When markets become the bearer of bad news, there is a natural tendency to take aim at the messenger. The truth is that governments need the disciplining forces of markets. But markets, like the human beings they are made of, do not always act rationally. In uncertain times and absent a robust regulatory framework, their volatility can exacerbate a crisis.
There is a broad consensus now that more robust, crisis-resistant markets need strong regulation. But the process is laborious and momentum in the G20 appears to be fading. In this context, it may become necessary for key countries to move ahead unilaterally in specific areas. Last year, Germany introduced a limited yet controversial ban on naked short-selling. Today, I would see the introduction of a financial transaction tax in Europe as another case for such a “pacemaker-approach” by a few, important pioneers.
One central lesson of the financial crisis was that markets could only function properly if risk-taking were not divorced from liability. The loosening of this bond was a central factor of the crisis.