Oh boy. Now we are going to have lots of Wall Street reform. We’ve had a few made-for-tv congressional hearings. The politicians did their posturing. They roughed up the tycoons before the cameras.
We need reforms after the big crisis. Just like we needed reforms after the 1929 market crash. We got those reforms in the 1930’s.
Since then the markets have changed a lot, of course. They created things like mutual funds and hedge funds and derivatives. And other fancy stuff with fancy names. They got hooked up electronically. So that players can shoot billions across the globe in a blink. They can buy and sell and buy again 100 million shares before you can blow your nose.
Lots of that new stuff got caught up in the big credit crunch. For instance, we had little or no regulation of the 8000 hedge funds. And they dealt in a few trillion bucks.
First, we need to vilify Wall Street. The politicians have been busy painting Wall Street moguls and firms as greedy, corrupt, etc. One headline this week captured the mood: “OBAMA TO TARGET ‘RISKY DECISIONS’ BY WALL STREET THAT LED TO CREDIT CRISIS.”
I put all this into a category I call “Yeah, But Mom”. You get caught swiping your sister’s candy. “Yeah, but Mom, HE wrecked her bike!”
Yes, we need to reform Wall Street. But Wall Street did not cause the crisis. The politicians did, from 1995 onward. It is writ as large as the Capitol dome. They forced banks to extend stupid mortgages. So they could tell voters they had made it easy for everybody to buy a house. Do you have a pulse? You qualify!
Banks resisted. Politicians insisted. And they had government guarantee those stupid mortgages. By doing that they turned those mortgages into gambling chips. Free ones. Wall Street firms scooped up the free chips and gambled with them. Politicians created the casino and handed out the chips.
Of course, they accept none of the blame. They exclude themselves in the reforms they cook up. In fact, they are pushing those ridiculous mortgages again. While they lambaste Wall Street. And pocket fat contributions from Wall Street firms. They have no shame. And they are shameful.
Meanwhile, it is easy to understand the gambling. There are always gamblers circulating. The chips they use are often legitimate things. They have two sides. Cattle futures, for instance. Oil futures. Options. These all have legitimate uses. If you are a huge oil distributor you buy futures to hedge against price swings. You buy stocks and bonds as investments. Investments. You play football for money. You play cards for fun.
Gamblers scoop up these chips. They flip them and play with them, gamble with them. You buy IBM for the long haul. They buy it for five minutes and sell for a tiny profit. And they do it on borrowed money, on credit. Which only increases the size of the gamble.
Good reform would limit the gambling. One of the reforms after 1929, for instance, reduced how much you could borrow against stocks.
Good reform would allow the legitimate use of the various investments. It would not toss the baby with the bathwater.
And good reform would zero in on the major mistakes our politicians made. It would spotlight them. In order to reduce the chances politicians would repeat their stupidity.
You can bet we will not see that in their reforms. It’s a gamble you cannot lose.
From Tom ... as in Morgan.                  

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