Reasons for the Crisis: Message 7/10

vii) Finance will become simpler.  

There is a general recognition that the market cannot keep financial agents in check.  At some point, they become so systemically important that they cannot be allowed to fail and have to be bailed out.  So a regulatory system is necessary.  The question is of whether that system can continue to rely on markets at all.  Basle II is all but dead.  Its focus on single-bank capital adequacy, internal risk models and credit ratings is seen as grossly inadequate to take care of systemic risk, the procyclicality of marking assets to market, or the intrinsic conflict of interests of credit rating agencies.  Technical ideas to fix those problems abound:  creating a "systemic risk tax" not unlike carbon emission taxes;  shifting capital requirements towards the funding structure (rather than the asset structure) of financial intermediaries;  demanding FDA-type of "health certifications" for new financial instruments;  focusing on the vulnerabilities of the "financial network" using the same protocols that govern the internet;  and so on.  But these sound more like attempts to fix the system that failed than to create a new one.  More likely, the financial industry will become a "utility", whereby a single or a few private suppliers get a government license to provide a standardized service at a regulated price and under heavy supervision.  This will make financial innovation more unusual.