Derivatives are a tool to provide needed liquidity for economic growth via hedging risk. The new Dodd-Frank rules give the SEC responsibility to ensure sufficient capital for the US while maintaining disciplined order.
An 8/10/10 article in the WSJ, detailed how a Mr Pia allegededly manipulated the market prices through large elite capital owners provides facts that the SEC has learned valuable lessons from the Great Recession. Recall George Soros and his well informed response to inside knowledge and his skillful 2008 management of his funds. This could only happen in an inefficient market where information is limited to most investors. The only case it has happened in efficient markets such as stocks, was when Madoff obfuscated the truth, but that occurred because Madoff had inside knowledge of the SEC's workings.
These same few guru's have now manipulated the Euro and European equities with the same knowledge available to the few elite investment managers with a network of political contacts that give them the inside edge on risk. In the past, the only way the elite could gain advantage is with inside company knowledge and as we now realize, the SEC will eagerly prosecute those found guilty of using this inside company knowledge.
When the new US regulations in place shortly, insider manipulation is only available in Europe, specifically London where 80% of hedge business is conducted. England in the past 20 years has grown from a minor financial player to a world leader. Elite investors and retired politicians exist to service wealthy clients. European regulation of Hedge funds will be a difficult task, considering the political power behind this last remaining enclave of hedge fund power, but if regulation is not implemented in Europe, the US will be at a significant disadvantage and lose growth. That is why Europe must develop a similar hedge fund oversight plan if American financials can survive.
The cure for both these types of insider trading is to establish a world interagency agreement that will protect investors of all kinds from sophisticated insider manipulation If this interagency sees a trend that has no basis, other than the herd mentality and coordinated attacks by elite hedge funds, they would step in and support the investment under attack. That would put and end to the hedge fund's insider knowledge and collusion of these funds in driving currencies and investments in the direction they want and the associated immoral returns that are gained. If information is sufficient, these hedge funds could also be prosecuted. Of course, this is not a rage against speculators who honestly take risks. This is about insiders that profit from their contacts and Bulwarism.
However, the problem with this simple cure is lack of global agreement. Just think, if global agreement on this issue had been implemented in 1990, London world financial growth would have continued to decline and would now be a mere footnote to world financial activity. But, London did not want to lose the financial gains of allowing risky hedging to occur in their markets and thus London became the skillful player's preferred sand box in derivatives and actually grew in power at the cost to uninformed investors.
To curtail this surreptitious growth through regulatory power would be globally unacceptable and the UK would never agree to this. That is why this crisis would happen again, but this time it's European. One nation cannot tell another that they must restrict over leveraging of their money, for that would be against the principles of capitalism. For proof of these facts, one need look no further than the inability of G20 members to come to any agreement regarding coordinated actions. I doubt wether our current regulations will again bend to meet world competition for capital, but that is for future generations to decide.