So what does Martin Wolf say?

First: financial crises cause economic pain:

When will the next financial crisis come? We do not know. Yet of one thing we can be sure: unless we learn from this crisis, another one will put the world economy back on to the rocks in the not too distant future.

Second: the financial world is inherently unstable and unfair:

the banking sector is the recipient of massive explicit and implicit public subsidies: it is largely guaranteed against liquidity risk; many of its liabilities seem to be contingent claims on the state; and central banks create an upward- sloping yield curve whenever banks are decapitalised, thereby offering a direct transfer to any institution able to borrow at the low rate and lend at the higher one.

In addition, banking institutions suffer from massive agency problems - between clients and institutions, shareholders and management and management and other staff. All this is also exacerbated by the difficulty of monitoring the quality of transactions until long after the event.

Third: crises are almost always systemic and politically hard to pre-empt

As William White of the Bank for International Settlement has noted, banks almost always get into trouble together.* The most recent cycle of mad lending, followed by panic and revulsion, is a paradigmatic example.

(...)

Yet, as Mr White also notes, the strength of the pressures against taking "away the punchbowl just as the party gets going", in former Fed governor William McChesney's famous phrase, is formidable. In addition to bureaucratic inertia, such action is subject both to unavoidable uncertainty about the dangers of current trends and to resistance from private interests.

Fourth: it's ultimately a political problem

On the one hand, we have a banking sector that has a demonstrated capacity to generate huge crises because of the incentives to take on under-appreciated risks. On the other hand, we lack the will and even the capacity to regulate it.

Fifth: the system is digging its own grave

A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run. Those who want market-led globalisation to prosper will recognise that this is its Achilles heel. Effective action must be taken now, before a still bigger global crisis arrives.

That last argument is very important, as far as I'm concerned: it's the smart liberals (in the economic sense) acknowledging that things have gone too far and that their (neo)liberalism needs to be tuned down. It's probably too little, too late, given that the crisis is basically unavoidable right now, but this will help define the political battleground: how much more regulation will be allowed as the crisis unfolds?

:: ::