But you're still stuck on the "evil Republicans." :) See "insane political ideology" post below.

We were screwed the second the government first said to the financial industries, "we will underwrite your risk." The resulting behavior was pretty much what one would expect.

If regulations were the magic answer, much-more-heavily-regulated Europe would be shining right now. How many different laws to prevent financial emergencies do you think have been passed, even in the U.S.? Hundreds?

Regulations are created by politicians, and they have axes to grind and campaigns to finance. Way too many regulatory agencies end up being buddies to the industries they're supposed to be watching. You can think up examples of that yourself.

Politicians also don't like economic downturns on their watch, and will do remarkably stupid things to keep those numbers going up. Naturally, nobody in the financial industry is going to complain one bit about this, probably even greasing palms to keep it moving forward, so the control is almost nil. Read the article Eri linked to (and missed the point of) here.

The end result is that regulations become ineffective at best, and destructive at worst.

The stark truth at the bottom of it all is that market forces work because they are impersonal. Also ruthless. I don't know how many more downturns or financial failures there might have been over the past seventy years without the massive load of regulations, government guarantees, and protections. Probably quite a few. But I bet each of them would have been relatively mild, and a lot of bad crap would have been weeded out of the system in the process.

I'm not saying there's no role at all for regulation, but the idea that you can somehow create enough laws to jury-rig a financial system where nothing ever fails is crazy. Failure is what teaches a business what not to do.

I use the "penny in a fuse box" metaphor a lot. It means something. Fuses blow, lights go out, and people bang their shins in the dark and curse. Eventually, somebody has to throw out the old lamp and buy a new one. It's a pain, and it costs money and time.

But you put pennies in the fuse box, and sooner or later the house burns down.

Right now the only economic solution politicians on both sides are offering is that "our guys will micromanage the economy better than their guys." Somehow, I doubt this.