House Financial Services Committee Chairman Barney Frank has a new proposal to regulate bank transactions. Some of it is OK and some of it perpetuates the abuses that brought Lehman and other financial institutions to their knees.

First the OK part. Frank's proposal would require over-the-counter derivatives to be traded on listed exchanges and sold on exchanges or processed through a regulation platform. This is not good enough. We need transparency for each and every trade done by each and every financial institution. That means that all trades must be done on a listed exchange and cleared through a clearinghouse. All of this data can be put on computers and monitored daily. Then if some trader goes beyond established guidelines, he will be shut down immediately.

If you think the health care debate is a big brouhaha, its nothing compared to the behind the scenes battle over government regulation of derivatives.

On the government side we have a proposal that would require the most standard derivatives to be processed through a clearinghouse, whose members would make good on any default. This is the way the commodity markets operate. For "nonstandardized contracts," banks would have to put up more capital or margin.

First of all, let's look at what hedging really is. Take, for example, a farmer who grows corn. He knows that his cost for growing corn is, say, $3.00 per bushel. But he doesn't know what price the price of bushel of corn will be come harvest time. He looks at the September futures contract for corn and sees that the price is $3.30 per bushel.

To guarantee that he will get $3.30 at harvest time, he sells September corn contracts equal to his crop (each corn contract equals 5,000 bushels). When harvest time comes he delivers his corn to the appropriate delivery point designated by the Chicago Board of Trade exchange (CBOT) where the contracts are traded. It should be noted that if the price of the futures contract goes above $3.30 per bushel, the farmer may be called for margin money until he makes delivery, at which time his account is settled out.

Who is going to crackdown on the speculators? The agency responsible for supervision of the commodities markets is the Commodity Futures Trading Commission (CFTC.)

If you remember, last year the spike in oil prices to $147.00 per barrel was done through speculation in oil futures contracts. A futures contract gives the trader to right to bet on the prices of various commodities, on whether they will go up or down. Contracts usually last for three months, at which time the longs and the shorts are paired down to zero, leaving the speculators out of the final trading. However, the speculators simply move their positions to another forward contract, keeping their positions in place.

The rub has been on the concept of "position limits." In most commodities the CFTC imposes a limit on the number of contracts that a single person or firm can hold. The real bone of contention is that the CFTC does not impose limits on oil or oil products contracts. That has been left up to the various exchanges.

Are financial stocks a buy now? Jeffrey Palma, a strategist for UBS says yes. He is recommending a modest "overweight" for this sector. He goes on to say that financials had the biggest gains among 10 industry groups in the MSCI World Index in the second quarter.

Let's be clear here. Mr. Palma is referring to the second quarter. The second quarter is done, finished. The real question is whether or not, going forward, the rally will continue.

During the years leading up to the financial meltdown, banks primarily took mortgages and other loans and bundled them together. Rating agencies were called in to bless them -- we now know those ratings were bogus. No one bothered to ask what was in the packages and no one cared as long as the value kept rising. Then when the crash came, it was too late. Not knowing what was in the packages, investors could not sell because no one on the other side of the trade wanted to buy. The markets froze and the meltdown was on.

Now U.S. Treasury Geithner wants to change the rules and force lenders to retain at least 5% of the loans they generate. In a way, this is akin to a margin requirement for these securities. Obviously the banks oppose such a measure because it would tie up a portion of their capital.

JP Morgan Chase & Company (NYSE JPM) held its annual shareholder meeting with Jamie Dimon, chief executive officer holding court.

Among his jabs against the Administration he complained that the rules against hiring foreigners was a "complete and utter disgrace." We might ask Mr. Dimon if he plans to hire another Chinese mathematician such as David X Li, whom JP Morgan Chase hired in 2000. Mr. Li developed a formula that created a single number from which traders bet billions of dollars in the past decade in derivatives which eventually brought the country to its knees when the housing bubble burst. This may help to explain why JP Morgan Chase has $87.7 trillion of derivatives "off the books." We might ask Mr Dimon to disclose the exact position in derivatives that he holds "off the books." Wouldn't that make fascinating reading?

Why is it that bankers will not come to grips with the fact the derivatives are destructive and have taken this economy down and turned it to ruin? Toxic assets are derivatives and we are throwing about $3 trillion of taxpayer money into this black hole.

Instead they are stubbornly holding on to derivatives and playing mickey mouse with a few changes. Listen to this one: -- 1400 banks and asset managers are adopting a new "big bang" protocol to make it easier to know what will happen in the case of defaults. What in the world do they think they are doing -- creating a new universe? This just a sugar coating. Also, the US market will introduce a standardized pricing for CDS contracts which hitherto have been unregulated. The CDS market is not the main culprit. The main culprits are the CDOs and CLO's and the banks don't have a "big bang" for these derivatives.

In the film version of Tennessee Williams' 'Cat On A Hot Tin Roof' (1958), Maggie 'The Cat' (Elizabeth Taylor), knows her husband Brick (Paul Newman) is hiding something, but she can't figure out what it is.

Later, we learn that Brick is hiding the truth about his father, millionaire Big Daddy (Burl Ives), and he slowly gathers the courage to end the mendacity that has permeated their lives.

At some point the nation will, likewise, end the mendacity about American International Group (NYSE: AIG) and announce the full, probable cost of the orderly stabilization of AIG. For economic conservatives, market absolutists, most Republicans, and others who oppose government intervention, the above would be bad news, but at this juncture, it appears to be unavoidable.

