So how will the bailout work? How can the government avoid creating a moral hazard?  Is there a way to create a set of detailed laws to regulate the industry?

  One of the real regulatory challenges is, from a public policy perspective, reinforcing what you want to occur.  I personally think that the FDA has a good approach.  When it comes to manufacturing drugs, FDA doesn't ask for detailed regulatory authority; the agency has "guidelines" for current Good Manufacturing Practices (cGMP or GMP).  FDA has the guidelines and manufacturers--like those that I have worked for--struggle to interpret what the FDA wants.  It's a moving target.  If our company came up with a great way of ensuring safety and reproducibility, then that move essentially raises the bar for everyone else.

As I have said previously, the idea that assets should be bought from banks at greater than market prices is just dumb.  Sure, marked to market can deflate prices, but banks new the rules going in.  If more banks fail, so be it.  The focus should be on taxpayers first.  Assets should be bought at a punitive price.  Similarly, if mortgages holders--those that bought houses--are to be helped, the help should be punitive.   Interest rates should reflect the credit score of the borrower and be tied to the 30-year rate.  At the end of each year, the outstanding balance should be inflated using the core rate of annual inflation--an encouragement to move away from government financing.  Homeowners that did dumb things should pay the price for their actions.