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The original Red Knight idea, that a bunch of well-heeled Man Utd supporters would club together to buy out the club, looks more-or-less dead.

I’ve spoken to a number of the potential investors and they all say the same thing: they can’t see how to do it without paying more than the club is worth; and they don’t want to throw their money away.

Why their pessimism?

Well, they’d need to find considerably more than £1bn in equity and debt to provide a return to the Glazers, the not-universally-popular current owners.

Which was always going to be challenging.

Even if the Red Knights had kept Man Utd’s £500m of bond finance in place, they would still have had to find perhaps £600m of risk capital.

At, say, a £15m contribution per deep-pocketed fan, it required 40-odd Knights to dig into their respective treasure chests.

That wouldn’t have been a doddle even in the balmy (or should that be barmy?) market climate of 2007. In the current volatile conditions of tumbling share prices and concerns about the risks of a lurch back into recession caused by the eurozone’s woes, it’s harder than breaking through Inter’s defence.

So I would say that the prospect of an offer being made to the Glazers by a bunch of “ordinary” fans, who just happen to be worth a bob or two, is as likely as Blackpool winning the Premier League next year.

It’s not going to happen.

Does that mean there’ll be no takeover bid for Man Utd?

I am not quite saying that.

The Red Knights, advised by Nomura, is scouring the globe for the (you guessed it) inordinately wealthy investor with so much money that he or she can take an improbably long view of when ownership of Man Utd could deliver a profit.

Whether Man Utd’s un-monied fans would believe that replacing the Glazers with a more conventional sugar daddy would be progress, I cannot say.

But, of course, with the Glazers having said all along that they don’t want to sell, the clever money probably says there won’t be a takeover of any kind any time soon.

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The cumulative impact has been a doubling of that rate during those 90 odd days, to more than 0.5 per cent yesterday – the highest three-month dollar LIBOR rate for something like 10 months.

What does it all mean?

As you’ll probably recall, when LIBOR rose relative to central banks’ official funding rates in an almost unbroken sequence from the summer of 2007 till the autumn of 2008 – when Lehman collapsed – the causes were sinister.

It was the most visible manifestation of perhaps the worst liquidity crisis the world’s big banks had ever experienced.

A whole series of wholesale markets in which banks had raised hundreds of billions of dollars closed down. And there was no great pool of cash elsewhere to make up for this great loss of finance – so the interest rates at which banks lent to each soared.

As 2007 turned into 2008, this liquidity crisis transmogrified into a solvency crisis, as the shortage of finance led to sharp falls in the price of assets, especially property and loans to property, which generated huge losses for banks.

The horrible consequence was that a liquidity crisis became a catastrophic solvency crisis: one enormous investment bank, Lehman, went bust, and a series of other financial institutions would have followed Lehman to the graveyard if taxpayers hadn’t resuscitated them with unprecedented injections of new capital.

What’s more, central banks have – since the Lehman debacle – created unprecedented amounts of new money, and have lent record sums to banks.

That means it’s difficult to argue that banks are suffering from a liquidity crunch on anything like the scale of 2007 and 2008.

And if you want evidence that banks really can’t be chronically short of cash, just look at how little the European Central Bank has increased its loans to banks over the past 18 days or so: its net funding for banks has risen just 6 per cent or so, which is hardly proof of banks gasping for liquidity.

What’s more the take-up of dollar loans by the ECB under swap arrangements with the US Fed has been paltry, even though the LIBOR prices indicate that the peak of stress for banks is in the dollar funding market.

All a bit odd. Unless you think that what’s going on is the reverse of the trends of 2007-8.

It could be that this time a solvency problem is wagging the liquidity dog, rather than a liquidity shortage giving a good shake to the solvency dog.

Or to put it another way, it may be that what’s persuading banks’ creditors to demand a higher rate for their loans is the expectation that European banks’ will suffer big losses on their holdings of assorted eurozone government bonds and their loans to assorted European property markets.

The rising price of Libor may be based on the belief that a possible default by the Greek government on its debts, or a further downward lurch in the value of Spanish property, could generate unsustainably high losses for a number of big European banks.

