During 2008, the U.S. financial system experienced extreme stress and came close
to paralysis. The long-term health of the U.S. economy requires more than higher
government spending, targeted Treasury bailouts, and unprecedented lending by
the Fed. This article recommends four reforms to regain and maintain long-term
economic health: (1) The markets for trading credit and its derivative
instruments must include a clearinghouse; (2) the markets for credit and its
derivative instruments must become public and transparent; (3) the size of
companies must be limited, or certain activities that can lead to failure must
be prohibited, so that no company can be allowed to become “too big to
fail”; and (4) the observed failures in financial agents’ monitoring
and in accounting practices must be rectified.