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<But if we DO regulate systemic risk (legislation, more oversight, more govt agencies, breaking banks into smaller ones, derivatives standardization or elimination), then much of the engine of growth from prior growth cycles gets crimped.>

The most significant part of what you wrote is "much of the engine of growth from prior growth cycles gets crimped."

Growth is good...if it occurs in the real economy of providing goods, services and employment.

Growth of financial instruments is a burden on the real economy, because investment dollars are diverted from productive use (such as building factories, hospitals, roads, etc.) to leveraging speculative finance (such as credit default swaps).

We all know that the engine of real growth -- business investment in R&D, technology, marketing, etc. -- is risky. Many new businesses fail. But these failures do not threaten the system.

Because financial instruments are based on huge amounts of leverage, they threaten the financial system.

The purpose of regulation of systemic risk is to restrict the untrammeled growth of financial instruments that do NOT provide an engine for real growth, but rather suck up the capital that would otherwise be invested in real growth.

Therefore, regulation of systemic risk is completely beneficial.

1. The growth that is restricted is only the speculative leveraged financial instrument that threaten the system (but produce nothing of value to the real economy).

2. When these financial instruments are restricted, they will be less profitable.

3. Investors will then shift some of the money to the real economy, which is where growth is beneficial.

Wendy
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