Reich Takes Aim At Financial Market Reform And Misses ~ Steve Blitz Morning Notes
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Thursday, June 18, 2009

Reich Takes Aim At Financial Market Reform And Misses

In his blog, Robert Reich gives his opinion on the financial reforms formally announced yesterday. Thankfully he summed his views up nicely in the first paragraph --

"The plan doesn't stop stop bankers from making huge, risky bets with other peoples’ money. It does increase capital requirements and oversight, but it doesn't require bankers to take their pay in long-term stock options or warrants, and it doesn't even hint that banks should go back to being partnerships instead of publicly-held corporations."

Obviously Reich missed that class in Money & Banking 101. If he showed up he would know that dynamic capital requirements act like reserve requirements to limit bank leverage. As for the nature of the bets, well I would like to think that there are quite a few traders, bankers, and risk managers on the look out for black swans.

If Reich really wants to make money trading less profitable he should want less of it floating around with no place to go. The solution is letting the East Asian currencies revalue to free market levels against the dollar. Import substitution and export sector growth will result. Smaller trade deficit, greater profit potential in the nonfinancial sector -- and the financial games will slow by necessity. But if the Fed/Tsy insist on quickly returning to high real interest rates and a strong dollar policy we will again have too many dollars chasing too few capital investment opportunities and then this recession will have been for naught.

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