"The Financial Crisis and the Path of Reform"

In the lead-up to the financial crisis, the U.S. financial sector was over leveraged, short-funded, risky, and opaque. "Shadow banking" permitted institutions to avoid comprehensive supervision and capital requirements. Innovation outpaced the ability or willingness of private- and public-sector guardians to rein in risks. An asset bubble fed the system, until the market imploded in the fall of 2008. When the crisis hit, our society found itself ill-equipped to deal with the failure of leading financial firms. In the wake of the crisis, the Obama Administration proposed a set of reforms that were eventually embodied, in large part, in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This Essay explores the Act's key reforms: the regulation of shadow banking, the creation of a consumer financial protection agency, and the development of a resolution authority to wind down failing financial firms. The Essay also analyzes the steps that must still occur domestically and internationally to lay a firm foundation for financial stability.