Purging the toxins

A friend sent an article from European Voices that succeeds in providing a basic explanation of the current financial crisis and solutions. It's worth the read in its entirety, but the following is striking and an important consideration in the Presidential election:

.

... the root cause of this crisis is an inadequately and under-regulated financial system. These are in part the effects of the Phil Gramm-Leach-Bliley Act passed in the US Congress in 1999. That act triggered a further wave of deregulation in the financial industry that, inter alia, brought to the market a plethora of fancy products whose risks were poorly understood. Mortgages are not toxic per se; badly constructed securities based on them are toxic. The packaging and repackaging of financial products are toxic, making their valuations increasingly unclear and reducing their tradability. Reward schemes that shape the decisions of managers and agents in markets and that make their behaviour irresponsible, when judged from a systemic perspective – that is toxic. Misleading quantitative models are toxic. Not to address these and other problems would be totally wrong. The tripwire for this financial crisis may have been in the housing industry, but housing is not the structural cause of the crisis.

.
What this crisis should make plain to everyone is that not all financial innovation is benign. It is therefore baffling to hear the argument that fresh regulation is bad because it would stifle financial innovation. Fresh regulation is necessary because there has been a lack of proper regulation and supervision. The enormous mistakes that have been made by allowing finance to develop its own, highly risky “raisons d'être” must be undone.

.
The path from greed to panic

.
But are we capable of learning that lesson? Why is it that we fail to learn from previous crises? Alexander Lamfalussy issued warnings almost a decade ago; the financier Warren Buffett and the former Federal Reserve chairman Paul Volcker are among those important figures who fired off warnings years ago. How is that their predictions of a crisis have not been listened to?