It is hard to judge whether the massive rises on the financial markets on Friday (not so far continued this morning) were driven by anything other than a naive sense of relief. The huge, unprecedented lifeline thrown to the rapidly sinking banking sector by the US government possibly made many in the markets believe that the worst is over. In truth, for them, the worst may be yet to come.
There will be a huge price to pay for the massive support from public funds that has been made available to the financial services sector around the world ever since the Labour government in the UK took Northern Rock under its wing. These massive subsides will screw up public finances for years, leading to cuts in public expenditure and increases in taxation, most likely a combination of both. Electorates will simply not stand for that unless they feel the incompetence, greed and sheer lunacy of the financial markets have been purged and brought under control. That means regulation on a scale that hasn't been contemplated before. It is isn't about transparency - what is the point of being transparent about hedge fund and derivative products so complex that only a handful of people understand them, and certainly not very many of the people selling them?
It will be a different sort of regulation. It may even see the abandonment of the regulation by solvency and a move towards the strict regulation of products. This should be looked at as the financial services sector has an appalling record when it comes to creating the right products for the right people in the right circumstances. On the retail side in the UK we have pretty much had 20 years of product-related scandals and now, across the globe, the wholesale markets have proved themselves catastrophically inept too.
May be this morning's cautious opening on the European markets is a the start of the realisation that the world has changed forever and that the immediate future will not be very rosy for those who plunged us all into this crisis.
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