Our economic blogging conference has broken into smaller groups for lunch, and the session I’m attending is called “The Fate of Finance.” The moderator, Robert Litan of Kauffman and Brookings, pointed the discussion toward regulation, which he says will be the hot topic for the next month. How are we going to regulate these financial institutions? Who’s going to do it? And do you seriously think it will work?

Litan thinks regulation will focus on the banks and other financial companies that are in the “too big to fail” category. And any regulation of hedge funds, for example, will be determined based on a hedge fund’s interconnectedness to the Citigroups and AIGs of the world.

He believes the Fed could be put in charge of the new regulation, and if that happens, what a disaster. Brian Carney, who’s on the Wall Street Journal editorial board, just jumped into our discussion, saying the Fed’s status as an independent “central” bank would be destroyed by such a move. And for crying out loud, doesn’t the Fed have enough to do?

Then again, who are we supposed to trust with this regulation? The Fed is about the only “brand” left with some credibility. The SEC? Give me a break. Madoff, Madoff.

Speaking of fraud, Yves Smith from nakedcapitalism.com says the fraud probably goes way beyond Madoff and the other cases we’re hearing about. She says some of these titans of finance and possibly the regulators should be in jail for what they did. Her voice is getting really high and worked up.

We’re going to wrap up soon, and move on to another topic. But before we do, I’ll leave you with this from yesterday’s congressional testimony by former Federal Reserve Chairman Paul Volcker. He said we need to “tame the animal passions” of the financial world:

“What protections can we build into the system when those animal spirits become a little bit too buoyant in the future? And I think there are protections we can build in.”

I’m sure there are. But what’s the point if the regulation isn’t practiced or effective?