Or to put it another way, the LIBOR rise may be saying that the eurozone’s fiscal crisis could be the precursor to the demolition of some substantial, thinly capitalised European banks.

Which would be the most worrying interpretation of the LIBOR rise.

There is however a more benign explanation.

The thrust of anticipated bank reforms – whether they’re the Obama reforms or the increases in capital and liquidity ratios to be demanded of banks by the Basel Committee on Banking Supervision – are likely to have the effect of increasing the costs for banks of lending.

And if the costs for banks of lending were to rise, that would mean that banks themselves would have to pay more for their credit, along with the rest of us (ouch). Hey presto, three-month dollar Libor rises in a semi-permanent way.

As it happens, there is one more explanation of the LIBOR rise: that disunited regulators, central bankers and government heads are largely united by a single reforming ambition, which is to put in place new legal structures for big banks that would allow them to fail without crippling the economy.

Here’s the paradox. If big banks can be allowed to fail, if they could no longer be certain that they’d be bailed out by taxpayers in a crisis, the risks of lending to them rise.

So in sanitising the banks, in turning them from weapons of mass destruction into more conventional businesses that can be permitted to go bust, they become less attractive to creditors, who would obviously demand a higher LIBOR interest rate.

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Business leaders have been arguing passionately that the public sector needs to become more efficient. You’ll recall that the equivalent of a plane-load of them publicly backed the Tories’ general election campaign to make additional savings in public expenditure this year – in order to avoid that national-insurance rise they hate.

Well, it’ll be interesting to see how they respond, now that their dreams have been made a reality.

Because a good proportion of the savings announced today will hit them directly.

So, for example, the Treasury has announced £1.15bn of cuts in discretionary spending by Whitehall on items like consultancy and travel.

Who receives the bulk of such largesse? Well, it’s private-sector consultants and travel companies.

There’ll also be £95m of IT savings – again a squeeze on monies handed over to private-sector contractors.

A further £1.7bn will be saved from delays and cancellations to contracts and projects – which is probably £1.7bn of revenue that won’t be received by companies.

On top of all that, there are the reductions in funding for regional development agencies, which could have an effect on financial support received by many thousands of businesses.

In other words, the harsh reality of making government more efficient may not be quite so appealing as the theory to the many business leaders who sell goods and services to the public sector.

As for those business leaders who recognise that there’s no gain without pain, they’ll only be half-impressed by today’s one-off cuts.

They’ll see most of today’s savings as so-called low-hanging fruit, blindingly obvious examples of eliminating unnecessary expense: what they’ll want to see is a cultural revolution, to improve productivity for years to come and create a waste-averse climate in every allegedly cushioned nook and supposedly feather-bedded cranny of the public sector.

Meanwhile, there’s another paradox about the effect on jobs of today’s cuts.

George Osborne said – and passionately believes – that the cuts in public spending that he announced this morning, and the further and deeper cuts that will be chosen in the autumn, will over time create jobs rather than contribute to intractable long-term rises in unemployment.

The chancellor bases this optimistic view on the assumption that shrinking the public sector, and narrowing the gap between what the government spends and what it receives in taxes, will liberate the private sector – which, he hopes, will create the jobs that are shed by the public sector.

How compelling is this argument?

Well, most would concede that interest rates paid by households and businesses will be lower, in the absence of a collapse in confidence in the government’s ability to pay its debts – and that therefore the interest burden on the private sector is irretrievably linked to the perceived financial health of the public sector.

Which means that the private-sector benefits if banks and investors are impressed by the coalition government’s determination to shrink the public-sector deficit earlier and faster than the previous Labour government would have done.

But there is an internal contradiction in one of the underlying arguments deployed by the Tories when saying that the state must be shrunk from the 50%-or-so share of GDP that it currently represents: to wit, that the public sector is intrinsically more wasteful, less efficient and less productive than the private sector.

