But I would just as much note that most people shouldn't have more than a fairly small percentage of their savings in real, honest-to-god risky investment. The small investor's chances of being wiped-out are too high and their being wiped out would, again, have a cost to society not just themselves.
Thus, the government should supervise a system where most of the average person's savings go into simple, plodding savings accounts and a fairly small amount is invested.
This system worked pretty well 1933 ~ 1980. I think Nicholas Taleb also mentions a similar system.
Oddly enough, a lot of this comes down to the non-Gaussian nature of a market's expected return. The theoretical foundation of all the schemes for interdependent, self-insured investment processes assumes the distribution of market corrections was Gaussian and that thus large corrections would be rare and multiple investment vehicles would support each other through the law of large numbers. But with a non-Gaussian, "L-stable" distribution, you simply can't expect such things.
Government aren't always. Certainly the US government has become more corrupt on the level of policy over the last thirty years but private industry has become similarly corrupt (as well as entwined with the state). I'm not sure what to do here. The state creates monopolies and then
Mandlebrot's essays on finance are very important to look at (along with Hyman Minsky's theories, etc).
The idea that there is some central intelligence that can decide the soundness of investments deceives the average investor or saver into thinking they need do nothing themselves. All the while the government is actively making things less sustainable and handing out favors along the way.
One could argue that the same is true of private stamps of approval. But there is competition and many voices out there, each having their own tolerance for risk.
To have government regulating things is like your brain never having doubts, never weighing competing concerns except for political ones. And many people think that way, just going along with the crowd. But we can't afford to have that sort of thinking govern everything.