Scatter the herd or financial crises doomed to recur

By Mike Dolan - Analysis

LONDON (Reuters) - However deep or long this year-old credit crunch proves to be, the financial system looks doomed to repeat the crisis in some form unless regulators look seriously at preventing banks and investors herding into booms and busts.

The pattern of the crisis that locked up world credit almost a year ago to the day is all too familiar -- years of wild optimism about credit risk sent debt assets soaring, only for the reality check of home loan defaults to trigger a sudden disappearance of liquidity and an indiscriminate collapse.

For all its idiosyncrasies, the credit jam bore the hallmark of every bubble of the past decade -- from Asia's domino-like crises of 1997/1998 to the subsequent dot.com frenzy and faint.

For sure, the history of financial excess and sudden crashes is centuries old -- Dutch Tulip-mania of the 1630s is the best known textbook warning of irrational booms and busts.

But if modern globalization, and the global financial system that greases its wheels, is here to stay, then persistently bursting bubbles of that scale every five years or so will come at a sky-high cost -- not least for the taxpayers who once again have ended up footing huge chunks of the bill.

Left to their own devices markets clearly do fail. Failure usually involves the disappearance of liquidity -- active buyers and sellers.

At that point the banks that are otherwise the stoutest advocates of markets being left alone to function to resolve their own problems, change their tune and call for governments to act as buyers of last resort to prevent systemic seizure.

Look no further than last month's multi-billion dollar bailout of U.S. mortgage giants Fannie Mae and Freddie Mac.