Most research proves that the productivity of public sector is indeed lower than the private sector. But the lower productivity of the public sector means – by definition – that each extra pound of reduced public-sector spending will tend to lead to relatively more jobs lost than are created by each extra pound of income received by the private sector.

To put it another way, the lesser efficiency of the public sector means that it creates more employment than the private sector when expanding, and sheds more when contracting.

Of course, that’s not an argument for increasing the size of the public sector relative to the private sector. If that went on indefinitely, we’d all be in the workhouse.

But it does mean that shrinking the public sector can in the short term bring a huge human cost, in jobs lost, and hopes of fulfilling employment dashed.

Which is presumably why the chancellor has not used all his public-sector savings to pay down the national debt. He has also authorised £150m of new spending, to create 50,000 adult apprenticeships, and he is allowing £50m to be spent on the modernisation of further-education colleges.

Shrinking the state may well boost the creation of sustainable jobs in the longer term. But the immediate effect must be to increase unemployment.

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George Osborne has declared it the “fastest and most collegiate spending review in recent history.” We’ll see by the end of the day how collegiate the rest of Whitehall is feeling. Usually, within hours, we in the media would be given juicy examples of innocent victims and programmes who are going to be “cruelly hit”.

But this is not a common-or-garden Whitehall pruning exercise. It is the first round in what is going to be a long – and painful – game. Staff may well want to save their hard-luck stories for later on, when they really need them.

The chancellor and his chief secretary will be pleased that they are in a position to “protect” schools and Sure Start and 16-19 year old spending from net cuts.

Given that the Conservatives were already protecting the NHS, defence and international development, it was always surprising that schools had been left out. Especially when the Tories wanted their schools reform plans to be up and running this year.

But note that the chancellor is still looking to cut the schools budget by £670m.For the department as a whole, that represents only a 1.3% cut in current spending – when others are having to find cuts of 3 or 4%. But when you take out core spending on schools, Sure Start and 16-19-year-olds, there isn’t a lot of education spending left. Local authority grants for education are going to be cut, and so will spending on higher education, even allowing for that £50m additional investment in further education colleges that was announced at the same time.

Other points to note:

A large share of the cuts – around 27% – will come not from civil servants but from private sector contractors. The Treasury is expecting to save £1.7bn on delaying, stopping or renegotiating private sector contracts.

As I’ve discussed in the past, the Labour government’s own efficiency advisers – some, like Sir Peter Gershon, now helping the coalition – thought this was an area ripe for savings – but not necessarily this year. It will be interesting to see whether the private companies concerned cry foul – or whether they, too, decide to hold their fire for future battles.

As the chancellor admitted, local government spending has also taken a big hit. More than £1.1bn of the total savings will come from cutting grants to local authorities. This is another result of the decision to ring-fence large areas such as defence, international development and health. It’s good politics for the chancellor to de-ring-fence £1.7bn in local government spending this year, to give authorities more freedom to cut. But I doubt that will be enough to silence complaints.

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The two main areas of cuts in the Business Department, to be announced later today, will be universities and industrial intervention.

I am expecting that funding for universities will be cut by around 3%.

And I also hear that there will be deep reductions in the budgets of the Regional Development Agencies for South East England and Eastern England – which may well be seen as the first step on the road to closure of these two agencies, whose aim is to provide support for business that is not available from the private sector.

In addition, a substantial saving is likely to be forced on the UK Strategic Investment Fund, a £750m fund that was the vehicle for French-style industrial intervention by the previous business secretary, Peter Mandelson.

The gross cut in spending at the Business Department will be £900m. But it will also receive £200m of new funding to support apprenticeships, so the net saving will £700 – or just over 3% of its £22bn annual budget.

One area regarded as strategically important for the UK’s long term economic prospects, support for science, will be largely protected.

And there will also be protection of funding for further education and adult learning.

In other words, the new business secretary, Vince Cable, will be able to argue that the government is doing what it can to provide relevant vocational skills to those most vulnerable to becoming semi-permanently unemployed at this time of weakness in the British economy.

