President's handling of headcase sensible piece of politics

Markets, it is sometimes said, reflect individual human behaviour on a grand scale.

Odd then that they so often behave in a manner which would be diagnosed manic-depressive if it were observed in an individual.

There might be days when they question their sanity, but it is statistically unlikely that investors and traders are any less mentally stable than the wider public.

Manic depression - more properly bi-polar disorder - has a range of symptoms but typically involves irrational exuberance followed by dramatic swings into depressive and sometimes self-destructive behaviour.

That sounds like a reasonable description of markets. Except for currency markets, where it is too generous. Currency markets are psychotic.

Whatever the label, Barack Obama believes he has the regulatory Prozac to curb the wildest of market excesses.

But while science has made great breakthroughs in the pharmaceutical treatment of mood disorders, there remains little evidence that Government regulation is able to keep up with market mood swings. At least not without resorting to the lobotomising tactics of totalitarian leaders.

One of the problems is that the markets aren't good patients. In fact they are among the wiliest, sneakiest and most devious of patients. They are always one step ahead of the regulators. They can afford to be.

In the past decade Wall St's investment banks have plucked the best accountants, lawyers, mathematicians and even physicists from the most eminent universities to confound the world with complex financial products that now look pretty dumb to the average taxi driver.

That kind of wizardry isn't easy to regulate.

The derivatives invented by the young turks on Wall St - credit default swaps, collateralised debt obligations (CDOs) and so forth - have, with some justification, been demonised. Those who pushed them on the public are the post-crash villains of the age.

It is tempting to make a reactionary case for their innocence. The derivatives themselves didn't fail: the investment classes they tied themselves to - in most cases the sub-prime mortgage market - let them down.

But that kind of argument can leave you looking like Charlton Heston at a gun-control debate. Derivatives don't kill investors - investors do. Although they make a much bigger mess when they go off.

It's best to stick with common sense. Don't let the manic-depressive people play with guns, for example.

That seems to be Obama's approach. The right to trade almost anything goes to the heart of American capitalism. It is what makes the place great. The President has as much chance of banning derivatives as he has of banning guns.

And he knows it. The proposals put forward this week are far from radical and have been designed with a difficult passage through Congress in mind.

For example, the plan to put institutions deemed "too big to fail" under the eye of the Federal Reserve is not unreasonable given the billions the US public has had to fork out in the past year. The state has a legitimate interest in how such businesses are run. But there are no guarantees for even the simplest proposal.

In this case there is the subjective issue of what exactly is too big to fail. There is nothing like the imminent failure of an AIG or Bank of America to hone the thoughts of politicians.

But without that pressure of an impending financial collapse there will be room for lobbying and petty politics to creep in. The Fed may find itself keeping a close watch on businesses that have nothing to do with the next generation's financial crisis.

It is impossible to regulate the future. At least Obama hasn't tried to do that. His plan does look a bit like the ambulance at the bottom of the cliff but it is a sensible piece of politics. He had to do something.

Hopefully by playing it straight the proposals won't have nasty side-effects - pushing markets off into other more obscure and less regulated directions.

If we're really lucky they might actually do some good - forcing markets to pace themselves to moderate excess. But don't count on it.