How far should the government go in its efforts to stem the financial crisis?

To regulate or not to regulate. That is the question currently being pondered by the Government as it seeks to address widespread problems in the UK financial sector that led to the collapse of HBOS and its subsequent takeover by Lloyds TSB earlier this month. Recent market interventions by the Financial Services Authority have been applauded. Its temporary ban on short selling of financial stocks – the aim of which is to prevent the demise of financial PLCs including major insurers such as Aviva and RSA – was welcomed by investors with the move causing shares to rally on the FTSE 100.

But does this mean further rules and regulations should be imposed on the market? Business leaders – who are tormented by a nightmare scenario in which companies are bound by endless reams of red tape – have warned against allowing the state to increasingly meddle in the market. In the last week, the Confederation of British Industry has lashed out at critics of the market economy in a desperate attempt to dampen down support for greater state intervention. Richard Lambert, director-general of the CBI said: “There are those who are saying that what’s happened in the financial markets shows fundamental weaknesses in the market economy, and that we need a fresh look at regulation and state intervention of all kinds – we have to make sure that everyone who matters accepts that this idea is total nonsense.”

Lambert’s heightened fear of increased regulation is largely due to the impact of the Sarbanes-Oxley act in the United States following the collapse of Enron and WorldCom. The Sarbanes-Oxley regulations, which introduced new rules relating to corporate governance, have been blamed for deterring companies from listing their shares on US stock markets. According to Lambert, the determination of politicians to “clean up” the City must be “tempered by the experience of Sarbanes-Oxley and the knowledge that recovering markets need help, not handicap”.

But will Lambert get his way? Maybe not. The Prime Minister has expressed his desire to increase regulation of the financial sector – exemplified by his comments in the last few days that the temporary ban on short selling could become permanent.

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