Also, the Regional Development Agencies in regions where the private sector is smaller and weaker than in the South – notably the North West, North East, Yorkshire and the West Midlands – will not be forced to make the kind of savings being forced on the South East and Eastern RDAs.

As for the squeeze on the UK Strategic Investment Fund, support for green technologies, such as tidal power, will be sustained.

Even so, most university vice chancellors already complain that they have inadequate funding, and will argue that the long-term competitiveness of the British economy will be put at risk by the 3% squeeze – especially since they’ll fear that they’ll be forced to take even bigger cuts later in the year.

Also, there will be squeals of anguish from those companies deprived of funding by the cuts in industrial intervention.

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The voice for calm would say yes. True, financial markets have been spooked this week by aggressive German rhetoric – and action – against speculators. But it’s hardly news that European governments want to rein in the financial system in key respects over the next few years. And, as yesterday’s key US Senate vote confirmed, the Europeans aren’t the only ones.

Look through the German rhetoric – the voice for calm would say – and you see the key player in the eurozone drama demonstrating that it is willing to put the future of the single currency before pretty much anything else.

Crucially, the 440bn-euro special stabilisation mechanism for the euro got the nod from the German parliament today. And assume that the Eurogroup of ministers is able to give the markets enough details about that special vehicle for bailing out eurozone governments in the next week or two that investors can start to believe it really exists.

(OK, so the Eurogroup meeting to sign off on the details was cancelled today – because they, er, didn’t have enough details to sign off. But assume they get their act together fairly soon.)

Assume – in other words – that the key pieces of the extraordinary support package for the euro agreed just under two weeks ago are soon in place. Then, in the short term at least, it’s not clear why global investors need to worry a lot about the euro.

The Greek support programme means that the Greek government won’t need to borrow money from the markets for well over two years. Markets can fret about them defaulting or restructuring their debt after that, but those doubts need not have much effect on Greece itself.

Likewise, if you were worried about Portuguese, Greek or Spanish debt sitting on bank balance sheets that they might find hard to sell – in theory, you don’t have to worry about that any more. The banks have a buyer of last resort in the form of the ECB.

And if you’re worried about other governments getting into trouble – well, there’s a 750bn-euro support programme (the eurozone money plus the money from the EU and the IMF) as a third lind of defence.

With all these fortifications in place, it’s difficult to see how you would get the kind of panic in the inter-bank markets which so rocked world markets in 2008 – and which we got another whiff of in the lead-up to those momentous negotiations earlier in the month.

Here endeth the lesson from the voice of calm. But, as I’ve been saying since the Greek crisis first began, all of this still leaves the central problem at the heart of the euro’s troubles – which all of these frantic negotiations have not even started to resolve.

I write this from Brussels. Today’s special taskforce meeting of European finance ministers is supposed to look at how governments could better co-ordinate their policies in the future – in effect, how the eurozone could behave more like a single currency area and less like a group of divergent states.

As we know, Germany is most focussed on the fiscal piece of this – tougher controls on national budgets. That is top of the agenda this afternoon. But I’m at a briefing by senior Commission staff involved with the meeting, and they say that “national competitiveness issues” – and “internal imbalances” – will also be discussed.

That’s code for the fact that Germany and the Netherlands, in effect, have been playing China all these years while Portugal and the rest have played the role of the US. In other words: those North European powerhouses have been running up huge trade surpluses, while the Southern Europeans have run bigger and bigger trade deficits.

Whenever Germany tells you how much the Greeks are costing them, remember this: German exports to Greece have risen by 133% since the single currency started. Greek exports to Germany have risen by 13%. The resulting trade gap between the two countries is one reason why German banks are now sitting on so much Greek debt.

Portugal’s current account gap was nearly 10% in 2009, only just below the Greek one. The Spanish current deficit was 5.3% of GDP.

These gaps have been hiding in plain view for years. But for all the talk about convergence, and “growth and stability”, the Commission – and the leading eurozone governments – decided to turn a blind eye. The argument was that these deficits didn’t matter – because they were caused by private-sector borrowing, not governments.

