Also, Wall Street firms should consider changing how they compensate their investment bankers. Many earn the lion’s share of their pay in bonuses, a policy that tends to encourage bankers to make risky deals to prop up the short-term bottom line at the expense of long-term planning. Firms should revise their compensation packages, paying bonuses based on a 3-5 year rolling average. This, of course, should be done by management, not by federal regulation.

Similar shady accounting was occurring at Fannie Mae, by the way.

The Office of Federal Housing Enterprise Oversight, the regulator charged with keeping an eye on Fannie and Freddie, reported two years ago that, “Between 1998 and 2004, Fannie Mae’s senior management deliberately and intentionally manipulated accounting methodologies to hit earnings targets and help executives maximize their bonuses.” That’s why former executives were able to cash out millions of dollars and stick taxpayers with the bill.

Finally, lawmakers should repeal Sarbanes-Oxley, the regulation-heavy law it passed after Enron collapsed a few years ago. Sarbox, as it’s known, hasn’t worked. It didn’t protect our economy from the current crisis, for example. But it has helped drive entrepreneurs to invest overseas (where regulations are lighter) instead of here at home. Washington could encourage growth on the Street just by getting out of the way.

As a rule, Congress is good at two things: 1) doing nothing at all. 2) overreacting.

Some lawmakers appear eager to prove that rule, pushing for a massive overreaction. Better they should quickly pass a limited rescue package that stabilizes the market, then proceed to remove the regulatory meddling that helped create this mess in the first place. That’s the best way to prevent future turmoil and protect taxpayers.