Like so many others, you probably wanted to be a fly on the wall when Warren Buffet gave his fourth-quarter report to shareholders of Berkshire Hathaway Inc. (NYSE BRK.A). Well, here's the bad news: Net profit fell 96%, the fifth quarterly straight decline and Berkshire's net worth dropped a whopping $10.9 billion in the final three months of 2008.

Omaha-based Berkshire Hathaway is a diversified company that invests in insurer Geico Corp. and such things as carpeting, ice cream, paint, and real estate services. But to quote Mr. Buffet: "the economy will be in shambles throughout 2009."

Originally a CDS (credit default swap) was a protection against the default of an underlying bond, usually a mortgage. It was a fine idea.

But now enter the speculators who developed a scheme to trade these CDS's independent of the underlying mortgage. This has developed into a $30,000 billion dollar trading market. It is this market that is destroying world economies like they are twigs snapped in the wind.

Here is a roster of some of the fallen ones.

Jimmy Cayne Former CEO Bear Stearns - latest compensation $32.1 million. He led Bear Stearns for 15 years. He resigned last January. Bear Stearns was acquired by JPMorgan Chase (NYSE: JPM) for $10.00 a share. He and his wife purchased two luxury apartments at the Plaza.

Richard Fuld Former CEO Lehman Brothers - Latest compensation $34.4 million. Subpoenaed by federal investigators to determine if he misled investors at Lehman. Executives at Barclays Capital (NYSE: BCS) bought Lehman's US assets.

Kerry Killinger Former CEO WaMu - latest compensation $4.5 million. He became CEO in 1990 and built WaMU into one of the largest US mortgage writers. He offered sub prime mortgages which led to WaMU's rapid growth. He was ousted in September when WaMU was sold to JPMorgan.

Angelo Mozilo Former CEO Countrywide - latest compensation $132 million. He helped build Countrywide into one of the country's largest lenders. A host of class action lawsuits have been filed against Countrywide, which is under investigation by the SEC. Countrywide was sold to Bank of America (NYSE: BAC) in January.

Berkshire Hathaway (NYSE: BRK.A) has a very ordinary quarter, but by founder Warren Buffett's standards it was awful. The company's insurance operations were hurt by hurricane claims. The other factor that damaged earnings was losses on derivatives. Buffett is supposed to think derivatives are for idiots, so it is not clear how that part happened.

Berkshire's net income fell to $1.06 billion, or $682 per Class A share, from $4.55 billion, or $2,942, in the period a year ago. Operating profit fell 18% to $2.07 billion, or $1,335 per share, from $2.56 billion, or $1,655. According to Reuters, "It fell short of analysts' average expectation for $1,429 per share, according to Reuters Estimates."

No one in his right mind would go through Buffett's 10-Q. It is as thick as the New York City phone book. The company still has an astonishing $50 billion on its balance sheet, which means Berkshire has a great deal of capital to buy companies it thinks are undervalued during the recession, a favorite Buffett habit.

For anyone who cares, the tiny Berkshire group that controls private jet company NetJets, Dairy Queen, public relations operation BusinessWire, and the Buffalo News did just fine.

How Buffett does it is anyone's guess. Who makes sure BusinessWire is doing OK?

Douglas A. McIntyre is an editor at 24/7 Wall St.

New York Times (NYSE: NYT) Columnist David Brooks draws attention to a U.S. economic discussion and reality that's been all-but-sidelined in the past three decades, particularly among younger investors and others who believe that history began in 1981. Namely, that there's been a distinct cyclicality to the nation's economic / public policy history.

Is a new progressive era ahead?

That may come as a surprise to market absolutists and others who see economic history and their view of economic progress as a straight line towards privatization. In fact, periods of economic conservatism and liberalism -- the latter also known as progressive reform -- have cycled for much of the nation's history.

For Brooks, those economic blinders help explain both the market absolutists' befuddlement at the financial crisis around them and their inability to adapt to the electoral demands brought on by the crisis. Market absolutists are in a straightjacket of a party that is ailing and part of a conservatism that is behind the times, he says.

On the cycle's timing, economist David H. Wang argues that the old era ends and the new era begins not when social pressures build from the bottom-up, but when institutions -- like investment banks, mortgage lenders and credit default swap issuers -- fail from the top-down.

Every once in while during a crisis or history-altering event, you run across a quote or an observation that sort of summarizes events on the ground, in a nutshell. Former U.S. Federal Reserve Chairman Paul Volcker articulated one such observation during a recent chat he had with PBS's Charlie Rose.

"It seems to me what our nation needs is more civil engineers and electrical engineers and fewer financial engineers," Volcker said.

U.S.: a decade of descent

And there you have it -- the United States' decade of descent, in a nutshell. Volcker's observation speaks volumes about where the United States economy -- and the nation, at large, for that matter -- is today.

For reasons that historians will undoubtedly debate for decades (globalization, automation, flawed public policies, inadequate regulations, overconsumption, the availability of foreign capital, greed) the United States embarked on a financing boom -- creating an increasing array of creative and untenable mortgage types, accompanied by an equally problematic set of mortgage backed securities. It generated an unsustainable housing bubble, which ended as all bubbles do -- badly -- triggering the global financial crisis.

And yet, all the while, as Volcker observed, public investment in infrastructure -- the physical backbone of the economy, of the nation, really -- declined. That infrastructure is now in a state of disrepair. The nation's schools, hospitals, roads/bridges/mass transit systems/air travel system and even our electric grid are inadequate to meet the nation's current requirements, let alone the requirements of an expanding, vibrant, dynamic, twenty-first century economy.