Martin Wolf on good regulation and bad

We've had some chatter here about when financial regulation is called for and when it isn't. Now the Roger Federer of economic pundits, the FT's Martin Wolf, has weighed in on the topic:

... what does this event imply for the future of regulation? It is important to distinguish two objectives. One is to protect innocents. The investors who bought the products do not fall in this category. They were, if not fools, willing speculators. It is not at all obvious why the state should try to protect such institutions from their own folly. Those who borrowed the money to buy houses may, however, be deemed innocents. Whether this applies to people who exaggerated their earnings in applying for loans is an open question. But paternalists may require minimum down payments or the abolition of “teaser” interest rates and other devices that encouraged ordinary people to borrow more than they could afford.

The second objective of regulation is to insulate financial markets against the sort of panic seen in recent weeks. The only way to do that may be to re-regulate them comprehensively. Restrictions would have to be imposed on products sold or on the ability of guaranteed financial institutions to engage in off-balance-sheet transactions. I cannot see how either would now be made to work. Regulation of the detail of the financial system may fall somewhere between hard and impossible. It is why financial institutions must never be too big to fail.