The current financial crisis has created a very interesting situation where not only the government and quasi-government institutions have underperformed, but more importantly, the different founding principles of a modern western state have been at odds with each other. Lack of regulation enforcement While the businesses were doing what they were supposed to do - maximize profits - the law and standards enforcing agencies were not doing their job properly. In several sectors the regulations were either not there or were very poorly enforced. There are certain criteria that have been followed in giving loans in saner societies and business environments. Those principles were abandoned in order to maximize profits. These were standards and guidelines and not laws. Formal laws and Guidelines In a democracy, in order to function properly there are certain contractual elements that are always laid down as laws and some are added as "guidelines" (or standards). While laws and formal regulations tend to add red tape and bureaucracy and hurt flexibility, the standards stand on the willingness of the various players of the society to voluntarily follow them in as "gentlemen rules". Some agencies are there to add penalties but most of the times, their authority and powers are limited. When a "guideline" is flouted blatantly, then the society responds by creating laws to compensate for them. This movement of a "rule" from the realm of Guidelines to the Law realm restricts the ability of a society to function and respond to emergencies promptly and flexibly. The success of Guidelines as a useful element of the society's "Rule infrastructure" is predicated on voluntary action and a basic foundation of trust in the bona fide intentions of the "other". It can be said that the societies in which the "Trust factor" in voluntary action is high have lower red tape and better economies and vice versa. It is no wonder that the countries which have high corruption also have high red tape and also very low "Trust factor". For a democracy to best succeed, this "Trust Factor" is absolutely essential!! Otherwise its slide to either dictatorship or complete anarchy (and soon both) is a certainty, for Red Tape "grows up" to become dictatorship. Notwithstanding the wiping out of people's wealth, in my view, the biggest tragedy and loss of this financial crisis has been the erosion of a substantial amount of "Trust Factor" - which will, in all certainty be sought to be enforced by Laws and Regulations instead of the erstwhile Guidelines. The world of "Trust Factor" is a one way door. You never come back. The move to higher red tape, more bureaucracy and higher controls and therefore more corruption. Why corruption? Because the motivations and aspirations do NOT reduce in proportion to the hurt to flexibility, but the means do. The motivated find ways to beat the laws to keep the prosperity and means of it at the same level. Wealth can be earned back. Trust and Honesty cannot. Read more