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The discussion is taking on a decidedly philosophical and religious underpinning.

Another type of analysts, while recognizing the correctness of the occurrence of crisis in an unhampered market, will argue that any intervention can only make things worse, human minds simply cannot understand the full effect of their actions, and in a complex system such as the economy, they better abstain from any attempt to act.

I can’t help seeing the fundamentally religious mindset behind such a position, in that it hypostasizes the market into an order beyond human understanding, that seems to exist in a transcendental realm: From a mere metaphor, the “invisible hand” suddenly becomes the Logos, the infallible organizing principle.

This rationale though, hinges on a misunderstanding of the “Butterfly Effect”. This famous effect is known by most, and for most, it is the only thing they know about Chaos Theory (and Fractals), and the dynamics of complex systems, but no butterfly ever created a hurricane, the image is simply that, again, a metaphor to say that very slight disturbance may contribute to(rather than create) unforeseen catastrophic effect. It does not mean that they always do so, or even that human understanding cannot have any control over the most adverse of these effects.

Real complex systems have some level of tolerance, of self-regulation at a local level, of resilience (to use a fashionable term). We may not control the weather, but we can open an umbrella not to get wet when it rains, and it does not make the rain any heavier.

Human beings are acting, whether in relation to the weather or in relation to the market, there is no such thing as an unhampered market, because there is no such a thing as a market without human actions.

The question is whether we should think those interventions in a rational manner, from a social point of view, or whether we should leave each individuals to impose themselves in the market on the basis of their luck, intelligence and birth, and let the big picture to the care of the “invisible hand” (if one has faith in its omnipotence, with regard to this context, this faith anyway falls beyond rationality).

That indeed would be my argument. In support of that argument simply observe the Soviet communist model as an example. The many millions of inputs required to create supply to match demand, simply is beyond any small group of individuals to manage.

Hence the laissez-faire system of allowing supply/demand dynamics to be mediated via the price mechanism.

Complexity in markets, and I refer now to financial markets have the following characteristics at their heart, which, precludes government intervention through regulation.

*Interrelated markets
*Tight Coupling
*Regulatory traps
*Increased complexity, decreased ability to see risk

Markets have increasingly become interrelated, hardly a relevalation, but not always obvious to the casual observer. There was after all the theory of decoupling that had been mooted until quite recently.

They have become increasingly interrelated due in no small part to the tight coupling that has been built into the system through the interdependence of financial products linked through their derivatives.

The tight coupling is leveraged via the non-stop news flow, and the insatiable demand for instant liquidity, and accentuated by the leverage entered into, itself, a direct result of liquidity.

Leverage and margin, are simply loans against securities that act as collateral. The willingness to lend against this collateral, due to the liquidity, or ability to sell out the collateral, instantly, drives the ever expanding leverage.

Accidents happen. Obviously, one has already happened. What we are seeing is, or should be expected…the increase of government regulation, combined with the bailout.

Trying to regulate the market however is a mistake, as is bailing out the market. By adding regulations to an already complex system, the regulations add to the complexity…thus potentially triggering unforseen consequences.

The most effective regulation, is the regulation that states, if you are reckless, take excessive risk, and you miscalculate…you will fail and you will be allowed to fail.

Each successive bailout has grown in size from the previous one in real terms. Bankers, particularly Citi bankers, have bet the bank, with ever increased leverage, due to the moral hazard engendered by the socialist doctrine.

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