This is a pretty good article explaining the chronology of the Wall Street mess.
You can't tell people what to do, you can only tell them what they can't. Over time people will push any system and exploit it until something gives.
But given all of this mess, capitalism is in principle still a very good system, and we shouldn't make wild changes yet. So I guess I agree in principle with Flaherty's position, though I reserve final opinion until I've seen details. I expect Dion would've suggested something similar.
Obviously what is missing from capitalism is responsibility [to shareholders]. Why are company leaders irresponsible? I propose that those leaders aren't held accountable, and that their decisions aren't transparent.
How can you punish an executive who ruined a company, but no longer works there? He's committed no crime save bad judgment, which isn't enforceable - and he knows it! How can you even know the decision might not be sound if the process isn't transparent? I admit introducing transparency is a difficult problem, and I have no ideas yet.
Companies which have decried regulation in the past now demand government help, holding the shareholders, employees and other stakeholders as hostages.
Shareholders have not demanded company leadership be responsible, they assumed it. However, recent events show at least some company leadership put themselves before shareholders and the longer term interests of the company. In fact, many shareholders themselves might be corporate-like entities such as mutual funds, pensions, etc. which might not demand responsible leadership.
So who should encourage company leadership to behave more responsibly, and how? Simply giving in to demands (for money, loans, etc.) may only guarantee the safety of the hostages temporarily.
Shareholders must return to valuing a company including its leadership and the market risks, and demand at least enough transparency to make a reasonable valuation. Perhaps too many have turned to technical analysis and ignored fundamentals? Not that technical analysis is wrong - but ignoring fundamentals might be.
As long as bailouts continue, then company management and shareholders have indeed shouldered no risk and will continue their behaviour.
Although the current problems seems made-in-America, don't forget the commercial paper crisis repercussions in Canadian Banks, or the tech bubble. We have the benefit of learning from American mistakes.