The Federal Reserve has taken its next step in trying to stop or at least slow the collapse of the world financial system:

The Federal Reserve, working with central banks in Europe, Canada and Asia, pumped as much as $180 billion into money markets on Thursday to combat a seizing up of lending between banks that is intensifying global financial crisis.

The move was aimed at boosting waning confidence and getting banks around the world to open their ever-tightening purse strings.

Congressmen, like the rest of us, are wandering around, dazed, unsure of what to do about the situation that has been fomented over a period of decades by their action and inaction. The present mess is a bipartisan one. Gramm-Leach-Bliley, one of the last major acts of deregulation in the financial sector, was passed in 1999 with 90 senators voting for it and signed into law by then-President Bill Clinton. How much more bipartisan could it have been? Besides, it merely legitimized what had already been taking place for years, the consolidation of the financial services industry, effectively repealing the Glass-Steagall Act which prohibited commercial banks from owning stock.

Both of the presidential candidates are talking about increased regulation in the financial services industry. From Sen. Obama:

I certainly don’t fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. […] It’s a philosophy that says even common-sense regulations are unnecessary and unwise, and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises.

and from Sen. McCain:

It is essential for us to make sure that the U.S. remains the pre-eminent financial market of the world. This will be a highest priority of my Administration. In order to do this, major reform must be made in Washington and on Wall Street.

Thursday’s editorial in the Washington Post points to the need for action:

The losses are far from over. Government must devise a more predictable and transparent way to help wind up the financial sector’s bad investments — along with new rules to help prevent a repeat performance in the future. That’s asking a lot. […] But no economic issue is more urgent, and the winners in November will have to face it squarely.

What sort of regulations and reforms will be proposed? What is likely to be enacted into law? Would any of them have been likely to prevent the situation that’s unfolding?

Megan McArdle who’s not only a blogger but a financial reporter, examined a series of “retrospective regulations” and comes a cropper. She concludes:

You cannot have it both ways–hailing the Clinton genius at economic management (and implying that Obama will bring back those halcyon days), and then claiming that Bush should have trailed around undoing all his work.

Unfortunately, people are thinking completely within the box which, after all, is what you’d when they got where they are largely by giving the expected answer to every question, when they really need to outside the box. The regulatory framework we’ve had for the last 70 years was put in place to deal with a relatively small, closely-knit national banking industry that dealt in a lordly way mostly with each other. Today’s financial sector is a globalized one, beyond the scope of federal government regulation, and chuck-full of consumer products.

That’s more what Nobel Prize winner Joseph Stiglitz is doing in his observations about the financial crisis.

In summary Dr. Stiglitz proposes:

1. Correcting incentives for executives, reducing the scope for conflicts of interest and improving shareholder information about dilution in share value as a result of stock options.
2. Creating a financial product safety commission to make sure that products bought and sold by banks, pension funds, etc. are safe for “human consumption.”
3. Creating a financial systems stability commission to take an overview of the entire financial system, recognizing the interrelations among the various parts, and to prevent the excessive systemic leveraging that we have just experienced.
4. Imposing other regulations to improve the safety and soundness of our financial system, such as “speed bumps” to limit borrowing.
5. Enacting better consumer protection laws, including laws that prevent predatory lending.
6. Enacting better competition laws.

There’s a certain irony in proposing that the SEC operate somewhat more like the FDA while the FDA is receiving criticism that it isn’t able to meet today’s challenges. I think that Dr. Stiglitz’s advice is probably closer to the mark but incredibly unlikely to be adopted for the reasons suggested above.

I’m not sure that we have the international structures in place to deal with today’s financial system and we may well be seeing willy-nilly a return to the “boom and bust” of the old, unregulated one. I certainly don’t see the will to return to an old, small, local financial system.

There may be quite a storm ahead without much to do but ride it out as best we can. Voltaire may have given us the best advice:

Pangloss, Candide, and Martin, as they were returning to the little farm, met with a good-looking old man, who was taking the air at his door, under an alcove formed of the boughs of orange trees. Pangloss, who was as inquisitive as he was disputative, asked him what was the name of the mufti who was lately strangled.

“I cannot tell,” answered the good old man; “I never knew the name of any mufti, or vizier breathing. I am entirely ignorant of the event you speak of; I presume that in general such as are concerned in public affairs sometimes come to a miserable end; and that they deserve it: but I never inquire what is doing at Constantinople; I am contented with sending thither the produce of my garden, which I cultivate with my own hands.”

After saying these words, he invited the strangers to come into his house. His two daughters and two sons presented them with divers sorts of sherbet of their own making; besides caymac, heightened with the peels of candied citrons, oranges, lemons, pineapples, pistachio nuts, and Mocha coffee unadulterated with the bad coffee of Batavia or the American islands. After which the two daughters of this good Mussulman perfumed the beards of Candide, Pangloss, and Martin.

“You must certainly have a vast estate,” said Candide to the Turk.

“I have no more than twenty acres of ground,” he replied, “the whole of which I cultivate myself with the help of my children; and our labor keeps off from us three great evils-idleness, vice, and want.”

Candide, as he was returning home, made profound reflections on the Turk’s discourse.

“This good old man,” said he to Pangloss and Martin, “appears to me to have chosen for himself a lot much preferable to that of the six Kings with whom we had the honor to sup.”

“Human grandeur,” said Pangloss, “is very dangerous, if we believe the testimonies of almost all philosophers […]“

“Neither need you tell me,” said Candide, “that we must take care of our garden.”

{…]

“Work then without disputing,” said Martin; “it is the only way to render life supportable.”