One cannot "deregulate" financial tools designed to regulate the economy.
When one tries to deregulate regulatory tools, one introduces chaotic elements and systemic faults into the financial markets.
The financial tools at the heart of the financial collapse were designed to regulate the economy. Things like the Federal Reserve, Freddie Mac and Fannie Mae are quasi government entities that serve regulatory purposes.
Our financial system is top heavy with regulatory structures.
Mortgages were designed to regulate the housing market. The idea behind the mortgage system is that people pay regular payments to banks which make regular predictable profits. Government backed re-insurance was added to mortgages to regulate this regulatory tool. Mortgage Backed Securities and Credit Default Swaps were also designed to provide additional insurance and stability for these regulatory tools.
Insurance, for that matter, is a regulatory tool. The idea behind insurance is that people would pay regular premiums into a pool to cover irregular expenses.
Insurance exists to regulate! When people demand insurance regulation, they are demanding regulation of a regulatory instrument.
Hedge Funds are investment tools designed to leverage and hedge investments. Hedge funds are not simply to investment funds. They exist to regulate, and use formulas that came from the regulatory mindset.
Short selling is a regulatory tool. With short selling, a trader sells a phantom share of a stock with a promise to buy the stock back in the future. It is an inherently anti-market device. Short sellers justify this anti-market device with the claim that it "provides liquidity."
The claim is absurd. Short selling increases in economic downturns and effectively decrease liquidity. Short sellers are the scum of the earth. The fact that they lie is no surprise.
The banking system is flush with regulation. The Federal Reserve and the system of fractional lending were designed from the ground up to regulate the economy.
This system of regulations built upon other regulations is inherently instable. It is a house of cards doused in flammable liquid. Nobody, not even someone as smart as Tim Geithner, knows what to do with the regulations stacked upon other regulations.
During the Clinton Administration, our financial elite deluded themselves into thinking that they could simply let go the reigns of their regulatory tools and the market would sort things out. The Bush Administration lacked the intellectual acuity to realize the dangers of the experiment of deregulating regulatory tools.
One cannot restore the free market by letting Wall Street run roughshod with a toxic mix of anti-market tools.
To restore the free market, we need to replace the anti-market tools like insurance and short selling with pro-market ideas such as the Medical Savings and Loan and Real Time Exchange.
Trying to deregulate regulatory tools will continue to lead to disaster and economic decline.