Let's say – just hypothetically – that an industry vital to the American economy was in serious jeopardy. When times were good, it resisted regulation. Then optimism gave way to excess, which caused a crisis, and the government had to step in. Regulation could have prevented this crisis. But rather than propose better regulation, the government actually proposed less.

Sounds crazy, huh? And yet that's exactly how the government wants to treat Wall Street.

Last year, as an article in The New York Times points out, Wall Street bankers, worried that the U.S. was losing its edge in the financial business, pushed for looser regulation of financial markets. Mostly, they argued that the alphabet soup of agencies designed to regulate markets had become overlapping and outdated, which is true enough. But what they wanted was to replace rules with "principles" that would govern their behavior. In other words, the new rules would be that there would be no rules.

One credit crisis later, Treasury Secretary Henry M. Paulson Jr. has introduced a plan that will take a step toward doing just that. It will streamline bureaucracy, which is certainly a good thing. But it will also give much more power to the Federal Reserve – which helped cause the subprime crisis by ignoring every warning sign that one could possibly expect. In other words, the government wants to reward the Fed for doing a terrible job – just as the Fed did with Bear Stearns.

At this point, it should be obvious to everyone that we need to better regulate the financial system. Some of this work involves streamlining the responsibilities of various agencies. But most of it involves making sure that we monitor the behavior of bankers before we have to bail them out of bad bets. During the Depression, the government essentially said that it would back up commercial banks so long as they abided by certain rules. Now it's backing up investment banks without getting anything in return. That's silly.

What's offensive about Paulson's plan is that it seems to suggest that the biggest problem with Wall Street is that it's having trouble staying competitive at a time when London is becoming a more important financial capital. If that's so, one reason is the inflated salaries of American bankers, who make far more than their international counterparts. Why shouldn't bankers be subjected to the same pressures that affect workers in other fields? The financial business has become important to the American economy, it has also ravaged that economy by speculating recklessly. And while it employs plenty of people, most of them are pretty obnoxious. I'm only half-kidding.

As we recover from the current credit crisis, we need to create a new system of rules to govern the speculation that caused it. What Paulson has suggested isn't even close.