There is so much to discuss. How low will stocks go? Should Microsoft be broken up? Will the Fed hike rates by half-a-point? But I want to focus today's commentary on the pressing issue of federal deposit insurance reform. I bet our listeners have been debating the topic at work and at the neighborhood barbeque! Yet now, when the economy is strong and credit is overflowing, is the time to consider ways to minimize the financial stress that will come with an economic downturn.

The role of deposit insurance is to maintain financial stability during troubled economic times, and it has been a very successful system. But here's the worry: Banks are getting bigger as the industry consolidates. Policymakers consider many of the new mega-banks as "too big to fail." In other words, all depositors are protected from losing money during insolvency. The danger is that the too-big-to-fail doctrine will encourage reckless behavior at these global giants during boom times. After all, if the gambles pay off, stockholders will pocket huge profits. But if the bets go bad when the economy tanks, taxpayers pick up the tab. That was the ill-fated dynamic behind the 1980s savings and loan crisis.

At a time of quicksilver technological change and rapid financial innovation, more traditional government regulation isn't the answer. Instead, policymakers should tap the market to better monitor management. For example, the Minneapolis Fed proposes that large uninsured depositors could lose up to 20% of their funds if a "too big to fail" bank becomes insolvent. The risk of losing money would create an incentive for sophisticated depositors to closely watch these banks, and discourage reckless lending.

Although it isn't part of the current policy debate, federal deposit insurance reform could extend the expansion and moderate the inevitable downturn.