History tells us that the scope for regulatory reform is directly proportionate to the severity of the crisis. The rescue of Bear Stearns and the deepening impact of the credit implosion on the real economy make it clear that radical financial re-regulation now looms. The snag is that radical remedies may not gravitate towards the right problems.

Consider some obvious systemic flaws exposed by recent events. Clearly, the Basel capital adequacy regime needs greater emphasis on liquidity. It could also usefully address the problem of pro-cyclicality in banking whereby risk appetites increase as the cycle cranks up.