KEY POINTS:
What an extraordinary phase of history these past weeks have been. Money, one of the foundations of economic life, has turned to fairy dust.
Governments are manufacturing it by the billions to sprinkle on moribund banks. Does it matter?
When this crisis began I thought it would be
no bad thing if reckless Wall St banks were to fall over. Then they let Lehman Brothers collapse and the financial system seized. Too many had been creating credit without substance for years on the assumption the system would not be allowed to fail.
Now that the fairy dust seems to be working we need to wonder: has anything really changed? Has the scare been enough to ensure financial markets are never again trusted to check their own credit risks?
An era is over. That is all that can be said for certain. Nothing I have read suggests anybody knows precisely what to do now, least of all the masters of the old financial universe, one of which is running for Prime Minister of New Zealand.
It is remarkable when you think of it that a leading mind - which John Key must have been to rise as high as he did at Merrill Lynch internationally - has the ear of a nation right now and has had nothing insightful or even remotely interesting to say on the subject.
But then nothing is preferable to the class war cry of Helen Clark who told Labour's campaign launch, "A curtain is being drawn on an area of the free-wheeling unregulated money traders and financiers whose greed has shaken the international financial system to its very core.
"Co-ordinated international action will be needed to ensure that the greed merchants don't ever again get the chance to destroy the lives of ordinary people in real jobs trying to put food on the table for their families."
Key's silence probably says more about the finance industry than him. To succeed in money markets you probably need a reflexive mind not a reflective one. Participants hunted in a herd and now they are running after solutions in the same way.
The United States Treasury Secretary came from the herd. Henry Paulson, formerly head of Goldman Sachs, thought the solution might be to buy out Wall St's bad loans. The industry keenly agreed. US voters were rightly sceptical.
Their Congress, facing an election a few days before ours, read the public mood and the Paulson plan required two runs through Congress, plus a few sweeteners, before it passed. Then it didn't work.
It wasn't until a bank or two collapsed in Europe, where governments worry less about free markets, that Britain stumbled on a solution which seems to be working: partial nationalisation of failing banks and for the rest deposit guarantees.
Partial nationalisation ensures that if taxpayers have to take on an institution's bad debt they will share any eventual profits of the rescue too. And deposit insurance for small savers reduces the risk of a run on all banks.
Many countries are insuring all the new debt their banks may need to raise, a prospect that's been discussed by the Government here and the Reserve Bank for the past two weeks. Now that we are on this slippery slope it is hard to see where it ends.
Within a day of the deposit guarantee announcement more regulations had to be issued for the surviving finance companies lest they indulged in dealings that would put the taxpayer at greater risk.
Three days later, the Reserve Bank added terms to the guarantee that would, among other things, impose closer scrutiny on non-bank deposit takers and charge fees related to their credit rating.
This week a further batch of rules was found necessary to clarify the scheme's boundaries, make sure its charges minimised its distortion of investment decisions and provide incentives for institutions to improve their credit rating.
All this is supposed to last two years, by which time October 2008 might be remembered as just another of those nightmares that always seem to happen in October. But I hope not.
Financial markets have proven unable to cope with the cheap money available in an era of low inflation generated by effective monetarism and growth of low-cost production in developing economies.
The wealth went into property, causing real estate to soar beyond the reach of ordinary incomes, and offered us ever more generous credit cards. It found ways to spread, hedge and swap risk until it was unrecognisable.
When markets cease to reflect risk they cannot direct national resources to activities of best value, the whole point of market-led economics.
If governments are going to stipulate security requirements now, market economies could be better for it. Money was supposed to be their lubricant not their most valuable product. May we never again forget it.
