What to make of Treasury Secretary Hank Paulson's plan to rewrite regulation of the financial services industry?

To start, whether you like his solutions or not, Paulson has asked the right question: Have the government's rules kept up with the warp-speed changes in this business? He says they have not, and I agree.

His proposal would overhaul or eliminate many government agencies, shift regulation of some banks and insurance companies from the states to Washington, and give the Federal Reserve broader authority to act in the next financial meltdown. What I don't see in his plan is a coherent framework for overseeing these complex markets.

Do we want a tough cop on the beat, or a market-based regime? Today, a hodgepodge of rules has encouraged the most shameless sort of regulation shopping. For instance, firms that want to dodge the relatively tough SEC merely transform their products into futures contracts. That way, they can be overseen by the Commodity Futures Trading Commission, where turning a blind eye to scams and hustles has become an art form. Paulson would merge the two agencies, but never quite says whose regulatory philosophy would hold sway.

It is the same with the Fed. As a regulator, the Federal Reserve has always paid far more attention to promoting the interests of its chartered banks than in protecting consumers. Especially under the reign of the laissez-faire Alan Greenspan, the Fed actively encouraged the use of off-balance sheet derivatives, which it believed would make markets more efficient. Is this the correct philosophy for the regulator of last resort?

The U.S. should also recognize it can't do this alone. Mega-firms can simply head offshore, where they will take advantage of both lax regulation and generous tax laws. Without enforceable international agreements, these institutions will be largely untouchable.

Whatever rules we come up with, they need to require greater transparency. The common denominator in recent financial scandals—whether at Enron, the hedge funds, or the subprime mess—is a shameful lack of disclosure. Nobody—neither the shareholders, the regulators, nor, apparently, even the CFOs of these firms, had any idea what the financial detritus that filled their investment portfolios was worth.

The details of Paulson's plan are not important. It is a hugely complex proposal by a lame-duck administration. Whatever Congress and the next President settle on in a year or two—if anything—won't look much like this. But first, they will have to do what this Administration did not and settle on a coherent framework.

Paulson has accomplished one thing, however. He has assured a steady source of campaign money for political candidates this November. Banks and brokers may be writing down tens of billions in losses, but they've still got plenty of dough to give to pols. And Paulson has given that tree the biggest shake in a decade, since the last time Congress tried to reform banking regulation. And here is a final happy thought: That legislation broke down the last of the barriers between banks and brokers and, at the very least, aided and abetted the current mess.