Speaking at a meeting of the New York and New Jersey Financial Managers Society in May 2006, I asked the audience what issues they faced. "Overheated residential real estate" was the uniform response.

Later that year, I participated in a bank directors' retreat at a bed and breakfast inn located high in the Rocky Mountains. The inn's owners had purchased the business for cash in Nov. 2005, after becoming convinced that California real estate was overvalued and selling all they owned.

How is it that these people and many others like them could see the current economic tsunami forming, while leaders on Wall Street and in Washington, D.C., disregarded or underestimated the danger signs? And what should be done?

As one who advises financial services companies, I believe the immediate problems and their causes have been correctly identified. Having the Treasury Department buy distressed loans amounts to a massive cash infusion into the financial system. This tool has been effectively used to blunt financial crises at least four times during the last 20 years. It can and will work again.

How to manage our financial system to minimize future crises is a more difficult question. Proposals to limit CEO pay, increase regulatory oversight or force the industry to bear the cost of its own mistakes via an insurance fund all have superficial appeal. Each imposes discipline, punishment or both.

Yet none of these proposals will accomplish the desired result. All of them fail to account for the fundamental forces that have reshaped our financial services economy and will continue to do so in the years ahead. Nor do they address the legislative and regulatory failures that have brought us to the edge of the cliff today.

House Speaker Nancy Pelosi recently said the cause of the current crisis is the financial services industry deregulation that began when Ronald Reagan took office in 1981. Re-regulation, she said, is the answer. She could not be more wrong.

True, proponents of laissez faire capitalism, including former Fed Chairman Alan Greenspan, have eroded regulatory oversight in the name of free and efficient markets. But at bottom, relaxation of legal constraints on financial institutions has been prompted less by ideology than by epic changes in financial markets, particularly globalization, the wide distribution of computing power and the creation of financial products like money-market mutual funds and mortgage-backed securities.

What is needed is not more of the same old regulation but a more coherent system of regulators and a different type of regulation -- one that makes overseers responsible to gather, analyze and disseminate information that is more useful to market participants and the government.

The current bank regulatory framework, for instance, is preoccupied with whether institutions are following the rules in making loans and taking deposits. Are the correct interest rate disclosures being made to consumer borrowers? Do loan files contain flood insurance certificates? Are banks properly reporting potential terrorists to the government?

Suppose instead that Congress decreed that financial regulators must act more like the National Oceanic and Atmospheric Administration. They would have to build an economic weather forecasting model that would enable them to identify capital-markets storms as they develop, disseminate up-to-date information about them and monitor their impact as they spread their fury.

Regulators and chief risk officers of financial institutions should have an emergency communications system and protocols for using it. Institutions must gather data about their business to be shared, confidentially, with regulators, so regulators can compile it, identify and analyze trends in real time and send warnings in direct terms rather than opaque central-bank-speak, such as Mr. Greenspan's warning about "irrational exuberance."

Such a system is feasible. The Office of the Comptroller of the Currency, which regulates national banks, has for nearly 10 years run a computer model it calls "Canary," as in canary in a coal mine. The model identifies weaknesses in the national banks regulated by the OCC, but not state-chartered institutions. The problem with existing tools, however, is that they serve the limited regulatory mission of each agency.

The biggest impediments to building an economic storm forecasting system have been bureaucratic turf battles and Congress's failure of will. Before Congress passed the Gramm Leach Bliley Act in 1999, the Federal Reserve Board, the Treasury Department, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and the National Association of Insurance Commissioners waged an internecine war over which agency would be in charge if Congress consolidated their regulatory charters. Unable or unwilling to resolve the conflict, Congress punted on the issue. It gave the Fed authority to regulate all activities that are "financial in nature", but preserved in place what it called "functional regulation." Thus existing regulators kept jurisdiction over all of the enterprises they had previously regulated.

Congress also directed regulators to streamline regulations. Nine years later, this still has not happened. And the current confusion and crisis are a result.

Congress must get serious about recasting the existing regulatory framework into one that meets current needs. Redundant agencies must be combined. Resources must be reallocated from assuring compliance with minor rules to systems development so that future economic storms can be mitigated and managed.

Legendary economist John Maynard Keynes once said, "Markets can stay irrational longer than you can stay solvent."

Our way out of the current crisis is first to restore solvency by injecting needed liquidity into the markets. But we cannot neglect to build better structures and tools to minimize the inevitable disruptions that will occur the next time market participants behave irrationally.