The aftermath of the financial crisis, has seen nothing short of a veritable crusade against the financial institutions around the world. The primary weapon used: financial regulations. Looking back however, financial regulations are not new and have been extensively used in the past. Yet, every financial crisis, including the most recent one, has eclipsed the ones in the past (minus the interventions). One item that is completely missed is that regulations tend to focus almost exclusively on the supply side of the supply/demand curve. What they fail to address is the inherent demand that exists in the investment/consumer community. In numerous other applications, addressing the supply side without curbing the demand side has not led the required outcomes (look at drugs for instance).
In short, as long as the demand exists, innovations in new supplies (financial instruments) will emerge to satisfy them. The major question is, how can the demand be better managed, through regulation or other methods. This is a questions I continuously think about. Further comments to follow.
Disclosure: Long C and NYB.