic approach to financial reform that President Obama and Congress must keep in mind when shaping legislation in the coming months. Not only will it improve the health of financial institutions in the United States, but it will also sit well with voters, who will perceive him as taking a stand against the monied interests who caused the crisis.

The premise of these reforms must be twofold: firstly, egregious risk-taking on the part of Wall Street must be limited and regulated by the government. Secondly, Wall Street institutions must never be allowed to grow to the point where their failure would result in the collapse of the entire Western economy.

DAVID ZOPPO