This subject is waaaay above my pay grade, but — shooting from the hip here — I think Obama needs to do at least these things:
(1) Get rid of the alphabet soup of federal regulators. Just as our national defense and security was merged under the new Department of Homeland Security, many financial regulation departments can be merged/eliminated with one board overseeing every aspect of the financial community.
(2) For God's sake, don't allow financial institutions to pick which oversight department gets to regulate them. That was bone-headed from the start. If financial institutions get to pick which regulatory body oversees them, then they will do exactly what they did — pick the most lax regulator (in recent years, it was the Office of Thrift Supervision, which was too overworked to actually do any oversight). In fact, what happened was that regulatory bodies competed to get business by effectively saying to financial institution that they were lax in oversight. How dumb is that?
(3) Allow the Fed to limit the amount that large financial institutions can leverage. That's pretty straightforward and self-explanatory.
(4) Set clear rules. The markets like certainty; business likes certainty. If you establish regulations, make them airtight… without loopholes.
(5) Include oversight of ratings agencies. It is staggering that all those agencies gave those toxic assets AAA ratings, when they were clearly junk. Of course, the financial institutions are the ones who pick the ratings agencies, so there is a conflict of interest. At the very least, those ratings agencies should be audited to make sure they "did the work", rather than just act as a rubber stamp to various financial packages.
(6) End unregulated financial products. Every consumer good — from soup to nuts — is overseen by at least one federal agency (like the Consumer Product Safety Commission, the FDA, etc.). The same should be true for financial products. Nothing should be traded on any market — either the public one or the private one — without someone in government looking at the nature of the commodity to see if it has the potential to create economic turmoil. This obviously applies to the credit swaps of the recent past, but all future financial products.
(7) Executive compensation reform. Bonus compensation should be tied to merit and success, not an automatic "gimme".
Today Obama rolls out his plan for overhauling the financial regulatory system. We'll see what the details are….