THE BLOG
04/06/2008 11:22 pm ET | Updated May 25, 2011

Fixing the Problems on Wall Street is Easy: Raise Margin Requirements

Margin requirements should be the centerpiece of any congressional testimony dissecting the recent market meltdown on Wall Street (Iceland, Spain, and Poland). The securities acts of '33 and '34 (covered at length in the series 7 exam I took in 1983 when I got my broker's license) contain excellent reforms that cleaned up the excesses that led to the '29 crash. Margin requirements mandating customers put up 50% or more (instead of 10% or less) of the purchase price of stocks deterred noxious speculation. The logic behind it makes sense. Raise the cost of speculation, deter speculation.

Market theocrats, however, don't like this idea. They like to think of the market as existing in a Friedman-esque vacuum of pure, unadulterated price discovery nirvana encapsulated by the virginal image of Adam Smith's "invisible hand" that serves as the market fundamentalist's equivalent to Mary's virgin birth. I don't buy it. I don't buy it for the same reason I reject religious fundamentalism; whether it's Christian or Muslim. Absolutism in any form is the enemy of reason. Only feudal lords (Bush, Cheney, Rumsfeld) and monopolists (Larry Ellison and Bill Gates) believe in the divine right of kings and corporations and I'm sorry, but my American ancestors fought a Revolutionary War to defeat that kind of thing.

There are many who believe that Greenspan, when he spoke of 'irrational exuberance' back in '96 should have raised margin requirements, Robert Shiller of Yale being one of them. If Greenspan had done so, many argue, much of the damage of the dot-com bubble would have been avoided and therefore much of the damage of the subsequent 'bubble transplant' of '00 when the 'hot money' bolted NASDAQ and juiced real estate prices (but much worse).

Adam Smith is not God and Greenspan-Bernanke are not his appointed representatives on Earth. But millions of home owners are getting crucified for their sins nevertheless. The efficient market theory is bunk. Neo-liberalism doesn't work. Margaret Thatcher's reputation is entirely due to the UK's lucky oil find in the North Sea (now that it's nearly all used up, Britain is re-opening the coal mines Maggie shut). If Reagan were alive today he'd be working at J.P. Morgan along with Tony Blair.

To reign in the hedge funds and the 'hot money' that is terrorizing the world's finances with what Warren Buffet calls 'weapons of mass financial destruction,' the Fed must raise margin requirements. It's cheaper than bailing out banks and it's 'deflationary' so we would see a drop in the price of energy and food.

Max Keiser's recent film documenting the war between savers vs. speculators can be found here.