Nevertheless, President Obama clearly believes the line fed to him by Wall Street. He is no Teddy Roosevelt. The question you should be asking is, will the tentative reforms proposed by the Obama Administration have any kind of positive effect?  The answer is probably in a very temporary fashion, but that is more a function of the impairment of the capital markets themselves.  However, if you don’t deal with a cancer fully, it comes back and spreads – even if you conduct surgery to take out some of the tumour.

Reform of the current US financial sector is neither possible nor would it ever be sufficient. It’s a bit like Lincoln saying, "Well, this slavery thing has a few problems, but we can ‘reform’ it and make it better.”  As any student of horror films knows, you cannot reform zombies. Zombie banks must be killed. In other words, the financial system must be downsized.

Downsizing can begin with the following set of actions:

  • All bank assets and liabilities must be brought onto balance sheets, and made subject to reserve and capital requirements and—more importantly—to normal oversight by appropriate regulatory agencies. Any assets and liabilities that are left off balance sheet will be declared null and void, unenforceable by US courts.
  • All CDSs must be bought and sold on regulated exchanges; otherwise they will be declared unenforceable by US courts.
  • Unless specifically approved by Congress, securitization of financial products such as life insurance policies will be prohibited and thus unenforceable by US courts.
  • The FDIC will be directed to examine the books of the largest 25 insured banks to uncover all CDS contracts held. These will then be netted among these 25 banks, canceling CDS contracts held on one another. CDS contracts with foreign banks will be unwound. The FDIC will also examine derivative positions with a view to determine whether unwinding these would be in the public interest.
  • In its examination, the FDIC