The European major economic countries met yesterday in Germany to discuss the financial crisis and they came to a conclusion that will have dire impact on many of the financial markets, including the Forex.  The conclusion they came to was that the markets need to be highly regulated.  Anyone trading the Forex understands the impact this will have as since its inception, the Forex market has not been under the scrutiny of government watchdogs.  In fact, one of the reasons that the market has gained so much in popularity in the past decade was just this.

Yes, Forex brokers are regulated by various Financial Service Authorities such as the Securities and Exchange Commission in the US and the British FSA, however the market itself was not governed by a strict set of rules – it was run as an old school marketplace where those investing and trading in it dealt with one another, buying and selling on a principle of fair and equitable trade.  What might happen after the Germany meeting is that countries may now place “laws” on the markets – including the Forex and how they are traded within their countries.

I personally think this is a bad idea.  The New York Stock Exchange and Nasdaq markets are examples of “open” markets that were hurt by regulation.  It was not the markets that failed recently, but the broker trading and financial companies selling derivatives of equity products – namely options and CDO’s (collateralized debt obligations).  However, the US does not see a distinction between the market and the people running them, in fact, they see them as one unit.  So what they have done is place restrictions on what can be sold and when and to whom – and as you see the markets today, their volume is sharply lower and they seem to be in a downturn.

 The US used the market volatility as a reason for their rules, but it was this volatility that helped the markets triple their value over the past decade – creating significant wealth for many.  This era is over and I fear the same might be true in the Forex as the European countries begin to regulate this open market.  The broker trading firms that roused their clients into buying junk are the ones that need to be penalized, not the common investor.  Those investing and trading in highly speculative derivatives should be responsible for their own losses – this is the engine behind a Free market society.  The socialist nations in Europe tried to play both sides, employing socialism for their governing of the masses while allowing for Free market participation, it was only a matter of time before the two collided.

I pray that they gain their senses and I hope that the American public, the people that brought us this Free market society and lived by it for over 225 years will recognize what their government is doing and resist the changes – but I doubt that those voices will be heard.  IF someone offers you a basket of freebies in exchange for greater control over things most people do not even understand, the innate greed of human nature takes over and we end up regressing to a time where a government controlled the people, and not the other way around.