Belmont Club » The Last Bubble

The only way to prevent a catastrophe, according to Johnson and Boone, is to cut deficits back and reform the financial system to avoid future hanky-panky. But neither is very optimistic it can be done. The actors benefiting from the short term bubbles are simply too powerful to keep anyone from wresting control of the wheel. And if the reformers ever succeed the money men will simply corrupt them all over again.

The real danger is that as this cycle continues, the scale of the problem is getting bigger. If each cycle requires greater and greater public intervention, we will surely eventually collapse….

In our view, the long-term failure of regulation to check financial collapses reflects deep political difficulties in creating regulation. The banks have the money, they have the best lawyers and they have the funds to finance the political system. Politicians rarely want strong regulators – except after a major collapse. So politics rarely favours regulation.