The Economic Solution

Regulation and transparency.

The Big Shitpile was created by greedy bankers leveraging themselves up to 40 times — 1 dollar in capital lifting 40 dollars in bonds.

That was wrong. It should not have been allowed. When leverage gets that high it’s impossible to get out of the position when the market turns around. Markets always turn around.

I saw this in the very first big story I ever did, a 1978 examination of a GNMA pyramid by a man then working for the University of Houston. UH had a huge construction boom going on, and the money was sitting around. This clown built a pyramid of bonds with it — buy a bond, get a loan on the bond, buy another bond. This worked fine so long as interest rates were going down (raising the value of the bonds, and delivering great gains on the pyramid), but when they shot up he couldn’t get out, and millions of dollars disappeared.

This was the same sort of deal, writ large.

We can’t have the government guaranteeing such nonsense. Any
institution which accepts the government’s protection (that of its laws or capital) must limit its
activities to what they can get out of. And they must reveal exactly
what they are doing, so the government is protected. That limits your
possible gains in rising markets, but it limits your losses in falling
ones.

Anyone who wants to run a pirate bank should be allowed to do so. But
not here. If you want to get around regulators go to some other
country, and seek their protection when you (inevitably) screw up.

In other words, this entire scandal was preventable. In deregulating
the financial system we made what happened inevitable, because markets
will always go right up to the edge of the rules (and some will slosh
over). When there are no rules, there’s nothing to stop the market from
going into the dumper.

So here’s the solution:

1. All financial instruments, agencies, organizations and markets based in the U.S. must be regulated to maintain fiduciary responsibility, avoid over-leveraging and keep markets stable.
2. All financial entities in the U.S. must have open, transparent
   books, which the government can look at whenever it chooses to, on
   behalf of the people.

The Republicans have spent the last two decades destroying the edifice
of regulation created by the New Deal, and what we’re getting out of it is a second Great Depression. That edifice needs to be rebuilt,  and
maintained by our children and grandchildren.

Let these days be the lesson. And, Larry Kudlow? Shut The Fuck Up! You have committed treason against the people of these United States for the last time.