The recent global financial mess was brought on by increasingly lazy investors poor due diligence and rampant misrepresentation of economic health by government administration and private debt rating agencies. Indeed increasingly overly optimistic government administration statements about sound economic health indirectly signaled private debt rating agencies that they were being too negative. Since private debt rating agencies are for profit their shareholders will cry when their personal assets are rated low by their rating agency while government officials are telling them don't believe your rating agency numbers. Instead, government really should have an independent appointed body deduce economic health and vigorously investigate debt rating agency ratings that are found to be misleading. Investors should also be aware of the vested interest elected government administrations and debt rating agencies have in painting self serving optimistic credit ratings for various preferred constituents and clients.
- Going forward the following needs to and will happen to stabilize financial markets.
- Stink! Short term regulation is not needed because it is abundantly clear now to investors that poorly regulated investments are very risky. Government intervention if any should be limited only to offer liquidity in exchange for hard private assets of troubled firms - which means government is like a kind but stern uncle. They don't give you anything, but they make a loan to you when no one else will in exchange for assets that have inherit value in the long run, but are deeply discounted due to short term market turbulence.
- Government regulation of recent financial instruments that have been heavily abused due to recently retracted regulations or because they are of new forms that have yet to have regulatory structures. This is needed because business disgust of recent financial recklessness will fade quickly and old bad habits will resume.
- An independent government body that rates economic health and vigorously investigates and prosecutes debt rating agency fraud - alas this will never really happen if elected government officials weaken or sandbag efforts to have such a body for their own political gain. Indeed, a non-profit entity to perform this function is probably the only way such a body can arise - think Vanguard meets Consumer Reports. Without this last bit, the next poorly regulated investment fad will hit again and everyone will complain why we didn't do something to fix the system again.