Carnegie Mellon University Professor Allan Meltzer has an interesting editorial in this weekend's Wall Street Journal (subscription required). As Congress considers ramping up hedge fund regulation, Meltzer isn't buying it: "... whatever the perceived problem, more regulation is not the answer. It is far better to change some incentives for excessive risk-taking. The old saying is true: Capitalism without failure is like religion without sin. The answer to excessive risk-taking is 'let 'em fail.'"

He makes a compelling case against bailouts of collapsing hedge funds, arguing that these can serve to increase excessive risk-taking.

The recent explosive growth in hedge funds and private equity will lead to some inevitable blow-ups in the years to come, probably starting soon. Just recently, a pair of Bear Stearns (NYSE: BSC) funds collapsed. As the panic sets in, investors and regulators would do well to keep a copy of Meltzer's column close by. Only through painful failure will investors learn the pitfalls of excessive risk.

See also:
Jon Ogg: Bear Stearns' subprime fund implosion -- media hype, or serious meat?
Kevin Kelly: Less talking, more hedging please
Tom Taulli: No June gloom for hedge funds
Zac Bissonnette: Is Bear Stearns in play?

Jim Chanos, the founder of Kynikos Associates and the renowned short-seller who was among the first to smell something funny at Enron, was interviewed by the Financial Times on Friday. His most recent high-profile short pick is bond rating firm Moody's Corp. (NYSE: MCO), which he says is "no longer a referee on the playing field, they are actually playing at this point. So although they are wearing an umpire's outfit, they have a Yankees hat on and I think that's the real problem, in that they are so entwined in the structured finance business."

Chanos opines on the private equity boom, hedge fund regulation, and explains how he knew to short PartyGaming (OTC: PYGMF), not long before its decline on news that the United States had banned online gambling.

Jim Chanos is one of the greatest investment minds of our time, and everyone who cares about his or her money should be an eager reader of what Chanos has to say. The top short-sellers are among the best investors in the world, and they get an undeservedly bad rap. These guys are the market's first line of defense against fraud, and it's time that they got a little more respect.