Wall Street had been rocked by a series of scandals. Investors had lost tens of billions. The national economy seemed at risk. Congress decided to act.

No, this isn’t the United States in 2010. It’s the United States in 2002.

Lawmakers were reacting to the collapse of companies such as Enron and WorldCom. They passed, with virtually no opposition, the Sarbanes-Oxley Act.

That law proved that Congress does two things well. 1) Nothing. 2) Over-react. Sarbanes-Oxley dealt with a problem that had, for the most part, already been solved by the financial markets. It also slapped massive new costs on American businesses.

Before the law took effect, the SEC predicted it would cost American business about $1.2 billion to comply. “In fact, the total cost has been more like $35 billion of direct costs of compliance,” Rep. Tom Feeney, R-Fla., told a Heritage audience a few years ago. “It’s been almost 30 times what the estimated costs were.”

Even one of the bill’s authors had to admit its shortcomings. “It was difficult to legislate responsibly in that type of hot-house atmosphere,” Rep. Michael Oxley told a group in London. “If I had another crack at it, I would have provided a bit more flexibility for small- and medium-sized companies.”

While Sarbanes-Oxley increased costs to American companies and drove business overseas, it didn’t solve the problems with our financial markets. Now policymakers are poised to inject another dose of bad medicine.

Members of the House and Senate are proposing regulations. And they want to create a whole new agency, too, a Consumer Financial Protection Agency. Lawmakers are unsure where to put it, but seem to be leaning toward making the agency part of the Federal Reserve.

Despite its name, the new outfit could harm consumers by eliminating the innovations that create better, less expensive financial products.

Beyond expanding the bureaucracy, lawmakers also want to: 1) give the FDIC (or another agency) broad power to seize and close failing financial institutions, and 2) establish a government fund to “resolve the affairs” of firms it takes over.

This makes little sense. In effect, this would create a new and permanent TARP, making future bailouts more likely. Meanwhile, it would strip private businesses of the protections currently available in bankruptcy courts, leaving them at the mercy of Washington bureaucrats, who could order them shuttered.

Rather than write far-reaching bills, lawmakers should reform the agencies most responsible for the 2008 meltdown: such as government-backed mortgage giants Fannie Mae and Freddie Mac.

So far, taxpayers have poured $125 billion into them. On Christmas Eve, the Obama administration gave the pair an expensive gift at taxpayer expense, promising to provide unlimited financial assistance.

Thus emboldened, Fannie and Freddie continue to back the vast majority of new mortgages. The Washington Post reports they “now own or back more than half of all U.S. home loans.” It’s just this type of over-concentration that caused the financial crisis in the first place.

There are problems in the markets. Banks are reluctant to lend and individuals are nervous about investing, for example. But a key reason is uncertainly over what Congress will do.

Many lawmakers want to pass a massive health care reform bill that would legislate mandates and impose new taxes. Last year the House passed a cap-and-trade scheme that would increase expenses for most businesses. Nobody can be sure what financial regulation will look like in a year, let alone a decade.

Instead of pursuing sweeping reforms that could end up causing problems instead of solving them, Congress should deal with the real threats to our economy. Fannie Mae and Freddie Mac could still drag us down, just as stringent over-regulation could.

Lawmakers should deal with the problems they’ve helped create, rather than rush to create new ones.