The U.S. economy is still struggling to escape the throes of the recession. Without getting into the nitty-gritty details of the practices that characterized the pre-recession economy, it is safe to say that the financial gymnastics that precipitated the sub-prime crisis – and the recession as a whole – were initially believed to be a beautiful and elegant method for mitigating the risk involved with loans and mortgages on balance sheets. Many of those practices – such as collateralized debt obligations, credit default swaps and other mortgage-backed securities – were first pioneered a decade and a half before the meltdown by some of the smartest people on Wall Street. When they were first developed, however, they were not meant to be used to cover up risk, and allow it to build up unnoticed.

Gillian Tett – an editor for The Financial Times – recently published a well-crafted account of how a team from JPMorgan and others created these seemingly benign financial instruments. She states that collateralized debt obligations and credit default swaps were used without proper risk management by over-leveraged firms (read: Bear Stearns and Lehman Brothers) that put the entire economy in peril. As a result, the Obama administration is pushing for financial reform and a one-time bank-levy – or fee on repaid bailout loans – in order to prevent a similar disaster in the future.

Financial reform, however, has to tread a very thin line between spurring growth and harnessing risk. It cannot be so overbearing that it restricts fundamental and necessary innovation. At the same time, it must cause companies to thoroughly evaluate the risk associated with new financial products. Regulations should ensure that new financial products do not have any negative externalities – detrimental effects on society that are not directly related to the sale of the product – or foster any rampant manipulation of unsuspecting stakeholders. The regulators must be active, meaning that they must understand the various nuances of different asset classes and products. They also must be aware of the innovation behind the scenes, but should not interfere so much as to be cumbersome. Regulators should be responsible and accountable for the industries they oversee, and they should have to present a yearly summary of the state of finance.

There is some doubt that the president’s proposed bank tax will pass Congress, especially given the Democrats’ recent loss of their supermajority. But a one-time tax is necessary to curb banks that created risky mortgage-backed securities and put society in peril. They destroyed lives. A drunk driver can be fined and jailed when he poses a threat to the safety of others. Is a one-time bank-levy too much to ask of the big banks that had a hand in destroying thousands of lives? Shouldn’t there be some form of repayment to the government that saved bank executive jobs? A one-time bank-levy is restricting, but it’s the cost of having the taxpayers bail banks out.

The finance industry will never again look like it did before 2007. The most important lesson we can learn from the sub-prime mess is how interconnected finance, the global economy and the lives of billions of individuals are. Banks must understand this and tread carefully in their creation of financial products. Regulators should be present in the industry, and communicate more often with their foreign counterparts. They should try to create as much transparency within the industry as possible. Governments should work together to inject stimulus into the global economy. And, frankly, banks shouldn’t balk and fight the proposed levy. Instead, they should be grateful to the taxpayers that enabled them to stay alive.

Saum Ayria is a sophomore in the School of Foreign Service.

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