This is what Lord Lawson said in the late-1980s boom, when asked whether we should we be worried about Britain’s gaping current account gap. It’s also what Thailand said in the late 1990s. They were wrong. And so was the European Commission.

In the end, these imbalances always come home to roost – the private-sector bubble that was causing them bursts, and one way or another the borrowing is shifted onto the public sector. And governments have to do a lot of painful things to bring it down.

In Britain’s case, and Thailand’s, devaluation was the route back to competitiveness for the private-sector economy. As we know, that route is not open to the likes of Spain. And if Germany won’t allow German inflation to rise above 2% (which it won’t), these countries will need years of falling prices – and possibly shrinking nominal GDP – to climb their way out.

Germany is very much in favour of this kind of “convergence plan”. It is not interested in making it easier – through higher German inflation, or higher German domestic demand, or higher German public borrowing.

So – with the best will in the world – this “better co-ordination process” being discussed today looks set to be an exercise in co-ordinated drudgery for large parts of the eurozone. And there will be another large part of the global economy looking to the rest of the world to provide its growth.

That is a pretty nightmarish scenario for the voice of panic to focus on.

The received wisdom, of the calming variety – says that even if it’s bad, it’s a slow-burn. There’s no reason to panic today. But, looking at the market movements of the past few weeks, I’m not so sure.

Even if markets are not as efficient as the boom-time economic theorising proclaimed, they do have a way of turning bad news tomorrow into bad news today.

As we discovered yesterday, fears of a double-dip recession in the US have not entirely gone away, even if they are greatly reduced.

For many investors, the prospect of there being little or no European domestic demand to fuel US growth is not a pleasing one.

Slower future growth in the eurozone also means lower European stock prices today. And that is if the citizens of these countries actually allow the drudgery scenario to unfold. Investors might well start to wonder whether people will.

Remember that the grand stabilisation mechanism will offer no comfort to governments in search of an easier life. The whole idea of this mechanism, we are frequently and openly told, is that the conditions for getting the money will be so tough, no country will ever want to come to it for help.

It’s true that Japan has gone through well over a decade of meagre, export-driven growth and falling prices – without riots, and without revolution. Maybe some version of that future is politically do-able for southern countries of the eurozone.

As I reported in early April, Ireland has taken its deflationary medicine surprisingly well. But I’m not sure that Spain and Portugal remind me of Japan.

I think I still believe in the voice of calm. And for today, at least, the markets do too. But I find myself hoping that, this time, the markets are as short-termist as the critics suggest. if investors start to think too hard about the long-term picture for the eurozone, we could be in for some very bumpy times indeed.

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Financial reform in the UK was always going to be conditioned by whatever reforms are enacted in the US.

And as of last night, we now have a clearer – if not yet definitive – view of how Congress is planning to shake up Wall Street.

The important point is that the Senate has – finally – voted for financial reform. Which means that President Obama will get his way, and there will be an overhaul of America’s biggest financial institutions more radical than anything we’ve seen since the 1930s.
But we can’t yet be certain of the minutiae of the overhaul, because the Senate’s reform package has yet to be reconciled with the House of Representatives.
Here, in general terms, is what is likely to happen:

(1) Most of the $600 trillion derivatives market will be forced through third-party clearing houses, to increase oversight of the deals and ensure participants in the deals put up sufficient margin or security against the risk of losses. As I’ve mentioned before, this will significantly reduce the profitability of derivatives trading for banks, because it will lessen their ability to blind gullible investors with the wizardry of their science.

(2) Banks may be banned from proprietary trading or speculating for their own account.

(3) An important part of banks’ derivatives business, their swaps desks – which include the business of insuring loans through credit default swaps – may be walled off, or forcibly separated.

(4) There’ll be a powerful new consumer protection agency.

(5) There’ll be new powers for the authorities to seize control of large systemically important institutions that appear to be running into difficulties.

(6) There’ll be new powers for the authorities to break up troubled systemically important institutions in a supposedly orderly way.

(7) There’ll be new multi-authority oversight of the risks in the financial system.

