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Wednesday, February 3, 2010

How Peter Lynch Would Reform Wall Street

Too Big to Fail? Try, Too Complex to Reform

Banks are like the heart that pumps blood — credit — to our country’s corporate muscles. If that heart is malfunctioning, any recovery will be anemic. But heart surgery is a very complex thing. You wouldn’t want yours done by a plumber or a politician.

--Thomas L. Friedman, "When Economics Meets Politics"; The New York

Of all the canards Wall Street has sold to would-be reformers, regulators, and at least one NY Times columnist, the biggest (and most self-serving) is that it is . . . inherently complex --"a beating heart," if you will.

Because Wall Street finance is so complicated, you need a Wall Street financier to oversee it. Or lots of them.

Eventually, *Wall Street insiders (vs. public-spirited civil servants, in the Paul Volcker mold) are running the Treasury Department, policing the securities markets, and serving as senior advisors to the President.

Sound familiar?

"The Complexity Canard"

The solution to Wall Street excess only partially lies in making too-big-to-fail firms smaller.

The other piece is to make the financial system simpler ("boring," if you prefer Paul Krugman's term).

Famed investor Peter Lynch famously advised, "invest in a business that any idiot can run -- because sooner or later, any idiot probably is going to run it."

My corollary for reforming Wall Street would be:

"Design a financial system that any idiot can regulate -- because sooner or later, any idiot is probably going to regulate it."

*Of course, FDR appointed a quintessential Wall Street insider, Joseph Kennedy, to head the newly created Securities and Exchange Commission. But Kennedy wielded his power on behalf of investors, not Wall Street. Imagine that . . .

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