The staff at the Bank of Scotland (HBOS) were so busy that they couldn't deal with the paperwork to set up a bank account for The Scottish Jacobite Party. A good thing as it turns out, since we don't have any hastle with donations, peerages etc.

Gordon Brown has just brokered a deal to merge HBOS with Lloyds TSB. A final demonstration that he knows nothing about markets and normal market function. Bye, bye, Gordie.

The US authorities are scrambling to put together a $40 billion rescue package for the US insurance giant AIG. But then, George W never pretended to know anything about anything.

Governments can not interfere with financial markets.

If they do, it destroys the integrity of the market process.

Its all about the rewards of being right balanced with the risks of being wrong. If you slip a few million into the retirement slush fund of Prime Minister or President to get a rescue package approved, a win-lose situation becomes win-win. The guys in charge retire with multiple dollar bonuses but the rescue packages only serve to keep alive failed institutions.

They have failed in the market place and must not to be kept going.

If they are allowed to fail, there will be pain and figurative blood on the streets. But, the guys at the top of the other wobbly institutions will have a good think about what they are doing.

The fact of the matter is that these guys have had no idea of their collective assets for years. The rush for the rich pickings of repackaged mortgage derivatives and other obscure financial vehicles have had the financial institutions investing heavily in instruments whose connection to any asset of real value has long been lost.

The auditors who have been signing off on company accounts are also culpable. An accountant is happy if an integer value in the credit column balances another in the debit column. They don't bother with any connection between the number and anything of value to the real world. Guilty as charged.

There has been a lot of loose talk about the dangers of short selling.

Short selling is part of normal market activity.

In any market, you are either betting that the price will go up. You buy the stock or shares. Or you are betting that the price will go down. You sell short.

In a transparent market where the value of the assets is known, short selling is a risky business. In the case of HBOS in the last couple of days, HBOS was loaded with derivatives of uncertain value. The market place couldn't put a fair market value on HBOS shares and the price plummeted.

The solution isn't to limit short selling.

The solution is to get rid of derivatives with little or no connection to assets of known value.

The market place then becomes transparent, company value is robust and short sellers are likely to lose their shirts.

A simple solution to a very expensive problem!

An Independent Scotland will have its own stock exchange. Any trading in derivatives or holding of derivative products by Scottish companies will be banned.

©  John Black 2008.

This analysis resulted from a chance conversation with a neighbour while waiting for the 7.42 train to Glasgow at Helensburgh Upper Station this morning. His contribution is gratefully acknowledged.