The government of the leading nation in the financial sector is spinning out of control, and taking the related exchange traded funds (ETFs) and stocks with it, but can there be a recovery after rock bottom?

AIG’s (AIG) recent rescue has done nothing to ease any fear or pain that the markets and the general public are experiencing. The bankruptcy of Lehman Brothers and Merill Lynch’s takeover by Bank of America were a shock in themselves. Then the government takeover occurred and took the financial sector and investment bankers to new lows.

The Economist says what happens next depends upon three questions, or rather, their answers, which time will give to us:

  1. Why has the crisis launched onto a new and destructive path?
  2. How vulnerable are the financial system and the economy?
  3. What can be done to put finance right again?

For an even slight wind of what can be expected, it is no joke to study the 1930s. Finance needs more capital, yet it needs to shrink. The industry will not be able to make money after this bust unless it is much smaller. For some time, government is the only buyer around. And remember, as finance shrinks so does credit, and without credit, most cannot buy.

So far, what we do know is that regulation in finance needs to tighten. There is much improvement needed within the laws of finance: an end to America’s fragmented system of oversight; more transparency; capital requirements that lean against booms and flex with busts; supervision of giants, like AIG, that are too big and too interconnected to fail; accounting that values risks better and that everyone accepts; clearing houses and exchanges to make derivatives safer and less opaque.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.