Yesterday, HBOS and Lloyds were locked in merger talks. Apparently they were "nudged" by Gordon Brown, the Financial Services Authority and the Treasury. These events followed rapidly after the collapse of Lehman Brothers.
At least we have reined back from the dangerous precedent of Fannie Mae and Freddie Mac, where the US government seemed to be developing a giant welfare state for bankers. But, nevertheless, there are growing calls for more regulation: is this the end of our liberal, capitalist financial system?
In fact, we already have an extensively regulated financial system. Freddie Mac and Fannie Mae had well over 200 regulators all to themselves.
In the UK, the FSA has frighteningly wide powers. Arguably, the very financial instruments that have caused recent problems - securitised mortgages - have been designed to avoid the inflexible regulation of the traditional banking sector. The more the regulators regulate, the more the whizz kids put their efforts into designing more complex products.
There are two further salutary lessons for those who believe that more regulation is the answer to our problems. As Eamonn Butler from the Adam Smith Institute has noted, US banks were forced by regulation to make loans to people who had poor repayment histories.
Also, when the dust has settled, we will probably come to the view that the underlying cause of the current crisis is that, as some of us warned, monetary policy was far too loose for far too long in both the US and the UK.
Low interest rates led to the underpricing of credit. This was also the cause of the boom that preceded the Great Depression. The US government overreacted with the introduction of draconian financial regulation then. Our government should avoid making that mistake today.
Markets may misallocate resources at times, but we should not think regulators can do better. The all-knowing, beneficent regulator is a creature of the imagination of social democrats.
We should begin by determining precisely what the limited objectives of financial regulation should be and develop institutions to achieve those objectives. Two aspects of the regulatory system introduced by Gordon Brown about 10 years ago need to be overhauled. Brown gave very general powers to the FSA to "promote public confidence in the financial system" and to "secure appropriate degrees of protection for consumers". This was a big mistake. The FSA has developed thousands of pages of regulations to try to achieve the unachievable, while missing the obvious.<