(8) In general, the Federal Reserve will emerge as the regulatory super-power, though the precise scope of its remit remains to be defined.
What does it all mean?

In theory, banks will be taking fewer risks – and they will certainly be less profitable.
There will be a particular challenge to the business model of Goldman Sachs, which generates more profit – in a proportionate sense – from proprietary trading and derivatives than most of its competitors.

The reforms would have direct implications for Barclays, owner of defunct Lehmans’ US operations.

And there will be indirect implications for all big British banks, because where America leads in financial reform has a significant influence on the room for regulatory manoeuvre of the British government.

Finally, there is a knock-on to conditions in global financial markets, especially stock markets, in the coming weeks.

Investors will fear that US banks forced by Congress to retrench and narrow their scope will be less generous with the provision of credit and liquidity, which could dampen the economic recovery.

There’s always a bill, a price, for necessary financial reform. Calibrating that price, in respect of timing and size, is the tricky part.

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The coalition’s programme for government will not please all businesses and business people.

There is a surprising amount of detailed policy to promote equality, for example, which will give the willies to some of the more traditional Tory-supporting corporate grandees.

So, for example, there’s a pledge to promote gender equality on the boards of listed companies.

That said, there’s conspicuous gender inequality on the board of UK plc, otherwise known as the cabinet. And if the target is to match the balance between the sexes in Mr Cameron’s team – well, most big companies won’t be sweating.

As for the banks in which taxpayers own huge stakes, Royal Bank of Scotland and Lloyds, they may be somewhat alarmed by the remarks this morning of Vince Cable, the business secretary, that they should become instruments of the state.

In particular, he wants to rip up their agreements with the previous government to provide a specific amount of gross lending to business and to replace those agreements with new targets for net lending.

This may sound a technical issue of little importance, but it matters.

As I’ve pointed out here on many occasions, any bank can take money out of the economy while increasing gross lending, so long as repayment of existing loans exceeds new lending.

It’s therefore much more stretching and demanding for a bank to be obliged to increase net lending.

Banks however would argue that it would be bonkers to oblige them to increase net lending, because they would be under pressure to provide credit to those who don’t deserve it.

And they would also make the point that what got the UK into its current economic mess is that banks lent far too much to households, businesses and other banks: forcing them to repeat the mistake would seem a little weird.

To which Vince Cable would reply that he only wants to make sure that small and medium-size businesses can tap into the credit they need at this delicate stage of the economic recovery – and that there’s plenty of evidence that these foot-soldiers in the battle to rebuild the economy are being starved of vital financial provisions.

It’s a finely balanced argument. And the government may yet opt for providing a more generous scheme of taxpayer-backed bank loans for small businesses, in preference to coercing Lloyds and Royal Bank to do more.

What I would point out, however, is that if Mr Cable were to opt for new net lending targets for the two semi-nationalised banks, the argument could become a fraught legal one.

Because Lloyds’s and Royal Banks’ gross-lending agreements are written into lengthy binding contracts relating to support they’ve received from taxpayers – and it may not be quick, cheap or easy to re-write these agreements.

Also, as I’ve pointed out in respect of a previous scrap between banks and ministers over bonus payments, the directors of the banks would probably have to resign if the government forced them to extend credit in a way that they felt was uncommercial and was contrary to the interests of all their shareholders.

Mr Cable could find himself having to chair the banks’ boards as the price of bossing them around.

So is there no joy in the government’s shared agenda for the private sector? Well, there is a commitment to create the “most competitive corporate tax regime in the G20″ – though no detail on how that will be judged – and a vow that any new proposed regulations will only be introduced if first other bits of red tape of greater bothersome effect are first abolished.

Also, there looked to me to be a reason for non-doms to crack open the bubbly.

Because the Tories’ election manifesto had pledged that these (mainly) well-heeled individuals who live and work here, but pay tax (if at all) elsewhere, would pay a new flat-rate levy – and the Lib Dems had pledged to phase out the tax advantages for non-doms altogether.

So what does the coalition’s to-do list say? Only that the government “will review the taxation of non-domiciled individuals”.

Hmmm.

