KEY POINTS:
Prevention is the best cure for most things. But when it comes to major disruptions in international financial markets United States regulators rarely suggest remedies until the disease has virtually killed the patient.
So it is with the sweeping plans US Treasury Secretary Henry Paulson announced this week
for a major regulatory overhaul to prevent a future US mortgage crisis turning into a full-blown threat to world markets.
Note the emphasis on "future". As with the much vaunted Sarbanes Oxley Act which the US passed in July 2002 in response to major corporate and accounting scandals such as WorldCom and Enron, the Paulson cure comes after investors have again lost billions of dollars with the resultant loss of confidence in global financial and securities markets.
Paulson points to regulatory gaps that fleet-footed financial firms have been able to slip through - and in the case of hedge funds, "drive a horse and carriage through".
The gaps were obvious after the last hedge fund crisis, which led to the US bailing out some very significant enterprises. Unless the current US problems become worse, or endure for a very long time, Congress is unlikely to move quickly. Powerful lobbyists will triumph over the impact on consumers and ordinary business people.
Paulson's 218-page "blueprint" is not a quick fix for the US problems. His proposals - which include consolidating a raft of regulatory bodies under three separate agencies - are unlikely to be enacted under President George W. Bush's watch.
Creating the Federal Reserve as a supreme "market stability regulator" in effect formalises the authority Governor Ben Bernanke has informally taken to himself as he cajoled financial system players to front up with enough information on their own activities while he sought to restore order to a troubled system.
The problem is that if you reduce the number of regulatory eyeballs monitoring markets the capacity for missing major signs of impending trouble are not necessarily decreased. It's just as likely to result in mistakes.
Paulson's blueprint thus has an element of mirage about it. It won't result in a structure that will stop all calamities - simply ensure more flexibility so that market disruptions can be dealt with quicker, investors and consumers obtain better protection and, hopefully, enable US capital markets to remain the world's most competitive.
Or so the Paulson spin goes.
New Zealand's political heavyweights have been loath to suggest this country could ever find itself in a similar mess.
Finance Minister Michael Cullen blames the global economic slowdown on the crisis in the US sub-prime mortgage lending market, which he said was caused by what should be considered "scandalous and immoral business practices".
Cullen is not ruling out what he quaintly calls a "technical" recession here - one where economic growth contracts for two quarters in a row. But he believes New Zealand has enough headroom to weather any storm.
The US regulatory system is vastly different to New Zealand's. But in both countries private lending has got out of control. Bankers took leave of common sense through issuing loc doc loans to consumers who did not stand a chance of funding their positions once the giant Ponzi stopped.
Financial institutions were not held to account for their own disclosure practices - it has been up to consumers to check out the health of their lenders.
The Reserve Bank's figures show housing debt more than doubled from 1986-2006, which leaves the economy vulnerable to downturn.
The resultant global credit crunch - more an issue of lack of confidence than a lack of real cash - has resulted in higher loans premiums, including in New Zealand.
But the real issue - just how safe are our banks - has been glossed over. These issues are on the table in the US right now and will trickle down to influence debate here.
Unfortunately the absurdity of the Paulson remedy is that his blueprint predates the current credit and mortgage markets crisis.
Rather like the new rules governing finance companies in New Zealand, the proverbial door is being locked after the horse has bolted, carrying with it investors' savings.
