The key phrase is "would seem likely". And it seems even more likely with people like Hank Paulson claiming that if he doesn't get a slush fund, the world will end. Even though its really just profits at Goldman Sachs that would end.

That doesn't mean we can start unwinding things by rolling back the individual policies that are causing the risky behaviors.

The government could, for example, ensuring only 80% of their bank deposits. We could start phasing out subsidies for housing by 2% per year. We could let the market set interest rates.

Of course, the people in charge (regardless of which party) seem to think only more government interference in the economy could possibly help. They seem incapable of examining anything they've done or admitting any errors.

Or we could recognise that a financial services organisation over a certain size engagine in certain risky practices is no more inherently safe for society than a factory dumping toxic waste, and restrict it accordingly. Sometimes 'big government' creates risk, but sometimes it controls it as well.

Yes,

Though one should also look at the number and sophistication of the people a company deals-with, the amount of leverage it uses and so-forth. But this kind of analysis isn't really new. It is what central banks are supposed to do. The Fed's job was "to take away the punch bowl just as the party gets going," (http://en.wikipedia.org/wiki/William_McChesney_Martin,_Jr.). Unfortunately, the Fed joined party itself with the repeal of the Glass-Steagel act and we've had stimulus-through-speculation over the last twenty years. The rise of speculative excess has a societal and psychological dynamic and once it gets going it is sustained by the social power achieved by the speculators. The pattern is old and has ended in grief a number of earlier times in history.

I would recommend http://prudentbear.com/ and Doug Noland's Credit Bubble Bulletin. This gives an intelligent analysis of the last twenty years' speculative excesses.

Also, before tossing out knee-jerk anti-regulation comments, consider how well Alan Greenspan used this sort of ideology as "covering fire" for the speculator economy. I'm neutral on whether a libertarian system could be built soundly from the ground up. But I think it's crucial to note how the use of a bit libertarian rhetoric to dodge regulations when convenient has been instrumental in leading us to the unsound ground we are currently on. (I would admit that Ron Paul's critiques Greenspan's policy actually have been quite good over the years).

One big problem with regulation is how subject to manipulation it is. It provides a false sense of security to just assume government regulation means someone is actually writing sensible rules and that someone is actually enforcing them.

The idea that there is some central intelligence that can decide the soundness of investments deceives the average investor or saver into thinking they need do nothing themselves. All the while the government is actively making things less sustainable and handing out favors along the way.

One could argue that the same is true of private stamps of approval. But there is competition and many voices out there, each having their own tolerance for risk.

To have government regulating things is like your brain never having doubts, never weighing competing concerns except for political ones. And many people think that way, just going along with the crowd. But we can't afford to have that sort of thinking govern everything.

I agree the government shouldn't be in the business of controlling investment.

But I would just as much note that most people shouldn't have more than a fairly small percentage of their savings in real, honest-to-god risky investment. The small investor's chances of being wiped-out are too high and their being wiped out would, again, have a cost to society not just themselves.

Thus, the government should supervise a system where most of the average person's savings go into simple, plodding savings accounts and a fairly small amount is invested.

This system worked pretty well 1933 ~ 1980. I think Nicholas Taleb also mentions a similar system.

Oddly enough, a lot of this comes down to the non-Gaussian nature of a market's expected return. The theoretical foundation of all the schemes for interdependent, self-insured investment processes assumes the distribution of market corrections was Gaussian and that thus large corrections would be rare and multiple investment vehicles would support each other through the law of large numbers. But with a non-Gaussian, "L-stable" distribution, you simply can't expect such things.

Government aren't always. Certainly the US government has become more corrupt on the level of policy over the last thirty years but private industry has become similarly corrupt (as well as entwined with the state). I'm not sure what to do here. The state creates monopolies and then

Mandlebrot's essays on finance are very important to look at (along with Hyman Minsky's theories, etc).

How are things coupled? And how to we decouple them? Serious questions.

Understanding banking system (and by extension the overall finance system) requires some study to say the least. You might start with http://en.wikipedia.org/wiki/Money_creation.

But considering we live in a complex, interdependent society, I'm skeptical that risk is going to be decoupled any time soon. I actually think regulating the most risky behavior is more practical than arranging for each person's risky behavior to only affects them.

Maybe its more practical in the next five minutes but I think less practical in the long run. Every time someone fails and the government assumes all the consequences, more people find it profitable to engage in the stupidity. And those who are prudent get taxed more to pay for it.

Long term its a game we can't win and it will collapse. And that collapse may ruin the US's ability to compete in the world, letting others win the next technology battle and leave us subject to their whims.

The whole mess can keep going, but ultimately it must compete with less stupid societies.