OK, I'll admit it. I've been pretty darn negative lately when it comes to financial reform. I've knocked the Dodd bill, criticized Krugman, and dismissed Geithner.

Am I just a grump who enjoys shooting down everyone else's ideas? I'd like to think not. I just want our government to put forth a comprehensive set of reforms that will actually help defuse the volatile financial system.

So what does that look like? I don't pretend to have an answer for everything, but I think the following are the most important areas that need to be addressed.

1. Regulate shadow banking
The "shadow" banking system is basically an off-the-grid financial market that sprung up so that financial institutions could make far more money than they could within the highly regulated traditional banking system. Troublingly, it was through the shadow market that companies like Lehman Brothers, Goldman Sachs, Morgan Stanley (NYSE: MS), Merrill Lynch, and Bear Stearns borrowed money to leverage themselves to untold heights.

The key here is to turn on the lights in the shadow markets and start regulating what goes on in these areas, particularly when it comes to participants' ability to lever up their balance sheets. As Walter Sobchak said in The Big Lebowski, "This isn't 'Nam ... There are rules." Or at least, there need to be.

2. Too big to fail
Though there's been plenty of jawboning about reducing "too big to fail," all we've seen so far is the opposite. JPMorgan Chase (NYSE: JPM) absorbed Bear Stearns and Washington Mutual, Bank of America (NYSE: BAC) took over Countrywide and Merrill Lynch, and Wells Fargo (NYSE: WFC) acquired Wachovia.

These banks were all too big to fail before, and now they're just too bigger to fail.

Regulators need to put hard limits on how large banks get, so that we don't have them holding a gun to the financial system's head when their bets go wrong. Sen. Sherrod Brown, D-Ohio, has proposed an amendment to a Senate bill that would require bank holding companies to limit nondeposit liabilities to 3% of annual U.S. GDP. And the calculation would include off-balance-sheet liabilities.

The specifics of Brown's amendment could be debated, but what's notable is that he's proposed a clear, specific measure to limit the size of banks.

3. Make banking boring
Thanks to deposit guarantees from the FDIC and dealings with the Federal Reserve, it's hard to call banks truly private institutions. For that reason, they should be focused solely on their primary objective -- taking deposits and making loans.

For a long time banks were prohibited from taking part in riskier activities, and it's time to resurrect that prohibition. Investing in banks should have the boring but dependable feel of investing in a utility, not the gut-churning excitement of a tech stock.

4. Crack down on derivatives
Keeping derivatives trading behind closed doors -- or operating "over the counter," as the insiders like to say -- makes for a fabulously profitable business for big investment banks like Goldman and JPMorgan, but it's often bad news for customers and risky for the financial system as a whole.

Putting derivatives on open exchanges is a huge step in the right direction. Another big issue -- particularly if we want to avoid another AIG (NYSE: AIG) disaster -- is to standardize and enforce the reserves that derivatives issuers hold to cushion against losses.

5. Eliminate stupid lending
Government types like to label this area "consumer protection." The way I see it, though, the banks have suffered just as much as consumers in most cases, as their own stupidity in lending money that shouldn't have been lent has come back to haunt them.

The reform solution here is simple: eliminate stupid loans. If you need 100% financing to buy a house, you probably shouldn't be buying a house. If you need a "teaser" interest rate to be able to afford your mortgage payment, you probably shouldn't be buying a house. And this includes the government's ill-conceived low-down-payment lending programs.

6. Discard Fannie and Freddie
While we're slapping at the government's overreaching hand, let's go ahead and put Fannie Mae (NYSE: FNM) and Freddie Mac out of their misery. Unfortunately, this can't happen particularly quickly because of their size and entrenchment in the system, but setting a timetable of a decade or so to defuse these financial nukes seems like it would be a big positive.

7. Reform the ratings agencies
If you have read Michael Lewis' The Big Short, you're probably acutely aware of how big a part Moody's (NYSE: MCO) and Standard & Poor's played in the buildup to the financial crisis. If nothing else, ratings agencies' businesses need to be realigned so that they are no longer paid by the companies that issue the bonds they are rating.

Join in
Think I've missed something important here? Join in the discussion by scrolling down to the comments section and sharing your thoughts on what needs to be done to reform the U.S. financial system.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.