In my post below, I linked to an article by Thomas Homer-Dixon in which, among other things, he argued that the problem with the contemporary financial system is that the arcane machinations and lack of transparency (Level-III assets, anyone?) have transformed the market from one of risk–which can form the basis for a stable financial system–to uncertainty–which cannot. So the question then, is how to create the conditions under which banks and other financial institutions, and investors can adequately assess risk. The lack of transparency is the reason that the credit markets have currently seized up and the Federal Reserve has had to come to the rescue of Bear Stearns. (Ben Bernanke–the Chairman of the Federal Reserve–himself has argued that “banks will fail” over the next couple of years. Indeed, a couple of small regional American banks have already failed.)
By coincidence, Democratic Presidential candidate Barack Obama gave a speech at Cooper Union in New York setting out his vision of how his policies would help the engine of the American (and international) financial system become more transparent and a solid foundation for the US and world economy. I encourage you to watch the speech, wherein Obama presents his view of the nature of the relationship between the market and state (government).
“It’s worth taking a moment to reflect on the role that the market has played in the development of the American story. The great task before our founders was putting into practice the ideal that government could simultaneously serve liberty and advance the common good. For Alexander Hamilton, the young Secretary of the Treasury, that task was bound to the vigor of the American economy. Hamilton had a strong belief in the power of the market, but he balanced that belief with the conviction that human enterprise, ‘may be beneficially stimulated by prudent aids and encouragements on the part of the government [state]'”