I wonder if it would be practical to establish diversification rules for backing assets and the assets that back those. It seems that one of the problems here is that fractional reserve banking requires that asset failures be statistically independent. If a bank has 10% reserves and a thousand different assets each of which has a statistically-independent 1% risk of failure, the likelihood that 10% of those assets will fail is quite small. On the other hand, if half the bank's assets are dependent upon some other single point of failure, and that point of failure has a 0.1% chance of collapse, then there's a 0.1% chance that the bank will go severely underwater.
I think that some sensible risk rules must be applied. I get the feeling that risk managers in the industry had some sense this mess was out there, but that no one listened to them.
This happened with S&Ls, Junk Bonds, The Dot.coms and the next will be?
If I were Bush, I'd ask the egg heads to deconstruct and then pin the map at the place the tipping point occurred, and then use that to establish rules and incentives for diversification for industries.