Michael Lewis and David Einhorn make a couple of great points in their mammoth, two-part New York Times op-ed. The first:

IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

As they note, this is a pretty intractable problem, since anyone who works in enforcement at the SEC is going to be an attractive hire for Wall Street firms. One way to fix this is hiring somewhat less "sophisticated" people at the SEC, since I'd guess people who come from big securities firms are more likely to seek work in a big securities firm post-SEC than someone like, say, an academic. Lewis and Einhorn sort of agree, suggesting the following compromise:

If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos [the investor who spent years trying to alert the SEC to Bernie Madoff].

It sounds like they're decribing a short-seller here--that is, someone who makes money by uncovering fraud and other bad behavior at public companies--which makes sense to me.

Lewis and Einhorn also write this: 

[P]ropping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.

Back in September, the reason I didn't think we were headed the way of Japan and its "lost decade" was Treasury's initial bailout idea, which was to buy up toxic assets from the banks whose balance sheets they were destroying. It was hardly a perfect proposal--among other things, it would have taken too long to set up. But, since the reason banks weren't lending was that their toxic assets (i.e., bad loans) were bleeding them dry, shedding these assets would have helped them resume lending again (assuming the government paid them a slight premium). Instead, the banks are sitting on the government's money and using it to cover losses from these same bad loans. That's a lot like what Japan's zombie banks did with their various government cash infusions in the 1990s.

--Noam Scheiber