As Yglesias writes, it's hard to write legislation separating the socially beneficial side of the finance industry (like airlines using derivatives to hedge against unpredictable changes in fuel costs, without which they'd go bankrupt whenever fuel costs jump) from the speculative side where people are just gambling and can be bailed out if their bad bets wreck the economy. He's responding to John Quiggin's piece here.
I thought I'd say a bit more about bailouts. Mere promises never to support more bailouts aren't worth the paper they aren't written on. Once a big enough financial crisis looms, policymakers will have to do something to prevent economic catastrophe. If bailing out banks is the only feasible way to do that, that's the policy we'll get. Quiggin's proposal to shrink the financial sector would solve this problem by eliminating the problem of financial institutions being too big to fail by just preventing the from being too big. The problem is how to implement it, eliminating the gambling while preserving the hedging.
Setting up policies for stabilizing the economy in the face of financial crisis, but which don't involve bailing out banks, would be a good way to go. For example, you could allow the Federal Reserve, in times of crisis, to simply print enough money and distribute it evenly among all residents of the USA. Then if the financial crisis led to people losing their jobs and incomes, free money from the Fed would provide a cushion. It'd probably do a lot to prevent the job losses in the first place, as the anticipated introduction of new money would counteract the forecasted economic gloom that leads to layoffs and recessions. And it'd prevent banks from gambling with the expectation that they'll be bailed out, because the bailouts wouldn't go to the gamblers. If that's a major factor in the growth of the financial sector (I don't know if it is, but to whatever extent it is, it should stop) it'd be a way of implementing Quiggin's financial sector shrinking agenda.
Obviously there are massive political obstacles here and we might never get circumstances where we'd be able to pass such a thing. But if we're talking about a legislative proposal that would actually have the right effects, this seems to be one.