My sources in the coalition insist that this review should strike fear into the heart of the tax-avoiding non-dom community, that (really, truly) it is not an example of a review being a substituted for action.

Time will tell. But if past reviews of non-doms’ taxation is anything to go by, the plutocrats don’t need to be booking their flights to Switzerland quite yet.

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Those who criticise the German government for trying to restrict the use of naked shorts and credit default swaps (CDS) are – on the whole – concerned about the when and the how, rather than the whether.

Or to put it another way, there are strong arguments for restricting the use of credit default swaps, or insurance policies for loans, in that their use exploded well beyond what could seen as sensible protection against loans going bad.

At their peak a couple of years ago, there were $60 trillion of extant credit default swaps, insuring loans with a value of around $6tn. This was the equivalent of taking out 10 buildings insurance policies on a single house, or 10 life policies on one individual.

The point is that $6tn of credit default swaps would have provided appropriate cover for the risk that the loans might go bad.

And just as you might feel a bit anxious if your neighbours took out nine insurance policies that would enrich them in the event that your house burns down or you pop your clogs, it is reasonable to fear that the other $54tn of CDS contracts were not all taken out with the purest of motives.

As I’ve pointed out before, many of these CDS contracts were a way of speculating in the fortunes of a business or a government, without the regulatory hassle of trading on a transparent, well-scrutinised, regulated exchange.

If a hedge fund or speculator thought that a company, government or specially created investment product, such as a collateralised debt obligation, were going to the dogs, a CDS was (and is) a way of making a killing from their respective woes.

And, perhaps best of all, that killing could be made well away from the prying eyes of media or regulators: it was the last frontier of a financial wild west.

None of which would have mattered all that much if – to coin a phrase – the cowboys in this financial Wild West had only hurt their own.

The problem is that many of the world’s biggest financial institutions, giant insurers such as AIG and assorted banks, couldn’t resist the gold rush – but found themselves on the wrong side of these CDS deals.

So when the speculators made profits, the insurers and banks made enormous losses. And the tab for these losses was eventually picked up by taxpayers, because (as you’ll be tired of hearing by now) the damage to all our prospects would have been unbearable if we’d allowed these cornerstones of the economy to crumble.

All of which is a meandering explanation for why there is a powerful argument for reforming the CDS market.

As you’ll deduce, there is a strong case for banning naked CDS’s, or the use of credit default swaps by those who don’t actually own any of the relevant debt being insured.

There are also good reasons for forcing all CDS trades through transparent, regulated exchanges and clearing houses, to provide some kind of verification that they’re not being used for insider trading, and to ensure that counterparties to deals put up appropriate “margin” or cash when prices swing as proof that they have the wherewithal to honour the contracts.

Here’s the thing however.

It’s quite possible to be the world’s harshest critic of the explosive growth of credit default swaps and still take the view that the German government took leave of its senses on Tuesday night when it imposed a unilateral ban on their use in respect of the debt of eurozone governments.

How so?

Well, in the world as it is – as opposed to the world as we might like it to be – the financial institutions who use credit default swaps provide vital loans to eurozone governments and businesses.

And if they’re told that, at a stroke, they can’t use those credit default swaps, well then investment climate for them in the eurozone is perceived to become harsher – and it becomes rational for them to seek to put their cash elsewhere.

The French finance minister, Christine Lagarde, has grasped the risk: she said yesterday that she was concerned that the German prohibition, if followed by other governments, would reduce liquidity in the eurozone government bond market – which, in theory, means that the price of those bonds would fall and would push up the cost of funds for eurozone governments.

There’s a time and a place for radical reform of financial markets. The place is probably the world as a whole, and not just one part of it – because unilateral national initiatives may either be ineffectual or may create dangerous distortions in the allocation of capital around the world.

And the time is probably when there’s evidence that fiscal deficits in Europe are on a pronounced downward trend and economic recovery is entrenched.

The worst time to alienate investors and banks by restricting how they invest is when they are anxious about the strains within the eurozone and can simply shift their money to other places where they feel more welcome.

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