Reserve Bank must slow down with the changes

Adam Smith, the definer of modern capitalism, thought extreme capitalism would be limited by men's desire for the regard of their fellows. Sadly, however, modern capitalist leaders seem not much interested in the regard of their fellows.

Leaders inhabit a narrow peer group and, in Henry's experience, admire their peers' ability to create the highest ratio of wealth to effort.

It was Milton Friedman who defined the role of the modern corporation as one of maximising profits subject only to the law, meaning in most interpretations the very letter of the codified law.

Nothing much about earning the regard of one's fellow corporate leaders, except by maximising profits at whatever cost.

If Karl Marx and Milton Friedman agree on the role of corporate leaders, and Adam Smith is an outdated idealist, who or what is to control the "extreme capitalism" or excessive greed that has led to the world economy's current unhappy situation? By definition, it is the law that was defective, and in the case of the world financial system it is the weakness of financial regulation. This point has been acknowledged by Alan Greenspan, who has declared he was wrong when he assumed financiers would regulate themselves.

Greenspan's mea culpa would be more convincing if he also acknowledged that he drove US interest rates far too low following the tech wreck.

The world economy has seen 30 years of strong growth. This growth has been driven by technical progress and the industrialisation of previously undeveloped nations of Asia, Eastern Europe and Latin America.

Growth has also been fuelled by deregulated financial markets, an orgy of lending and borrowing and erosion of traditional standards of acceptable behaviour, whether in the utterly disproportionate salary payments for senior executives or in the lack of restraint on unacceptable behaviour either from the operation of conscience or the work of regulations and regulators.

In seeking to apportion blame, general societal mores must take first place. But given the extremely damaged state of the global financial system, financial regulators must be held responsible in a more immediate way.

Political response to obscene payouts for failed financiers will produce some welcome rollback of excessive greed. Nationalisation or part-nationalisation of failed banks will, if governments have representatives on boards that do their job, produce further force for reform.

But unless this is followed up by serious reform of financial regulations and regulatory agencies, the problems of a failed global financial system will be merely papered over and will return, far more damagingly, within a generation.

In Australia, the Reserve Bank's role is two-fold: not to ease monetary policy to the point that excessive lending and borrowing resumes anytime soon; and to insist on a serious, deep and thorough redesign of the rules for regulating modern finance.