Kuttner recently testified before Congress on this matter .

He suggested reregulatig the financial system .

In the 80s rules for S&Ls were relaxed then guess what ? The S&L crisis or bubble .

In 1999 Congress abolished Glass Steagall and guess what? The LTCM meltdown , the market bubble , and now the subprime crisis or liquidity bubble ...

Effective Marginal Taxes must be raised . Now there so many looopholes , tax schemes (on shore and off shore) that the Effective Tax Rate is in the single digits for those who know the game .

Raisiing marginal tax rates and closing tax schemes will dry up this excess liqudity while allowing legitimate investment to proceed.

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All these quant funds are fine as long as everything happens according history. The fact is markets are dynamic, and history is not necessarily a good predictor for the future. Yes the chances were 1 in 4.5 million or something like that but all the underlying assumptions from the past are constantly changing. Quant fund should really only be used within very narrow time frames. Change the underlying rules, and the fund breaks. As we all know the rules of the game are constantly changing

...is this: how disconnected from underlying value can these quants be before the bottom falls out?

I don't see how the Fed, effectively printing money by slashing short term rates in a desparate effort to appease leverage-addicted Wall St., can possibly help with the fundamental problems of risk mispricing and asset overinflation. Cheap money will make the problem worse.

Let the Fed go ahead and create another artificial bubble, hey let's make it even more exotic and hard to understand than CDOs, hedge funds and quant derivatives!

This path will only accelerate the recent spiral downward of the dollar, and consequent economic chaos. Why does a financial wizard such as Bernanke find these facts so hard to understand? This is elementary economics; I don't even have a college degree yet.

Great post, Mr. Leonard. I wish more of the media were as insightful and probing as this blog.

Nice to see that the morons dumb enough to pass the IQ test low enough to work on Wall Street are too dumb to know what my father knew about computers 50 years ago, when he had a sign over the desk in his lab:

"THOSE WHO THINK COMPUTERS THINK DON'T"