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Thursday, September 3, 2009

Credit Where Credit Is Due

If you have read our book, The Great Recession Conspiracy, you would know I have great reservations about Tim Geithner because of his ties to Goldman Sachs.

But his recent actions to address the problems that lead directly to this recession are very encouraging. First, he has identified the two big problem areas; 1) Banks that are so large that they might bring down the whole financial system, and 2) Banks and other financial organizations that take huge financial risks which can lead to enormous losses. (Goldman Sachs fits into both categories.) Geithner is proposing that such institutions hold much, much larger reserves than is required today. That is exactly what we proposed in the Great Recession Conspiracy.

We recognize that there is a downside to greater reserves. It will reduce bank profits somewhat and it will reduce the money in the economy that is available to lend. We don't see either of this side effects nearly as dangerous and expensive as the costs of small reserves that led to this crisis.

Stay tuned and watch this one carefully since it is probably the key to how the financial system will function going forward.

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