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What caused the global financial crisis? And how can the United States avoid a repeat? Those questions have sparked endless handwringing among economists, policymakers, financiers, and voters over the last decade. Little wonder: the crisis not only entailed the worst financial shock and recession in the United States since 1929; it also shook the country’s global reputation for financial competence.

Before the crisis, Wall Street seemed to epitomize the best of twenty-first-century finance. The United States had the most vibrant capital markets in the world. It was home to some of the most profitable banks; in 2006 and early 2007, Goldman Sachs’ return on equity topped an eye-popping 30 percent. American financiers were unleashing dazzling innovations that carried newfangled names such as “collateralized debt obligations,” or CDOs. The financiers insisted that these innovations could make finance not only more effective but safer, too. Indeed, Wall Street seemed so preeminent that in 2003, when I

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