The recent period has shown that there are lots of imperfections in the existing financial system. The Basel II accord did not set the necessary requirements. Incentive structures motivated managers in an inappropriate manner. The result of this is that governments were forced to intervene in the economies, what led to the awareness that radical changes are needed to make sure that a comparable situation will not occur in the future.
Basel II had the goal of setting capital restrictions that would decrease the chances of default. Although these restrictions were considered very stringent, they have not been rigorous enough with respect to decreasing the risks that banks and financials are allowed to take. The result was government intervention in almost all developed economies. Even though intervention is very controversial, it was clear that intervening was the only option to prevent the economy from collapsing. The consequences for the governments are not yet clear. The most likely result is that they will economize on their spending. Is it fair that the citizens will pay for the default of the financials, or is it possible that these enterprises are punished for their deeds?
Since the consequences of the crisis are becoming more clear, it is time to think about the future. What changes are needed to make sure that an event like this is least likely of happening? This seems like the ideal time for governments and supervisors to make fundamental economic changes. Will they opt for more rigorous capital requirements? Will there be an economy created that will get rid of economic bubbles? Or are bubbles fundamental aspects of the economy? Is perhaps the best option to nationalize all financials?
Put differently: what is the perfect system?
And maybe even more important: is there a perfect system?
