If inflation doesn’t get us, incompetent government action will. This is the view of one of our favourite common sense Economist, Willem Buiter, professor of European Political Economy at the London School of Economics and Political Science.

Buiter warns that the “the next big crisis … will be a crisis of state ‘overreach’ and of government failure” and that “stultifying state capitalism, initiative-numbing over-regulation and overambitious social engineering may well be the defining features of the next socio-economic system to fail.” We’ll drink to that.

What follows is the conclusion of the Den Uyl lecture Buiter gave in Amsterdam on 15 December 2008 (emphasis added). Print it out and stick it to the door of your fridge. It’s one of the best accounts we’ve read of the brave new world will be ushered in by the recent financial collapse.

Reaction follows action in politics as in physics. The inevitable result of the financial collapse and deep contraction we are going through now will be at least a decade of over-regulation in the financial sector. Popular outrage at the excesses that were permitted to range unchecked during the era of self-regulation and light-touch regulation will have to be assuaged. The ‘pound of flesh’ demanded by the body politic is likely to involve a fair amount of ‘if it moves, stop it’ type regulation. That is regrettable but politically unavoidable.

The public no longer trusts the captains of finance and the politicians and appointed officials who either actively contributed to the excesses (like Larry Summers and Timothy Geithner during the Clinton administration or Gordon Brown in the UK) or failed to warn or protest sufficiently vigorously when these excesses begin to materialise on their watch (Ben Bernanke (in public service since September 2002), Mervyn King (at the Bank of England since March 1991) and most other leading central bankers). Neither the public nor the new vintage of politicians that will take over is likely to listen to those who either actively contributed to the disaster or failed to foresee it or warn against it.

Over-regulation will harm the dynamism of the economy. How serious the damage will be is not clear. What is clear is that a lot more regulation, and regulation different from what we have had in the past, will be required to reduce the likelihood of future systemic failures and to better align private and public interests.

Buiter message is clear: the rules are going to change, whether you like it or not. Investors who fail to understand this will get badly burned as they try to make their way in the new economy.