Structural Reform - a Necessary Evil

In addition to the Chinese headwinds affecting US growth and global markets, this week a new truth has become apparent - President Obama is waging war on large institutional banks. He has proposed a tax on banks with over $50 billion as well as regulating the amount of risk they can take in the future. Economic growth stems from the financial system. When they make bucca bucks, so does the economy. However, when banks excessively lend and over-leverage consumers and then their bubble pops and they experience losses, so does the economy become over-leveraged and then experience a bubble pop and losses.

What we've seen thus far have been cyclical, short-term measures to pump liquidity into the economy and lower interest rates to keep dollars flowing and business operating (on life support). However, the greater reform must be structural. The foundational health and stability of the economy comes from preventing excessive risk and making US consumers less debt-driven, leveraged. These reforms will hurt the CURRENT business world in the sense that it will hamper business growth -- but is hampering potentially excessive growth a bad thing? Is hampering yet ensuring healthier growth bad?

I posit, it isn't. I will look ugly in the markets and economy as the transition is made. Growing Pains - Michael Sever style really. However, at its core, these types of adjustments must exist to end or at least diminish the boom and bust trend we've known for the past 20 years. So, while the motivations might be debatable behind the Administration's recent suggestions, and while it is true they are counter-free market -- I believe these action ensure a healthier (even if more restrained future).

I mean, lets be honest, America isn't exactly free-market anyways. It's just the closest thing to free market compared to anywhere else. So if there is going to be regulation and governmental control, lets at least make sure its healthy and prudent.

The thing is - its the inevitable and necessary taxation and structural reforms that will cause market upheaval. So while the Fed appears resistent to raise rates anytime in 2010 (which, it also appears inflation fears will remain muted throughout 2010) and while I may prefer quantitative responses from the government to prevent excessive exuberance now, kudos to the government for doing something I suppose.