Of course, Paulson's call for new regulations is to be welcomed. More transparency in banks and ratings agencies would be great, and stricter control of brokers would help too. But I really have to wonder, how did this mess develop in the first place? Could it have anything to do with the relentless war against government regulation that the political right has been fighting for decades now? Paulson is a proud Republican; the party that holds that government is the problem, not the solution. But I guess that's only until the markets are collapsing and investment banks are threatened with insolvency. Then -- and only then -- can government regulation play a positive role by sweeping away all the debris and getting the whole cycle started again.

Here's an interesting quote about regulation from Paul Volker, the legendary former head of the Federal Reserve:

I think it seems clear that both the market and the political system will always try to game the Federal Reserve and find ways of getting around restraint. Nobody likes restraint. Everybody likes the stock market to go up forever and the economy to go up forever. When the central bank tries to restrain, the natural instinct is to find some way around it, to find substitutes and new political instruments less directly under central bank influence. If they cannot find the way economically, they will look for it politically, which presents another problem. It is also very clear from history that whatever changes in procedures and policy were made today will cause changes in the market system tomorrow, as the market adapts to what you have done and tries to find a way around it.

While Volker is speaking about the Fed, his words apply to virtually all government regulation of financial markets. I think the lesson is clear enough: markets need to be regulated, even though many market participants will fight tooth and nail to avoid or escape regulation. So cheers to Hank Paulson for finally calling for stricter rules for financial institutions. I just hope that Volker's lesson will be learned finally, and that the next time a politician calls government regulation a problem, voters remember what an economic crisis feels like, and boo him off the stage.