By setting up this perverse system whereby the most risky of mortgages/loans (i.e. those that showed a high likelihood of default) would be backed and “insured” by the government, we were creating an incentive for banks to loan money to people they s…

Quite right.

And, it’s not just disasters, it’s local infrastructure also.

Moreover, the federal govt shouldn’t be paying for NYC’s subways, or the Bay Area’s BART. The Big Dig should have all come out of MA’s hide.

As for economic bailouts, it’s dadgum frustrating to keep on doing this when the financial system never seems to learn its lessons — like from the S&L crisis. More here.

However, I think your conclusion that the “right amount” of regulation is the answer is fundamentally flawed. The problem with that idea, is it relies on the assumption that an imperfect and self-interested government made up of imperfect and self-interested elected people and the imperfect and self-interested bureaucrats who work for us are capable of determining the “right” amount of regulation. This is an impossible hope.

Regulation, in addition to the greed and dishonesty, helped get us where we are today. For example, it is not possible for a group of bankers to understand “the right interest rate” for any given period in economic and market activity. Theses powerful decision makers are not omniscient nor immune to political pressure, and thus their decisions place artificial controls on the market and will naturally lead to distortions in market outcomes. And yet, we give this power to the Federal Reserve, a power which cannot be centrally ordered without negative and damaging consequences.

Another example is the power of the big ratings agencies, which are supposed to give investors and consumers unbiased and unmanipulated information about the health of a corporation or creditor. These ratings agencies have had an abysmal record of gauging the health of the titans of finance as they burned around them. Sometimes downgrading them only within days or hours or even AFTER bankruptcy, and yet these ratings agencies operate with the blessing of a government charter and are also constantly being pressured politically to hold a system together based on the faith of the participants.

The list of how regulation distorts the miraculous give and take of the market is endless. Everything from fiat currency to biofuel are the products of a centrally planned regulated market, as are all of the problems and negative side effects of these policies. I won’t bore everyone with a giant list in this post.

What it comes down to is this: this country is at its very foundation based on freedom, that is “certain inalienable rights.” These are rights that cannot be given by man or his governments. However, these rights can be taken by man and his governments. The unique character of the United States rests on the fact that the Founding Fathers actually recognized this divine truth, and they set up a government to protect us from the deprivation of these rights and to give us the freedom to be our best, or worst selves. They did not establish this nation simply to provide a guarantee of security and comfort.

There is no Constitutional right which protects someone from financial loss or even ruin. There is no right to a nice home when Nature destroys the one we have. There is no inalienable right to ever increasing home value or to a growing portfolio or to quality health care, or even to a secure retirement.

These are all wonderful things, and I think it is good to try to achieve them, especially in a highly developed society, but when the government tries to impose or ensure these things on a macro scale as in these bailouts or with the individual, there will ALWAYS be a loss of the individual choices and there will ALWAYS be great immoral imbalance.

To be sure, the market system does not equalize the material comfort and socioeconomic standing of the individual, but it always respects liberty.

Bottomline, very smart people knew this would happen a long time ago.

And here’s some even worse news, it’s gonna get worse — credit card debt, U.S. auto manufacturers, healthcare system … just like the investment banks were built on a house of cards, so is the US government.

As Thomas L. Friedman like to say about the environmental movement, “We’re having a party.”

Ah, what a hangover it’s gonna be. Pass the Exedrin please.

Not sure, but I think those rescued nowadays get charged.

Seems like a lesson there.

It’s just another tax payer funded corporate handout … it’s indefensible for AIG nor for GM … and he calls this Change?

I agree, but I see that Obama ranked 2nd in the amount of donations he received from Fannie and Freddie … that doesn’t bode well for change or ‘regulations’.

Also, while I agree with Obama’s call for changes in regulations, such as increasing reserves that banks have to hold; this position was originally put forward by Bush appointees: Bernake and Paulson, and opposed by Democrats like Dodd.

Alas, we’re left with 2 really unaccountable parties, BOTH ON THE TAKE … if you think otherwise, you’re likely just rationalizing your position by choosing data points to make you feel comfortable with the position you’ve chosen. Don’t get me wrong, everyone does it!

This is where there is an alliance between big business and government where each helps the other and the working man is kept without political influence. In Italy the alliance explicitly went after the strong labor, socialist and communist movements. This lead to the widespread civil rights abuses and the eventual alliance with Germany.

In the US, the government has not (yet) resorted to violent suppression of worker’s rights, instead we have had 40+ years of union busting through rewriting of the laws, outright abuses and a propaganda campaign promoting the idea that individualism rather than belonging to a community is the ideal.

It is only when the cronyism reaches a crisis that the degree of interdependence between government and big business becomes apparent to all. In more normal times the tax breaks, subsidies, trade policies, and environmental and safety law changes slip through without much notice.

Regulation will be imposed and big business failures will be covered by the tax payers, but then the cycle will just start again. Capitalism has this as an innate feature – one can go back to the tulip craze or the South Sea bubble to see this.

What is becoming different now is that the idea of unlimited growth that is the basis of capitalism is coming under scrutiny as the world moves into an era of resource shortage. I claim that capitalism will not be appropriate for such a condition.

Here’s my 2 cents on the issue:
http://robertdfeinman.com/society/capitalism_must_die.html

While we should never have gotten into this mess in the first place, the Treasury and the Fed are right to be taking actions now to shore-up the system. Will this come back to bite the taxpayers? Possibly, depending how these distressed assets aultimately recover. But a meltdown would have had an even more significant impact on us, the taxpayers, with longterm repercussions on the economy and the financial system. A regulatory schema for preventing this from happening again is clearly required – to wait until that is in place before acting on the current crisis would be foolish.