Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission.
This post is based on Commissioner Aguilar’s remarks at the recent SEC Speaks conference.
~~~ ” … The recent crisis made clear that the financial sector was, and remains, dangerously exposed to firms that are too large and too interconnected to fail without crippling effects throughout the financial system and the real economy. As I have said,  this must be changed.
Casino Capitalism Has Devastating Effects on the Real Economy
There is also a possibly deeper and more troubling observation to be made about our economy and financial markets. As Benjamin Friedman, the noted Professor of Political Economy at Harvard put it, “By now there are few people who do not acknowledge that the major American financial institutions and the markets they dominate turn out to have served the country badly in recent years.” 
As those in this room know, the essential role of the financial services sector is to facilitate the allocation of capital to economically productive uses.  There has been a clear failure in this regard, with widespread mispricing of assets, trillions in losses, and, perhaps most disheartening, painful levels of unemployment and underemployment — together with an unprecedented concentration of wealth at the top.  In addition, as Professor Friedman stated, “the cost [of the financial crisis] was not just financial losses, but wasted real resources.” 
Ironically, over the years during which the allocation of capital by the financial sector has been poor, the financial services sector expanded significantly, and the salary and bonuses of people working in financial services grew and continues to grow, outpacing the real economy.  It could be said that our society’s capital was allocated by financial services, to financial services.  There was, and continues to be, a disconnect between the lavish bonuses, salaries, and other rewards on the one hand — and the poor job the industry did for our economy on the other. This decoupling of the real economy from Wall Street is also apparent in the growth of equity stock prices compared to GDP. 
This contrast between Wall Street and Main Street  — between the financial sector and the real economy — should remind us of John Maynard Keynes’s warning that: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”  As many have observed, deregulation in the financial sector ushered in casino capitalism, resulting in a form of capitalism that, in the words of Martin Wolf, the chief economics commentator for the Financial Times, “represents the triumph of the trader in assets over the long-term producer.” 
Today, we live in a world where a significant amount of the profits, and financial market activity, arises from leverage-financed bets on stock prices and credit derivatives, with not enough concern for the fundamentals of the underlying companies. It is clear that the direction of Main Street and Wall Street should be brought back into alignment. Regulatory reform that curtails inappropriate risk taking, such as excessive leverage, could help curb the trend toward casino capitalism.  In this way, our financial system will not only be safer, but will better serve its role in the economy.
I support President Obama’s recent statement renewing his commitment to robust and effective reforms. In his State of the Union address, President Obama made it clear that he was committed to “a strong, healthy financial market that makes it possible for businesses to access credit and create new jobs.”  He also emphasized that “if the bill that ends up on [his] desk does not meet the test of real reform, [he] will send it back until we get it right.” 
As Congress returns its attention to financial reform, I urge it to do so with investors and the American public foremost in mind. It is my hope that we can shift the dialogue from the discussion of how best to preserve “too big to fail” financial institutions to what is best for investors, particularly retail investors, and to our long-term economic growth. Political leaders, market participants, regulators, and other interested parties have to remember that financial services exist to serve investors — and in turn, our economy. To that end, it’s important that the focus on “too big to fail” doesn’t ignore retail investors by thinking of them as “too small to matter.”