Beyond mortgages, the Dodd-Frank law also aims to constrain the broader risk of financial excess. It calls for tracking "derivatives" (complex financial contracts) and hedge funds. It doesn't regulate banker compensation, but it does require that shareholders have a "say on pay." And the Federal Reserve is nudging the financial sector toward pay incentives that reduce risk-taking.
While all this promises to result in a safer financial system, no one is expecting sudden perfection in the banking industry. Some of the reforms, after all, are akin to fighting "the last war" rather than preparing for the next one. Lobbying by industry and by fair-lending advocacy groups eliminated other potential reforms. Then there is the hard truth of history. "As long as we've had markets and banks, we've had financial crises," says Paulson.
That doesn't mean the efforts to prevent another calamity are hopeless. Rather, in Paulson's view, it means regulators should strive to "address problems before excesses create major speculative bubbles, and [should] have the tools and political will to act with force to minimize the impact of any crisis."
2. THE ONLY WAY TO STEM A PANIC IS WITH ACRONYMS.
For all its complexity, the financial crisis was, at root, a run on banks. The core challenge wasn't simply that the housing market had collapsed. It was the way the collapse triggered wider doubts about the safety of many large financial firms – and finally caused important pipelines of credit to freeze altogether.
In this case, the "run on the bank" wasn't by mom and pop depositors. It was a run largely by financial firms on one another as they backed away from short-term loans that had flowed easily before 2007.