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.

Follow Max Keiser on Twitter: www.twitter.com/maxkeiser

Comments

[LeftRight]

In addition to raising the margin requirements, we also need to make sure that ANYTHING that's traded is on a regulated market!!

[zaneblue]

Finally someone talking some sense! Thank you!

[salimfadhley]

Max, I'm delighted to see you finally on HuffPo - it's been way too long.

[monkeyinatree]

I'm happy to see him here too! I've been watching his Aljazeera stuff on Youtube. Max should make a film about the North Sea oil financing Maggie's neoliberalism story.

[FearlessFreep]

Another thing you can do is levy a tax on speculation. Just .1% (if you buy a $1000 stock, you pay a $1 tax) would go a long way toward balancing the budget, and probably help stabilize markets too.

[worldtraveller]

You can't raise margin requirements for things that trade that are not even listed. Therein lies the true problem.

[brownshirted]

the derivatives pyramid - although mostly outside of the SEC's oversight - still rests on a foundation (if you can call it that) of gov't bonds - and margin requirements for holding these is 10% at most. Raising this requirement, the margin rate itself that brokers charge to borrow to borror and/or short securities, and even raising the bank's reserve requirement per the Basil accords - would all have the basic effect of 'deflating' leverage from the system. but as keiser alludes to in his piece - deflating bank's activity is the last thing the bankers in charge want to do no matter how much sense it makes; because it would reduce their fee income if they had less of a 'derivativ­e-o-sphere­' to play in.

[joebhed]

Truth.
Big truth.
But I wouldn't call that which you called the foundation.
Government bonds.
Payable by the taxpayer.
It is the taxpayer and the depositor that is the foundation of all of the so-called financial services industry.
Arguing over ratios as we are reminds me of this quote from The Bankers'Magazine in 1892.

"The truth is well known among our principal men now engaged in forming an imperialism of capital to govern the world. While they are doing this, the people must be kept in a condition of antagonism. By thus dividing the voters we can get them to expend their energies in fighting over questions of no importance to us, except as teachers to lead the common herd. Thus, by discreet actions we can secure all that has been so generously planned and successfully accomplished."

And, as you appropriately termed it, the "derivativ­es-o-spher­e" is where they have been securing their blessings of late.

Last quote, if I may:

"The great monopoly of this country (USA) is the monopoly of big credits. The growth of the nation, therefore, and all our activities, are in the hands of a few men who chill and check and destroy genuine economic freedom." - President Woodrow Wilson

[worldtraveller]

brown,
it is not mostly outside the SEC oversight. It is COMPLETELY outside their oversight. These are transactions based on counterpary credit contracts called ISDA agreements. They are supported by nothing. They need to be moved onto exchanges and controlled. This is what happened with Enron and the entire energy industry in 2002 and despite crazy volatility in energy has not happened since.
Funny thing is activity is now greater than ever before in energy. Problem is all these banks would be insolvent immediately.