Has it dawned on anyone else that we are now living in a financial anarchy? Every day, short sellers using a variety of derivative securities (e.g. SKF), CDS , and other financial instruments, are allowed to run wild and pummel US stock and credit markets, causing a cascade of negative feedback loops, which in turn cause increasing real economic harm worldwide.

Yes, we need to restructure our financial institutions, yes there was fraud at big banks, yes the government should not be expected to bail out investors (including credit holders), and yes the economy is in shambles, but how does allowing financial instruments that merely make matters worse by further destroying confidence help the situation? Isn’t it the duty of a democratic government to protect its citizens from undue harm, in order to create a more stable society?

If certain financial instruments are exacerbating the economic downturn and preventing the needed restructuring of our financial system in a rational manner, shouldn’t the government outlaw these instruments immediately? Why couldn’t the government simply nullify many harmful credit derivatives and CDS contracts? Are we truly afraid of the backlash from various counterparties, when those counterparties themselves are bent on destroying our economic system?

What are your thoughts?