LONDON, England – What do you do once your house has burnt down? Rebuild it the same as before? Or think hard about why it burnt down - and make sure it is a lot less likely to do the same again?
There seems to be a feeling among many of the world's leaders that once we have stemmed the present financial crisis, we should work out how to stop such a firestorm ever recurring.
The argument goes that this means redesigning the global financial architecture that has served since 1944, when an international agreement at Bretton Woods, New Hampshire, set up the International Monetary Fund and its sister institution, the World Bank.
Already sketching away on his drawing-board is the UK Prime Minister Gordon Brown - no doubt feeling himself to be the man of the moment after seeing his nationalization-by-another-name model for bank rescues being widely adopted, even by the Bush administration.
At its summit in Brussels, the European Union endorsed his approach and gave its blessing to this weekend's visit to Washington by the French President and EU Council President Nicolas Sarkozy and the European Commission President Jose Manuel Barroso. (It must have taken at least two strong men to hold Brown back from jumping aboard the plane alongside them.)
It is of course hard to disagree with the prime minister when he calls for a global "early warning system." That is about as controversial as motherhood and apple pie; of course we all support them. But the reality is that many authoritative voices warned of the dangers of spiralling personal and mortgage debt in the U.S., UK and elsewhere, but they were broadly ignored.
With all due respect and the luxury of hindsight, what is the point of going to great trouble to build a new early warning system when you have a history of ignoring the crescendo of early warnings of disaster - and when you allowed the problem to progress to the point of catastrophe?
The other question is one I raised on "Business International" a couple of days ago with Geoffrey Wood, Professor Economics at London's Cass Business School: what caused the fire in the first place? Was it the system that was at fault, I asked him, or was it reckless misuse of the system that got us into this mess?
Wood told me that both were at fault, but that rebuilding the so-called financial architecture was "neither necessary nor helpful."
So what did go wrong?
In Wood's view, the regulators failed. So on Friday's "Business International" I turned to Chris Rexworthy, a former manager at the UK's Financial Services Authority. He conceded the point, while pointing to the difficulties of supervising a highly complex industry with a small body of enthusiastic, intelligent but ultimately inexperienced and probably underpaid regulators.
Another important strand of Gordon Brown's argument is the need for globalized regulation in an of rapid globalisation. Again, that seems hard to dispute - but unless national regulators are up to the job, how would that work any better? Would the establishment of a supranational regulatory body really bring real benefits, or just tie up the world's best financial brains in years of haggling over its shape, size, scope and powers?
So before we embark on that process, gushingly referred to as "a new Bretton Woods," let us ask what part those 64-year-old institutions themselves have played in all of this? The fact is, the International Monetary Fund has been on the sidelines, with Managing Director Dominique Strauss-Kahn railing furiously about the intensity of the flames engulfing the financial house, while lacking water and a hose with which to douse them.
In fairness, the IMF has dealt admirably with what it was set up to do: deal with national governments whose financial payments got into scrapes. Its involvement in helping Ukraine is a fine example.
But what the fund was never designed to do was deal with a problem that originated within the commercial banking system. So it can hardly be blamed for the turmoil that swirls around us now, or for being left as more of an advisor than a rescuer. It was also never intended to save us from what we now recognise as the inevitability of the business cycle.
It is only human to seek a scapegoat, and a large well-heeled international organization like the IMF might do nicely. But ultimately, we need to address the real root of the banks' woes: those famous "toxic subprime assets" - the result of fancy financial footwork which took advantage to minimal regulation and lumped ill-advised mortgage lending in with perfectly sound loans and then marketed them as "investment grade."
Whose job was it to spot the dangers they posed and nail them? The answer must in future surely be national regulators and governments, aware of the global dimension and unafraid to turn to other nations for help and a common approach.
New Hampshire is an attractive place at this time of the year, when the autumn colors turn the hills red, orange and yellow, and especially appealing to officials and investors beaten black-and-blue by slumping markets.
But before we head off to revisit Bretton Woods, let us be clear what really went wrong, who was responsible, and whether we really need completely revamped financial architecture - or a well-constructed new wing to the house.
What do you think?
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